The CFTC is considering changes to the way swap instruments are deemed suitable for mandatory trading on swap execution platforms.
Speaking at the ISDA AGM in Montreal Thursday, CFTC chairman Timothy Massad confirmed plans to revisit the current “made available to trade” approach, which could ultimately provide the agency with greater authority over which products are mandated for trading on registered platforms.
“The current framework is modelled on product innovation in the futures market, but some say that the CFTC should have more authority or power to initiate an application,” said Massad.
Some market participants have criticized the current approach, which puts the power into the hands of swap execution facilities themselves to apply for over-the-counter swap categories to be deemed suitable for trading on the registered platforms.
Despite the clear commercial incentives for platforms to request a broader range of products for SEF trading, since the first wave of MAT applications were made in late 2013, which ultimately kick-started the countdown for the trade execution mandate, no further applications have been made to extend the obligation to additional products.
Massad confirmed at the event that he has asked CFTC staffers to convene a public roundtable to consider the situation.
Under the current regime, the CFTC has 90 days to determine any MAT submission made by a SEF. The CFTC is required to approve applications unless they are clearly inconsistent with the Commodity Exchange Act or the CFTC’s own regulations.
When the first – and only – applications were made in October 2013, the industry was riled by a submission by Javelin, which included all interest rate swap tenors from one month to 51 years in US dollars, sterling and euros. A rubber stamp from the CFTC – which appeared likely at the time – would have pushed the entire rates curve onto SEFs, incorporating a large number of illiquid instruments.
Bowing to industry pressure, Javelin eventually revised its application to mirror a submission from rival TrueEx, which incorporated only standard tenors.
Some believe that SEFs have come under intense dealer-led pressure to avoid any attempt to expand the universe of products that must be traded on registered platforms.
“The MAT process doesn’t make any sense. I don’t see any reason why a SEF wouldn’t push to get things onto SEF,” said one buyside participant speaking on the sidelines of the conference. “If there was no fear of retaliation by existing liquidity providers, or if the CFTC could make those submissions, I think we’d see more products added.”
By contrast, the European approach under the revised Markets in Financial Instruments Directive, due to be implemented in 2017, puts the decision in the hands of the European Securities and Markets Association, which is currently creating liquidity thresholds, above which any swap product would be forced onto a new breed of platforms known as organized trading facilities.
Anonymity debate continues
Some believe that a change in the MAT regime represents a central part in a range of measures currently up for consideration, which could ultimately open the market for non-traditional liquidity providers.
Regulators anticipated a wave of new entrants, but other than Citadel, which recently became a top four swaps dealer on Bloomberg, a series of hurdles have kept other liquidity providers at bay.
A lack of anonymity when trading on a SEF order book continues to be a concern for buyside participants. Most inter-dealer broker SEFs still operate name- give-up, whereby counterparty names are revealed after trading on the order book.
”This is an issue I am very concerned about….We have heard market participants express concern about potential negative consequences of this practice with respect to its effects on liquidity and participation, and I have not heard a compelling justification for it.” Massad said.
”Some market participants have also expressed the view that no individual SEF can afford to be the first to prohibit name give-up practices in the absence of action by us, because of potential retaliatory action by other market participants. In light of that, I am discussing with my fellow commissioners possible actions, and I expect that we will have more to say on this in the future.”
