With the Commodity Futures Trading Commission expected to mandate that OTC swap executions take place on swap execution facilities, a flurry of activity has occurred in the form of made-available-to-trade, or MAT, determinations.
Under the Dodd-Frank Act, once an SEF makes a MAT determination for a particular instrument, all SEFs are required to offer that instrument for trading.
The Wholesale Market Brokers’ Association, Americas (WMBAA), in a letter to the CFTC, expressed concern about the application of MAT determinations to “packaged transactions,” which involve simultaneous execution of two or more components.
The WMBAA advocates the CFTC adopting a phased approach to the implementation of the MAT determinations, considering specific contracts based on their liquidity, and excluding packaged transactions from the initial phases of implementation.
“By adopting a phased approach, the Commission would have additional time to examine the remaining implementation concerns related to packaged transactions,” said WMBAA chairman Shawn Bernardo. “Absent cautious implementation of the MAT determinations, market liquidity for packaged transactions would be harmed and market participants would experience increased risk and cost when attempting to execute these transactions.”
Bloomberg, in its MAT submission to the CFTC, also said that packaged transactions should be excluded from MAT determination.
“While package transactions are common in the marketplace, they are highly customized and we therefore believe that package transactions should not be subject to the mandatory trading protocols,” said Gregory Dumark, chief compliance officer of Bloomberg SEF.
Other types of swaps that Bloomberg said should not be MAT include non-benchmark swaps, non-spot starting swaps, non-par swaps, basis swaps and overnight indexed swaps.
An overnight indexed swap (OIS) is a fixed-to-floating interest rate swap where the periodic floating rate is based on an overnight index rate. For example, a USD OIS swap uses the Federal funds rate as the underlying for the floating leg.
The most commonly traded inters rate swaps are trading on the benchmark points of the swap yield curve (from 1 to 30 years), known as “benchmark swaps.” Once a benchmark swap ages past its start date, even by one hour or one trading day, it becomes a bespoke swap, or non-benchmark swap. In non-benchmark swap, liquidity becomes significantly more fragmented because they require principal risk-taking on both sides of the transaction, rather than one side merely performing a market-making or liquidity-provisioning function.
In 2013, less than 0.1% of the swap trades executed on the Bloomberg Electronic Trading Systems were in non-benchmark swaps. “In our experience, there are very few ready buyers and sellers of these swaps,” Dumark said.
Although Bloomberg SEF offers functionality to trade OIS, only 45 OIS trades were executed year-to-date on the Bloomberg systems, in contrast with more than 10,000 trades in spot-starting benchmark swaps.