By Richard Henderson
Mandated trading will begin on swap execution facilities (SEFs) on 16 February for common dollar and euro interest rate swaps after the Commodity Futures Trading Commission (CFTC) approved a made available to trade (MAT) proposal from Javelin SEF on Thursday, although its CEO predicts a broader MAT offering within a year.
Javelin was the first SEF to submit a MAT proposal, approval of which constitutes the de facto beginning of mandated trading on the new OTC derivatives platforms. The ruling requires participants to trade products listed in Javelin’s MAT plan on any operating swap execution facility from 16 February.
Javelin’s MAT products include US dollar spot starting benchmark rates and US dollar spot starting benchmark swap spreads with tenors between two and 30 years; euro spot starting benchmark swaps between two and 30 years and certain US dollar money market swaps.
Javelin CEO James Cawley told theTRADEnews.com the CFTC MAT approval was a historic moment for the US$400 trillion dollar swaps market and one of the largest structural events for capital markets in recent decades.
He added the range products Javelin has designated MAT, the scope of which the SEF reduced in an amended filing late last year, would increase in the 12 months from February as participants overcome initial operational issues.
“You can expect many additional MAT [proposals] that will be coming from Javelin and other SEFs as the market absorbs the impact of events in February,” Cawley said.
“We made the decision to amend our [initial] MAT plan after speaking with customers in response to legitimate operational concerns in the market,” he said, adding that once those concerns were dealt with, a greater variety of OTC derivatives, including less-liquid products, would transition to mandatory SEF-based trading.
Previously, Javelin, which will focus on interest rate swaps, had proposed the widest parameters for MAT products, stating those with tenors between one month and up to 50 years could be included.
In November, outgoing CFTC chair Gary Gensler said he believed the market had enough liquidity to support SEF trading for all instruments across the interest rates curve, an idea that has yet to gain widespread market support.
A total of five SEFs have lodged MAT proposals with the CFTC: Javelin and trueEX for rates; MarketAxess for credit default swaps; and Tradeweb and Bloomberg for both credit and rates instruments.
Fellow SEF trueEx is next in line to receive CFTC approval for its MAT plan expected next week, while the first credit products will be covered in Tradeweb’s MAT plan, which the CFTC has until 27 January to rule on.
CFTC Commissioner Scott O’Malia, in a statement released after close of business on Thursday, described the MAT process as “flawed”, highlighting in particular a possible discrepancy between interest rate swaps and packaged swaps transactions, the latter comprised of multiple types of instruments.
“I find this approach especially troubling given the CFTC Chief Economist’s assessment that these packaged transactions comprise 50% of the notional volume of the rates market,” the statement read.
“By accepting Javelin’s determination and then immediately contemplating further action with respect to half of the MAT transactions, the Commission creates uncertainty in the market and sets a dangerous precedent for future MAT determinations.”
The CFTC will discuss the MAT process in a meeting of its technology advisory board on Tuesday.