By Karen Brettell (Reuters)
Javelin Capital Markets, an electronic trading platform for privately traded derivatives, said on Wednesday that it has executed and cleared over $4 billion in interest rate swaps through CME Group, the first time the trades have been cleared in real time.
The move gives credence to regulatory efforts to push for more real time clearing of the contracts. Whether technology in the U.S. $300 trillion derivatives markets was sufficiently developed to enable real time trade clearing has been a focus of debate. The issue has been at the heart of some of the most contentious rules over how to regulate the industry.
The move by Javelin appears to end a debate over whether technology in the U.S. $300 trillion derivatives markets was sufficiently developed to enable real time trade clearing. The issue has been at the heart of some of the most contentious rules over how to regulate the industry.
Derivatives are undergoing a dramatic overhaul, mandated by last year's Dodd-Frank financial reform, which is designed to reduce risks of the opaque markets that were blamed as a major contributor to the 2008 financial crisis.
"We wanted to put a timestamp on what is technologically practicable," James Cawley, chief executive at Javelin in New York, said in an interview.
The Commodities Futures Trading Commission (CFTC) has proposed rules that would require central clearinghouses to accept or reject trades "as quickly as would be technologically practicable if fully automated systems were used." Debate over exactly how quick this can be, however, has been intense.
Javelin said that last week a group of large dealers and fund managers, including Bank of America, Wells Fargo and ING, tested how fast trades could be executed and cleared and found that in 90 percent of the cases the CME confirmed clearing acceptance in less than 2 seconds.
"This could be done using existing market infrastructure and now sets the standard for everyone else to beat," said Cawley.
Trades included 21 interest rate swaps of varying maturities and an average size of $195 million. Interest rate derivatives are used to speculate on or protect against changes in interest rates.
The average trip from execution to when the counterparties received confirmation that the trades were cleared was 1.93 seconds and the fastest was 1.32 seconds. Clearing houses stand between trade parties and guarantee financial obligations of the counterparties.
The speed in which derivatives can be executed and then centrally cleared has been a key issue in recent regulation, and was at the base of a major flare up between some of the largest market participants over the summer.
In this case some large dealers were calling on certain documents, known as triparty agreements, to be used until the market infrastructure guaranteed real time trade acceptance, arguing that they were needed to ensure that smaller investors maintain access to the markets.
This move was hotly contested by others, who claimed that the dealers were exaggerating delays and instead wanted to use the documents, in which investors, dealers and clearing agents pre-agree credit trading limits, as a way to maintain their dominance in the lucrative markets.
The dispute led the CFTC to propose an unprecedented ban on using the documents, the first time a regulator is thought to have intervened in such an issue.
Javelin was among a group of companies that also included fund managers Citadel and Vanguard and other banks and trading firms to meet with CFTC commissioners to push against the use of the contracts.
(Reporting By Karen Brettell)