By James Rundle
The MAT process is one where SEFs outline what instruments they will be offering for execution on their facilities, and then submit it to the CFTC for approval. Javelin's initial submission covered virtually all instruments eligible for trading on SEFs, but was later amended to reflect a narrower range of derivatives.
Those swaps will then be made mandatory for trading on all SEFs and designated contract markets (DCMs), where applicable. As it stands, the submission approved by the CFTCcovers roughly half of the notional volume of today's rates market, including US dollar and Euro-denominated benchmark swaps, along with a number of others.
"This is clearly a landmark event for the $400 trillion swaps market and is one of the largest structural events for any capital market in 20 years," says James Cawley, CEO at Javelin Capital Markets.
The MAT process has proved controversial in some quarters, with participants seemingly baffled by the CFTC's decision to allow SEFs, the entities supposed to be overseen by the regulator, to make the determination themselves. A number of firms have submitted MAT applications to the CFTC in recent months, including Bloomberg and Tradeweb, two of the largest SEFs in the market. Even representatives from Bloomberg, however, expressed surprise at the eventual form of the MAT process.
"Obviously I'm part of the SEF world, in that Bloomberg operates a SEF," said Nathan Jenner, COO of fixed-income electronic trading at Bloomberg, speaking on a Waters webcast late last year. "But even from that perspective we think it's strange that the MAT process, which is designed to determine which instruments need to trade on a SEF or can stay off a SEF, and applies to the whole market, is governed by the SEFs."
The most public criticism came from within the CFTC itself, with Commissioner Scott O'Malia expressing strong dissent when it came to the decision.
"It is hard to imagine a federal agency regulatory process that is more flawed than the MAT determination," he said. "The Commission staff has certified all interest rate benchmarks and related packaged transactions for mandatory trading on SEFs or DCMs, while at the same time, stated that it will consider some future action for all packaged transactions. And to complicate things further, the Commission has been excluded from a major regulatory decision that significantly reshapes current market infrastructure."
O'Malia went on to question whether CFTC staff had a solid legal basis to certify Javelin's determination, in that the firm said it would exclude certain packaged transactions containing one or more MAT transactions, yet the regulator's rules say those must be executed through a SEF. This, he explained, highlighted a conflict of interest at the heart of the entire process. Others highlighted further conflicts inherent in the MAT determination process.
"The CFTC approval of Javelin's MAT submission means that trading is now guaranteed to migrate to SEFs and DCMs in February," says Sassan Danesh, partner at Etrading Software. "Commissioner O'Malia, in his dissenting note, raises some interesting points regarding remaining regulatory uncertainty. An example of when additional clarity would be welcome is the case where a multi-leg order is to be executed with one leg being a benchmark swap, and therefore caught by the CFTC MAT rules, and the other leg being a Treasury, and therefore falling under Securities and Exchange Commission rules."
The Bottom Line
- The CFTC's approval of Javelin's MAT submission means that those instruments must be traded on SEFs or DCMs (in the case of swap futures) from February 15 onwards.
- The MAT process itself is still controversial, though, with conflicting regulatory consequences. Some even question the legality of the process itself, given the inherent conflict in some instances and the CFTC's subsequent (and self-imposed) powerlessness to resolve it as the rules stand.
- Further MAT applications are being considered, having been submitted in recent months by other SEF operators.