By Mike Kentz
The CME Group and Javelin Capital Markets cleared and executed USD 4.1 billion in interest rate swaps last Tuesday for a group of dealers and end users in a few seconds, a market first that could undercut dealer opposition to anonymous real-time clearing in the U.S. The swaps were executed with maturities between 2 - 10 years, with an average notional of USD 195 million and an average turnaround time of 1.932 seconds. Ninety percent of the swaps were accepted in under two seconds, with the fastest coming in at 1.32 seconds, according to both Javelin and CME officials.
The event could define what the Commodity Futures Trading Commission has called technologically practicable for the acceptance and clearing of over-the-counter swaps under Dodd-Frank. It has mandated that trades be processed within “milliseconds or seconds or, at most, a few minutes.” Not all clearinghouses have this capability, and the dealer community has argued that the difficulty in implementing such a mandate will bring risks to the market that should be mitigated by dealer access to end user trading books, something the end user community and regulators have opposed.
“The beauty that’s been proven here in production is that, just as in any other derivatives market, no execution documentation is needed,” said the head of OTC clearing at a major global hedge fund, referencing dealer attempts to use execution documentation for further access. “It is also foundational for empowering electronic execution and we’re very excited about the market structure transformation that real-time acceptance is pivotal to.”
Neither LCH.Clearnet nor the InterContinental Exchange currently has the ability to do what CME has done this week, but both are planning to. LCH officials confirmed that they have told their buyside advisory committee they hoped to be ready for real-time clearing by the second quarter of next year. The ICE has said it will be ready earlier, said the hedge fund source, and an ICE official confirmed the plans in general without giving any specific timeline. ICE owns the CreditEx platform, which should allow for a relatively seamless transition to real-time clearing. Officials at LCH confirmed that because they currently operate under a batch processing system, they would have to implement changes to their risk management systems, but could not comment further due to the need for regulatory approval first.
The dealer community previously said a lack of real-time clearing capabilities would impose risks on the market since the market could move in between the time a trade is agreed upon and the time it is cleared if there is a high degree of latency. The dealers involved in the trading could not be gleaned.