There are currently 15 SEF applications lodged with the US CTFC at various stages of registration. With experience in other asset classes showing that while many new entrants may emerge only a few will succeed, many in the industry are wondering which of these new SEFs will make it beyond their first birthday.

Even for those that do survive there’s no guarantee of a profitable business at the end of it. The CFTC’s MAT rule (Make Available to Trade) states that once a SEF makes a swap available to trade, all other SEFs and DCMs listing the same swap have to make it available to trade too. So the more successful a specific swap becomes the greater the likelihood that a SEF will face competitive undercutting of its fees. A lose-lose situation for the SEF, surely.

On the one hand the MAT rule is good news for investors and traders but on the other hand it raises questions about innovation. In the pharmaceuticals industry, a patents system incentivises investment in research and development. In the swaps market no such mechanism exists to support investment in new ideas. In deciding how and when to apply the MAT rule, the CFTC needs to strike a balance between competition and innovation – and that is certainly no easy task.