Derivatives Transaction Execution Facility (DTEF) Definition

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James Chen, CMT is an expert trader, investment adviser, and global market strategist.

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Updated July 25, 2023
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What Is a Derivatives Transaction Execution Facility (DTEF)?

A derivatives transaction execution facility (DTEF) is a market that focuses on supporting the transaction of derivatives limited to underlying assets of excluded commodities or assets with an inexhaustible and deliverable supply. A derivatives transaction execution facility allows for the execution of commodities with no cash market. All products listed on the exchange must not be susceptible to measures of influence or manipulation.

The nature of derivatives transaction execution facilities changed with the passing of the Dodd-Frank Act in 2010. This piece of legislation further regulated the derivatives industry with the introduction of swap execution facilities (SEF)

A DTEF provides a venue for the trading of excluded commodities, such as interest or exchange rates and other derivatives. DTEFs bring liquidity to the trade of limited sets of commodities.

Key Takeaways

  • A derivatives transaction execution facility (DTEF) focuses on supporting the transaction of derivatives limited to underlying assets of excluded commodities or assets with an inexhaustible and deliverable supply.
  • DTEFs allow for the execution of commodities with no cash market. 
  • Because DTEFs are not open to retail investors, investors must belong to an eligible commercial entity, be an eligible contract participant, or transact through a futures commission merchant.
  • Retail participants may trade on DTEFs through high net worth futures commission merchants with at least $20 million of adjusted net capital in their accounts.
  • The nature of DTEFs have changed over time, as the Dodd-Frank Act further altered the nature of DTEFs by introducing SEFs.

Understanding a Derivatives Transaction Execution Facility (DTEF)

Derivative transaction execution facilities are not open to retail investors. To trade on this exchange, an investor must belong to an eligible commercial entity, be an eligible contract participant, or transact trades through a futures commission merchant.

Retail participants may trade on DTEFs through high net worth futures commission merchants (FCMs) with accounts with an adjusted net capital of at least $20 million. A registered commodity trading investor who directs trading for accounts containing total assets of at least $25 million may also trade for the retail investor.

Derivative transaction execution facilities must register with the Commodity Futures Trading Commission (CFTC). The CFTC grants the facilities with fewer regulatory requirements than other contract markets. The CFTC receives reports and data on significant trader transactions. The regulatory commission also assesses derivative transaction execution facilities’ compliance programs via rule enforcement reviews.

The Role of Underlying Assets in a Derivatives Transaction Execution Facility (DTEF)

Derivative prices depend on the underlying assets. Underlying assets include stocks, futures, commodities, and currencies. The underlying asset may also be an index, such as the S&P 500. In this case, the underlying asset is made from all of the common stock listed on that index.

The two main types of underlying assets in the U.S. options market are securities options, including stock options and futures options. In a case that involves stock options, the underlying asset is the stock itself. In futures options, a futures trader will buy or sell a contract that promises to deliver an underlying asset on a particular date.

Investors use underlying assets and options as a way of speculating and hedging risk. The value of an underlying asset could increase or decrease over time, which therefore changes the value of its option. In a contract for difference (CFD) trade, the underlying asset is never actually bought or sold, but the profit or loss depends on the price movement of the underlying asset of the position taken.

Are DTEFs Regulated by Financial Authorities?

Yes, DTEFs are subject to regulatory oversight in most jurisdictions. After the global financial crisis of 2008, there was an increased focus on regulating the derivatives market to enhance transparency and reduce risk. In the United States, the Dodd-Frank Act mandated that certain derivatives be traded on regulated platforms, such as SEFs. Similarly, other countries and regions have implemented regulations to govern the operation and conduct of DTEFs.

What Types of Derivative Contracts Are Typically Traded on DTEFs?

Common contracts traded on these platforms include interest rate swaps, where one party exchanges a fixed interest rate for a floating interest rate, and credit default swaps, which offer protection against credit default events for a specified entity. Additionally, foreign exchange contracts, commodity swaps, and equity derivatives are among the various other products traded on DTEFs.

What Are the Benefits of Trading Derivatives on DTEFs?

Trading derivatives on DTEFs offers several benefits. Firstly, DTEFs provide increased price transparency, as traders can view real-time market data and competitive prices from multiple participants. Secondly, DTEFs facilitate efficient execution through automated order matching processes, reducing the time it takes to find suitable counterparties. Lastly, trading on DTEFs can lower counterparty risk, as transactions are cleared through a central clearinghouse, which acts as a buyer to every seller and a seller to every buyer.

The Bottom Line

DTEFs are electronic platforms facilitating the trading of various derivative contracts. They offer transparency, efficient execution, and reduced counterparty risk, providing institutional investors and market professionals a regulated marketplace for buying and selling derivatives in a standardized and customizable manner.

Article Sources
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  1. United States Congress. "Dodd-Frank Wall Street Reform and Consumer Protection Act."

  2. Commodity Futures Trading Commission. "Swap Execution Facilities (SEF)."

  3. Justia. "Legal Dictionary: Derivatives Transaction Execution Facility (DTEF)."

  4. Office of the Law Revision Counsel. "U.S. Code: 7 USC 7a: Derivatives Transaction Execution Facilities."

  5. Commodity Futures Trading Commission. "Commitments of Traders (COT) Reports Descriptions."

  6. Bank for International Settlements. "Derivatives Markets, Products and Participants: An Overview," Page 3.

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