As SEFs work their way through the regulatory process, uncertainties abound in the made-available-to-trade area. Last Thursday, Javelin Capital Markets amended its filing with the Commodity Futures Trading Commission related to which interest rate swaps it will make available to trade on its SEF.
Javelin narrowed its MAT submission by removing variable notional swaps, thereby shortening the maturities from 50 years to 31 years and dropping forward start interest rates.
Javelin was the first SEF to file its MAT application on Oct. 18 and also the first SEF to alter its application, noted Radi Khasawneh, research analyst at Tabb Group Europe in a commentary posted on Friday.
In its original filing, Javelin applied the rule broadly with swaps covered by request for quote and limit order books, including by phone, noted Tabb Group’s Khasawneh. Variable notional swaps are used very much by the buy -side to sell –side trading and mimic cash flows in mortgages, according to a derivatives source. “By putting the instrument on a SEF, it will force those instruments to be traded on SEFs,” says the source.
This sparked some industry debate on whether SEFs should take a broad approach by listing interest rate swaps for every point on the curve, or focus on the most liquid swaps.
“MAT translates into SEF trading of swaps by any means of interstate commerce, which includes the telephone and request for quote trading to two dealers—Javelin is pleased to have sparked the debate and to adopt a more scaled approach for product offerings on its platform,” commented Jamie Cawley, CEO of Javelin Capital Markets in the firm’s press release.
Two other SEFs, TrueEX and Tradeweb, submitted their MAT applications to the CFTC, focusing on the more liquid swaps. TrueEX’s filing focuses on listing the most liquid, benchmark swaps with tenors of 2, 3,5,7, 10,15, 20 and 30 years, while Tradeweb’s submission covered ten points on the curve between two years and thirty years.
[For more on Tradeweb's SEF Focuses on Standardized Swaps to Phase In Market Transition, see Ivy Schmerken's related story.]
“Javelin was the first to move, and so didn’t have the luxury of making a comparison with the approach taken by others. This may just be a natural part of what is a very public process that will determine the future shape of the market,” wrote Khasawneh in the commentary entitled “SEF MAT Submissions: Reality Check.”
The reality is that SEFs are allowed to self certify which swaps they want to trade and the CFTC hasn’t provided much guidance. “The WMBAA had indicated in the past that the CFTC should consider making all MAT determinations as they do with the Mandatory Clearing determination. That didn’t happen and the SEFs are responsible for making these determinations,” commented Chris Ferreri, Managing Director and Head of Ecommerce, Americas ICAP, a firm that’s a member of the Wholesale Markets Brokers Association representing interdealer brokers.
According to Tabb’s commentary, conversations with market participants and other submissions point to an emerging consensus that only the most liquid contracts at the most traded points on the curve should qualify for initial listings. Some buy side participants are skeptical of this “blanket approach,” wrote Khasawneh. Some believe that SEFs need to prove they have the ability to make markets in any contracts they submit. Others contend it’s reasonable to include the less liquid swaps in their submissions since they are derived from more basic instruments and dealers will provide price quotes in them.
It’s also uncertain whether the CFTC will react to the MAT submissions individually or as a group, wrote the analyst.
Only time will tell if the CFTC will provide guidance to other SEFs that have yet to file MAT submissions. SEFs are in the implementation stage, so it is logical to assume the regulator would offer some clarity. As Khasawneh and Ferreri point out, the CFTC is understaffed and resource constrained. “It was remarkable that on the day when the swap market was about to undergo its historic move to a regulated marketplace, our government was closed and the principal regulator for the markets was working with a skeletal staff,” said Ferreri.
Meanwhile, trading on SEFs won’t be mandatory until February to March of next year, regulators have time to react. “The MAT determinations start the clock on these markets moving into the Required Products status and will then implement a specific set of execution methods. We would expect this to happen early in the first quarter of 2014,” said Ferreri.