Although swap execution facilities have officially launched, not all swaps will be required to trade on SEFs until the Commodity Futures Trading Commission has decreed that a swap is “made available to trade” and is subject to a mandatory clearing requirement.
These wrinkles in the final SEF rules adopted by the CFTC mean that most swaps will not begin trading on SEFs until next year.
“The mandatory trading deadline is hitting in early 2014,” said Neal Brady, CEO of Eris Exchange. “Nobody knows the exact date, but the market consensus is the first quarter, at which point swaps that are required to be cleared and have been declared as made available to trade will then be required to be executed on either a SEF or a DCM [designated contract market]. That’s what’s driving interest in our product and its inherent advantages.”
October 2 was the mandatory registration deadline for SEFs to be registered, and the CFTC has given SEFs another 30 days to implement the pre-credit risk controls and onboarding procedures necessary to get them operational.
The CFTC allows a DCM or SEF to determine to make a swap available to trade (MAT), Once a MAT determination for a swap that is subject to the mandatory clearing requirement has been approved, all transactions in that swap must be executed on a DCM or SEF – i.e., over-the-counter trading in that swap will no longer be permitted. In the meantime, swaps can still be traded bilaterally or through interdealer brokers.
“Mandatory clearing creates challenges for the industry which SEFs are in a position to offer solutions for,” said Robert Burke, managing director and head of global OTC clearing at Bank of America Merrill Lynch. For example, portfolio compression services may become are useful tool for the buy-side to reduce the number of transactions in their portfolios.
In making a MAT determination, a DCM or SEF must consider such factors as whether there are ready and willing buyers and sellers; the frequency or size of transactions; the trading volume; and the number and types of market participants.
Once the MAT determination for a particular swap is approved or deemed certified, all DCMs and SEFs that list or offer that swap for trading must comply with the trade execution requirement.
The CFTC has stated that it intends to exercise its right to extend the review periods for initial MAT determination submissions, giving market participants more time to prepare compliance with the trade execution requirement. The first MAT determinations will apply to classes of interest rate swaps and index credit default swaps that are currently subject to mandatory clearing.
“While the market will determine over time the best model for execution, the switch to electronic trading provides an opportunity for innovation,” said Burke. “SEFs must first get the basics right: robust technology; seamless connectivity to participants, DCOs, limit hubs, and FCMs; clear and equitable rulebooks.”
Eris Exchange is a futures exchange (Designated Contract Market) subject to CFTC jurisdiction, listing cash-settled interest rate swap futures. Eris Exchange contracts are cleared by clearing firms through CME Clearing.
Wells Fargo has joined Eris Exchange to provide liquidity and clearing services to Wells Fargo's global client base. Wells Fargo's swap desk recently executed its first Eris Swap Futures trade.
"Eris Exchange welcomes Wells Fargo as our newest dealer bank trading partner," said Brady. "Adding Wells Fargo to our existing group of liquidity providers brings deeper and more liquid markets to our end user clients and will significantly accelerate the recent increases in volume and open interest we have seen as the Dodd-Frank deadline for mandatory swaps trading approaches in early 2014."
Additionally, Wells Fargo launched support for customer clearing of Eris Swap Futures and client access to Eris SwapBook, Eris Exchange's electronic central limit order book.