The era of standardized swap trading is beginning on swap execution facilities. Today, Bloomberg announced that its SEF has electronically traded the first ‘MAC’ interest-rate swap contract on its multi-asset class swap execution facility (SEF), adding that Goldman Sachs completed the trade with a leading global asset manager.
The Market Agreed Coupon (MAC) contract has a range of pre-set terms including start and end dates, coupons, currencies and maturities. The International Swap Dealers Association (ISDA) introduced the terms of the MAC swaps in April of this year, which are aligned with quarterly expiration dates of interest-rate futures.
Since the terms are standardized, the addition of MAC swaps could boost liquidity and efficiency for those who are constrained by line items and also help the buy side to net their contracts, known as portf
“Today there is a critical need for fungible, standardized contracts as the derivatives market migrates to electronic platforms,” commented Ben Macdonald, Bloomberg’s Global Head of Product and President of Bloomberg SEF LLC in a statement. “By providing the ability to trade these contracts electronically, Bloomberg will continue to help our clients’ transition to a more centralized marketplace.”
In a speech on Monday, CFTC Chairman Gary Gensler said that Congress required standardized swaps to be executed on a SEF or designated contract market, to benefit the public, broaden competition, and promote transparency. According to a report on Bloomberg’s trade in the Financial Times, the MAC swap is seen as becoming a liquid part of the market that will be traded on SEFs.
Other SEF competitors are planning to list MAC contracts on their platforms as well. In October, TrueEX filed its Made Available to Trade (MAT) with the CFTC seeking to list Standard Coupon Standard Maturity swaps with 1,2,3,5,7, 10, 15, 20 and 30 years.
“The move toward standardized contracts is a good thing, and this is small step they [Bloomberg] are taking in that direction,” said Kevin McPartland Kevin head of market structure research at Greenwich Associates.
For example, the MAC contracts have terms that correspond to the quarterly expiration dates of interest rate futures in March, June, September and December.
However, McPartland noted that a nine-year, three day swap is also a standard contract. “It’s easy to value which makes it easy to clear.” He added, “This (MACs) are the next level of standardization. This takes us closer to a futures style market.” Comparing the MAC to Eurodollar futures, McPartland illustrated if someone bought 10 contracts today and 10 contracts tomorrow, the trader would have 20 contracts and one line item. But if someone bought a traditional one-the-run-swap, today and tomorrow, they would have two line items, he said. “If you did 10 separate MAC trades over a week, the clearing house would very easily compress them into one item because the terms are identical,” he explained.
In April, ISDA said the MAC contract would improve transparency and increase liquidity in the interest-rate swap market as well as enable buy-side market participants to engage in portfolio compression, which reduces notional amounts outstanding.