New regulations and increasing oversight are transforming OTC (derivatives) market, adding new levels of operational complexity and reporting requirements across the contract lifecycle. Mercari’s aspiration is to facilitate this transition by providing orderly, transparent and efficient electronic OTC market venues and services to professional and wholesale investors.
The Mercari eSEF offering addresses customer expectation for a comprehensive OTC derivatives solution which can be used to navigate the rapidly changing regulatory and operational environment.
Mercari Direct eSEF is an Australian Market Licensed venue for the trading of Over the Counter (OTC) products. The contemporary term for this form of marketplace and structure is a swaps execution facility (SEF). Mercari’s proprietary electronic swaps execution facility is branded Mercari eSEF.
By way of further definition, the Wall Street Reform and Consumer Protection (Dodd–Frank) Act lays the foundation defining a SEF as a “facility, trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by other participants that are open to multiple participants in the facility or system”. Mercari eSEF comfortably satisfies this definition.
Mercari eSEF operates as a licensed swaps execution facility having held an Australian Market Licence since 2005. Mercari eSEF is now licensed to operate markets for energy, commodity and environmental derivatives (since December 2010), in addition to interest rate and foreign exchange derivatives.
Participation in the Mercari eSEF market is available to wholesale and professional investors. Participation enables the electronic trading of any available listed product. In addition, authorised participants may contact the Mercari eSEF team to request listing of additional OTC products.
Over the counter (OTC), or "privately negotiated", derivatives are largely traded via the telephone, but are increasingly traded on electronic platforms and executions facilities.
Recently, the legislative bodies of G20 nations, notably those of North America, Europe and key parts of Asia, moved to enhance the robustness of these OTC derivatives markets through enhanced regulations. These global financial reform initiatives seek to achieve several key policy objectives for the OTC derivatives markets including but not limited to:
A key lever to achieve these policy objectives is the swaps execution facility (SEF) – an electronic platform for the trading and management of OTC derivatives.
According to the Wall Street Reform and Consumer Protection (Dodd–Frank) Act, a SEF is a “facility, trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by other participants that are open to multiple participants in the facility or system”.
As can be seen, the policy objectives for SEFs is to provide pre- and post-trade transparency, encourage competitive execution for the entire institutional marketplace, and to provide the tools required to ensure a complete record and audit trail of trades. Mercari eSEF is licensed to provide a regulated facilities and marketplaces for transacting in interest rate, foreign exchange, energy, commodity and environmental derivatives.
Systemic risk management of OTC derivatives is also a key G20 policy objective, and central (counterparty) clearing of OTC derivatives seeks to reduce counterparty risk and strengthen overall market integrity. Designed correctly, central OTC clearing also helps with position segregation and portability in the event of a default and improves transparency for regulatory requirements.
While Mercari Direct does not own or operate a clearing facility itself, there are several providers of OTC derivative clearing services to whom Mercari Direct is able to pass trades. Mercari is currently working with LCH.Clearnet, SGX Asiaclear, NOS Clearing and CME Clearport to assist Mercari market users to fully automate their OTC trading and to better manage their operational and market risk.