Javelin Capital Markets has written an open letter on the ongoing US SEC and CFTC discussion about block trading and real-time swaps reporting.
The electronic trading venue stresses the need to enforce Dodd-Frank's requirement for reporting interest rate swap and CDS transactions in real-time, as well as suggesting what should constitute a block trade.
Real-time reporting is crucial, argues Javelin CEO Jamie Cawley. He says: "You just have to look to September 2008 to understand the importance of real-time information for the market. It is a ridiculous notion to think we can operate IRS and CDS today with them being so liquid and not have any kind of real-time reporting of those trades."
Cawley says that knowing the value of the last trade is important to customers before they put their own trade on. Achieving this through real-time reporting will engender greater market confidence, with greater liquidity and lower systemic risk. He says this "provides for continuous markets, particularly in times of stress when the markets need that most".
Javelin argues that the one exception to real-time reporting should be block trades. This issue was addressed specifically by US Congress, allowing for a limited time delay in public reporting. Cawley explains that by giving a block trader time to offset, hedge or even trade out of their position, they are more likely to make bigger quotes in the future, benefiting liquidity.
How to define a block trade is where the issue becomes slightly more complicated. Javelin recommends a different method for IRS than for CDS, with IRS block trades being calculated according to risk per basis point.
Cawley says: "For IRS, we believe this should be done on a duration-weighted basis. If you take US$200,000 or US$250,000 of risk per basis point, it comes to US$1bn-US$1.2bn for two-year swaps but around US$135m-US$150m for 30-year swaps. The risk is constant across the yield curve, but the duration difference means for the same amount of duration - or DV01 - the notional goes up."
He continues: "The block trade is notionally bigger for two-year swaps than it is for 30-year swaps. That is somewhat consistent with the practice in the US Treasury world looking at futures."
Meanwhile, for CDS Cawley says the existence of multiple credit curves means that DV01 is not the correct approach. Instead, Javelin advocates using a 10x multiple to define a block trade. Javelin's open letter advocates using US$50m as the block trade for investment grade CDS (assuming the standard size trade to be US$5m).
The letter also suggested that US$50m is the standard size for investment grade index trades, but Cawley says that has recently been revised upwards. The market is understood to now consider US$100m to be the standard size trade for investment grade index trades, meaning a block trade should be US$1bn.
Cawley cautions that only block trades should have any delay and that, even then, such a delay should be measured in minutes, if not milliseconds. He concludes: "Only block trades should have any kind of time delay and even then there should never be an instance where information is not reported to the marketplace. The time a trade took place, the amount, the credit and the price should be reported, but not the names of the buyers or sellers. Some people are campaigning to have 30 days to report that information, which we think is ridiculous."
Javelin Capital Markets LLC
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