Institutional investors and large non-financial companies that trade swaps are rarely one-off users; rather, they’re in the market regularly as part of enterprise-wide hedging or speculative programs. To optimize efficiency, packaging trades into a single transaction can be indicated.
As swap execution facilities have developed since the industry’s Oct. 2013 start date, so-called package trades have been an area of uncertainty, as the phased approach implemented by regulators has meant that at times, certain swaps had to be traded on SEFs when others didn’t.
But with multiple key U.S. Commodity Futures Trading Commission relief-expiration dates now passed, SEF transactions increasingly consist of more than one component.
“We're starting to see the more complicated workloads,” said Kevin McPartland, head of market structure and technology research at Greenwich Associates. “We’ve come a long way and for the most part, basic stuff like trading swaps with Treasuries is now required. SEFs have adapted and prepared well.”
In May 2014, CFTC relief expired for package trades in which all components are considered made available to trade (MAT). Later in the year, relief expired for package trades with at least one leg MAT and the other(s) subject to mandatory clearing, as well as package trades consisting of a MAT swap component and U.S. Treasuries. Just last month, relief expired for some package trades that pair a MAT swap with a new-issue bond, or with a non-swap.
Since the fall of 2013, the CFTC extended compliance deadlines multiple times for package trading on SEFs based on feedback from market participants, who indicated they needed more time to prepare for the new trading protocol, according to Chairman Timothy Massad. “We wanted to avoid unnecessary disruptions in the marketplace,” Massad told a banking industry group in a March 2 speech.
For end users of SEFs, package trades are appealing because they can consolidate two or more trades into one transaction, at least theoretically resulting in lower transaction costs. Perhaps more importantly, the concurrent execution of a package trade eliminates the risk of the price of a second trade moving after the first trade, which could scuttle the rationale for making the transactions.
“Packages are somewhat ‘funky’, in that a key aspect participants look at is the associated basis risk if they’re going to execute that package in two separate legs,” said Chris Amen, head of U.S. institutional rates markets at Tradeweb. “The beauty of electronic trading is being able to execute that package holistically -- getting a single price and enjoying the benefits of the straight-through-processing and downstream reporting that a SEF provides.”
Tradeweb, which operates two SEFs, has seen “significant” growth in package-trading volume as the transactions were phased in, according to Amen.
“In terms of the upcoming phase-in of packages that need to be executed on a SEF, the next important date is May 16 with TBA mortgages versus a MAT swap,” Amen said. ”TBA mortgages are liquid instruments that are traded via both voice and electronic platforms in a commoditized way. We anticipate some uptick in volume when that package moves onto SEFs, but at this time we don't see other dates that will have a profound impact on e-trading of derivatives.”
In November 2015, CFTC relief will expire for package trades in which one leg is a MAT and the other leg or legs are futures contracts. “There is a little bit more to come” with regard to SEF package trades, McPartland said. “But we’ve got the easier ones under our belts.”
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