Update On SEF Trading—Bunched Orders, Standby Clearing, And Allocation Agreements

In connection with the impending Dodd-Frank trading requirement that will compel market participants to trade on a swap execution facility ("SEF"), many futures commission merchants ("FCMs") are now taking a close look at the way in which clients execute trades in cleared swaps such as interest rates and credit default swap indices. For asset managers, there are currently three models of execution:

• Trading directly in the fund name,
• Executing a bunched order (i.e., orders that are traded in aggregate and then allocated to underlying funds), performing a pre-trade allocation, or
• Executing a bunched order and performing a post-trade allocation.

While bunched order allocation has existed in futures and equity markets for years, the introduction of SEFs and a review of the operational readiness of these SEFs for trading of clearable bunched orders creates some novel issues that we think investment funds and asset managers should be aware of heading into the