CFTC Expected to Usher In New Swaps Trading Rules

By Katy Burne


A top derivatives regulator is expected next week to accept one electronic platform operator's request to list several swaps for trading, said people familiar with the matter, bringing closer to reality a key plank of the 2010 Dodd-Frank financial overhaul law.

The Commodity Futures Trading Commission has been preparing since the financial crisis to force more open and transparent trading of derivatives called swaps, after they were partially blamed for jeopardizing the health of the global banking system.

The new rules aim to foster competition among dealers in the $693 trillion swaps market so as to lower trading costs for their customers, to give regulators a clearer view of trading and to help guarantee that the parties involved in a trade fulfill their promises.

The CFTC set a deadline of January 16 to accept or reject Javelin Capital Markets, LLC's October 18 filing requesting to list swaps for open trading on its platform. If the regulator lets the Javelin proposal through next week, after its 90-day review is complete, any trading in the swaps on Javelin's list must be done on a newly registered swap platform or a futures exchange by mid-February.

The platform's approval could solidify a mid-February deadline for users of certain types of frequently-traded swaps to comply with the new U.S. trading rules. More esoteric and customized swaps would still be allowed to trade privately.

The derivatives overhaul should "reduce interconnectedness and systemic risk, improve pre- and post-trade transparency, and foster an open, level, competitive playing field," wrote Chicago trading giant Citadel LLC in a Nov. 29 comment letter to regulators about the trading rules.

"Trading swaps on [competitive platforms] is no longer optional once the CFTC certifies" the platforms' filings, said James Cawley, CEO of Javelin.

Currently, swaps aren't required to be traded on the new platforms, known as swap execution facilities, or "SEFs," although many investors have been testing the systems voluntarily ahead of the expected CFTC mandate. As of mid-February, the only alternative where those swaps covered by the rules may be traded will be on registered futures exchanges.

CFTC staff in recent days discussed Javelin's filing with company executives, said two people briefed by the regulator.

Javelin's new filing, completed Thursday, is its third amendment to its original request since October. The company this week dropped several requests for the types of derivatives it asked to be mandated to trade on new swaps platforms like its own.

Some of the types of swaps dropped from the proposal include complex derivatives that include other types of transactions, such as a swap paired with a Treasury bond trade. Regular bond trades aren't addressed by the derivatives regulation.

The Managed Funds Association, a trade group, estimates that these linked transactions constitute about 25% of the U.S. dollar-based interest-rate swaps market. It and other trade groups, such as the International Swaps and Derivatives Association, have pushed for the CFTC to phase in rules on more complex derivatives after first tackling the most commonly traded swaps.

Javelin also removed forward contracts from its latest filing, which are agreements to buy or sell an asset at a specified rate on a set date.