Javelin’s application for a made-available-to-trade determination has kicked up a dust storm among participants in the OTC industry, who claim that the application is too broad, and would therefore require that almost any swap would be mandated to trade on a swap execution facility (SEF).
Javelin filed its MAT (Made Available to Trade) submission with the CFTC on October 18 for a broad range of interest rate swaps, including spot and forward starting swaps and variable notional swaps, with tenors ranging from 1 month to 51 years.
The Javelin submission, in its current form, is not ready for action by the Commission because it lacks the specificity needed to determine whether it meets the six factors and the listing requirement set out by the CFTC, said Robert Pickel, CEO of the International Swaps and Derivatives Association, and Kenneth Bentsen, president of Sifma, in a comment letter.
“The Javelin submission potentially applies to a vast number of swaps due to all the possible permutations of trade dates, maturities, currencies, indices, payment and reset dates, and other factors,” said the Isda/Sifma letter.
The letter noted that Javelin asserts that since spot and forward starting swaps are ‘mathematically related’ then, as a result, consideration of the factors for spot starting swaps should be sufficient evidence of consideration of the factors for forward starting swaps and no separate analysis for forward-starting swaps is needed.
“We respectfully disagree that a mathematical relationship is a sufficient basis to assert equivalence for the purposes of MAT certification,” said the Isda/Sifma letter. “This is an extraordinarily low bar to clear, particularly in the context of fixed income swaps, virtually all of which can be connected by some mathematical relationship.”
Congress required that certain standardized swaps must be executed on a SEF or designated contract market (DCM). The trade execution requirement covers all swaps that are subject to mandatory clearing and made available to trade.
There are now 19 temporarily registered SEFs where more than a quarter of a trillion dollars in swaps trading is occurring on average per day. Four SEFs have made filings for a wide range of interest rate and credit index swaps to be determined made available for trading.
Morgan Stanley believes that Javelin’s MAT submission is far too broad. “Javelin has made
exaggerated claims about the MAT suitability of literally billions of different swaps based on the characteristics of only a few dozen of the most liquid swaps,” said Morgan Stanley managing director Dexter Senfft, in a comment letter. “It provides mathematical formulas and discusses the theoretical ability to create synthetic hedges without regard to the practical aspects of actually doing so. And it proposes to create a monopoly for itself, potentially locking certain participants out of the market.”
In comparison, both the trueEX and the Tradeweb submissions make reasonable arguments that the identified swaps should be considered MAT, according to Senfft.
TrueEX and Tradeweb made MAT submissions for “benchmark” IRS tenors. TrueEX included its so-called “SCSM” (standard coupon standard maturity) swaps and both MarketAxess and Tradeweb ‘MAT-ed’ CDS index swaps.