Javelin and CME clearing handle swaps in seconds

By Michael Mackenzie


A group of swap market participants including CME Group, the US exchange operator, on Wednesday claimed to have set a new standard for real time reporting of cleared over-the-counter (OTC) derivatives trades, saying they had handled interest rate swaps in an average time of less than two seconds.

Javelin Capital Markets, a swaps trading platform, and the CME's clearing house, said $4.1bn in notional value of the contracts had been executed and cleared in this way.

Executing and clearing OTC trades in "real-time" or "as soon as technologically practicable" is a central aim of proposed rules under the Dodd Frank Act, being implemented by the Commodity Futures Trading Commission, the futures regulator that will also oversee the OTC derivatives markets.

Gary Gensler, CFTC chairman, has repeatedly argued in favour of introducing more transparency into OTC markets for derivatives, often referred to as swaps in the US.

"We [also] are looking to soon finalise real-time reporting rules, which will give the public critical information on transactions – similar to what has been working for decades in the securities and futures markets," he said last month.

Javelin and CME said the 21 trades were transacted across various maturities out to 10 years and the average trade size was $195m between dealers and investors on Javelin's anonymous execution platform last week.

Javelin's platform is a central limit order book, where bids and offers are entered by various counterparties and trading takes place. Most current OTC derivatives trades are negotiated bilaterally between counterparties, with prices only visible to the parties.

The Dodd-Frank act requires that most "standardised" OTC derivatives be traded on more formal trading platforms where prices are more widely visible, although the CFTC has yet to finalise exactly how such platforms will function.

The average time that elapsed between trades being executed on Javelin and cleared at the CME was 1.932 seconds. The CME accepted 90 per cent of the trades in less than two seconds, with the fastest being 1.32 seconds using its current existing clearing technology.

"Dealers, buyside firms, clearing firms and Javelin wanted to put a time stamp on what 'technologically practicable' meant," said James Cawley, chief executive officer of Javelin. "This now means in under two seconds. A new industry standard has now been set."

Brad Small, head of rates trading atIng said: "Counterparty and execution risk have now been dramatically reduced by combining central clearing with real time acceptance."

Some banks, however, have told regulators that the process of clearing trades with customers will take far longer than a matter of seconds and could take several hours and require substantial spending on new systems. In October, MarkitServ cleared credit derivative trades in minutes after they were transacted between dealers.

Clearing swaps is growing quickly as Dodd-Frank rules in the US and other G20 reforms aim to push clearing of nearly all swaps through clearing houses. The main clearing houses vying for a slice of the market are CME, LCH.Clearnet and the IntercontinentalExchange.

Last week, LCH.Clearnet, which clears the bulk of interest rate swaps between dealers, announced enhancements designed to speed up the clearing of swaps via futures commission merchants, or futures brokers, to which Dodd-Frank has assigned the role of intermediary between OTC swaps customers and clearing houses.

CME said last week it had cleared $150bn in notional volumes of interest rate swap and credit default swap trades, including a record $61.9bn in November, between customers such as BlackRock and banks such as Goldman Sachs and RBS.