NEW YORK, NY. December 4, 2014. Javelin SEF, LLC (“Javelin”) announced that it formally requested the CFTC to consider lowering the minimum liquidation time for certain Market Agreed Coupon (“MAC”) and International Monetary Market (“IMM”) swaps.
Lowering the minimum liquidation time for MAC and IMM swaps may open the door for swap clearinghouses such as LCH.Clearnet and CME Group to reduce the initial margin requirement to levels that are consistent with Interest Rate Swap (“IRS”) futures such as the CME’s Deliverable Swap Futures and Eris Exchange’s Standard Swap Futures contracts. IRS futures are virtually identical to their OTC-cleared counterparts yet they have a much lower minimum margin requirement. They enjoy this preferential margin treatment despite the fact that volumes in the OTC-cleared equivalents are significantly larger.
“There is no reason why IRS futures should have a lower minimum margin requirement than equivalent OTC-cleared swaps when OTC-cleared swaps have significantly larger trading volumes,” said Michael Koegler, Managing Director of Javelin Capital Markets. “IRS futures and OTC-cleared swaps are both cleared at the same venue by the same FCMs. Portfolios in both instruments can be liquidated in the same period of time and one could argue that a portfolio OTC-cleared MAC and IMM swaps would be more easily liquidated than IRS futures given the larger degree of liquidity available.”
“Electronic CLOB trading for MAC swaps could be short-lived if the margin differential between OTC-cleared swaps and IRS futures are not addressed,” said Wally Sullivan, CEO of Javelin SEF. “Margin relief is a necessary step in the evolution of the IRS market and has the potential to level the playing field between IRS futures and OTC-cleared swaps from a cost-of-trading perspective.”
About Javelin SEF, LLC (www.thejavelin.com)
Javelin SEF, LLC (“Javelin”) is a derivatives execution platform for Interest Rate Swaps. Javelin offers both anonymous electronic and voice-hybrid methodologies for trade execution and works with several execution partners to ensure optimal liquidity for its diverse customer base. Javelin is one of the first platforms to register as a Swap Execution Facility under the Dodd Frank Act with the Commodity Futures Trading Commission.