Citing concerns about operational readiness and feedback from buy-side institutions, Javelin SEF has amended its regulatory filing related to which interest rate swaps will be made-available-to trade on its trading platform.
Based on feedback from a broad group of institutional buy-side firms, Javelin has streamlined its MAT submission to the CFTC to include only benchmark US Dollar and Euro swaps along with certain IMM swaps, according to Javelin’s announcement on Friday.
The IMM dates [IMM stands for International Monetary Market] are the four quarterly dates of each year, which most futures contracts and option contracts use as their scheduled maturity date or termination date. “What has become clear is that considerable operational hurdles remain as the market prepares for the swap trading mandate. Starting with benchmark swaps is the only that that makes sense right now. We can discuss Data Two only after we have safely go past Day One,” said James Cawley, CEO of Javelin Capital Markets in a statement released on Friday.
[For more on Javelin's SEF Amends Filing; Uncertainty Lingers, see Ivy Schmerken's related story.]
As for operational concerns, pre-trade credit checking hubs are not ready for game time, said Cawley in an interview today. He said the pre-trade credit hubs could only handle specific trade types and very rudimentary order processing. “They cannot handle different types of orders or trade types (like curves, flies, limit orders),” he wrote in an email. Also, Cawley said the buy side is not ready to properly process off-the-run swaps, forwards, and certain compound strategy transactions on a SEF.
MAT Rules, Flexible but Vague?
Javelin’s SEF was the first to file its MAT submission on Oct. 18 and the first to alter its filing in late October when it removed variable notional swaps, thereby shortening the maturities from 50 years to 31 years and dropping forward start interest rates. This sparked some industry debate about whether a SEF should list swaps on every available point on the interest-rate curve or focus on the most liquid swaps.
Each SEF is required to evaluate its MAT instruments on the basis of six factors: 1)ready and willing buyers and sellers; 2)the frequency and size of transactions;3) trading volume; number and types of market participants;4) the bid/ask spread; and5) the usual number of resting firm or indicative bids and offers. The MAT submission gives SEFs tremendous leeway in which swaps to make available to trade and it has a six-factor test in which no one factor is dispositive — one is not better than another," said Cawley.
In the wake of its MAT filings, Javelin has heard from its buy side customers and had a constructive dialogue with firms, including total return accounts, long only and insurance companies. “Something that jumped out at us was the market readiness,” he said. “For an abundance of reasons, they’re not ready to move. They’re working as quickly as humanly possible, to meet deadlines,” said Cawley.
Cawley considered listing liquid benchmarks on Day One, and forwards on Day Two and complex transactions on Day 3, but when his team spoke with buy side institutions, no one could agree on when Day Two would be, he said. Some institutions saw Day One happening 15 days later, while others suggested 30 days or 3 months. “The only thing we could do was to dumb down our MAT submission, focus on Day One and get Day One right,” he said, adding that clients were relieved.
“Let’s get back to basics,” said Cawley. “People trade on SEFs or certainly with technological solutions because it certainly makes their lives easier.” That means they have the ability to do pre-trade credit checks on an order, and show their internal people an audit trail, he added. They can use the pipes connected into a SEF for pre-trade credit, audit trail and reporting to a swap data repository (SDR).
Thus, Javelin has decided to focus on the benchmark interest rate swaps, and Javelin will still have the flexibility to do subsequent MATs. In the meantime, if SEFs have the workflows that permit transactions, which are not in the MAT submission, then they could certainly use a SEF to do them, he added.
As for the buy side’s readiness, “by the time the dates for [mandatory trading] come down and the dates become effective the expectation is that people will be ready to trade the benchmark swaps,” said Cawley.
For now it’s important that the buy side gets to the point that they actually want to trade on a SEF, not because they have to, but because it provides them with better services, and because technology has made their lives easier, said Cawley.