Bloomberg’s SEF Executes Electronic MAC Trade

Terry Flanagan

Goldman Sachs and a large asset manager have used Bloomberg’s SEF to execute the first fully standardized swap contract, signaling a new phase in the global derivatives market.

The first electronically traded Market Agreed Coupon (MAC) swap contract was executed on Bloomberg SEF LLC, the company’s multi-asset class swap execution facility (SEF), as part of its ongoing effort to prepare market participants for trading in a more regulated environment.

The electronic trading of this newly created standardized interest rate swap further advances Dodd-Frank’s goal of increasing standardization and transparency in the global derivatives market. Goldman Sachs completed the trade with one of the leading global asset managers.

“Today there is a critical need for fungible, standardized contracts as the derivatives market migrates to electronic platforms,” said Ben Macdonald, Bloomberg’s global head of product and president of Bloomberg SEF. “By providing the ability to trade these contracts electronically, Bloomberg will continue to help our clients’ transition to a more centralized marketplace.”

The MAC swap contract features a range of pre-set terms including start and end dates, coupons and maturities. Because the terms are standardized, the addition of MAC swaps will help improve liquidity and efficiency for those who are constrained by line items, as well as enhance the ability of buy-side market participants to engage in portfolio compression.

“We are pleased to work with Bloomberg and to play a role in the ongoing evolution of the market structure for interest rate products,” said Kostas Pantazopoulos, global head of interest rate products at Goldman Sachs. “Goldman Sachs values its role as a market maker in MAC swaps, as well as other interest rate swaps that fit the specific needs of our customers.”

Many market participants have used bilaterally pre-defined, fixed coupon interest rate swap (IRS) structures bilaterally for years; however, different end-users have used different structures.

The proactive development of a market agreed coupon (“MAC”) swap may be in the best interests of many market participants, irrespective of size, as clearing and exchange trading becomes mandatory and other new rules come into effect, according to the Asset Management Group of the Securities Industry and Financial Markets Association.

Such cleared swaps contracts would not create upfront funding issues at exchanges. No or limited initial technology build-out should be required for futures clearing merchants (FCMs) or clearinghouses.

“In addition, we believe that systems build-outs may be more scalable for smaller market participants that choose to use MAC structures,” Sifma AMG said in a statement. “Additionally, we believe that MAC contracts would help users keep the identity of end users and trading strategies private and may help promote liquidity and price transparency.”

MAC contracts may also facilitate trading on SEFs in a request-for-quote (RFQ) environment, as well as position management. “We hope that these factors will also lead to more price transparency and lower initial margin requirements to reflect increased liquidity within a narrower field of standard trades,” said Sifma AMG.

Bloomberg’s SEF, the first SEF to receive Commodity Futures Trading Commission approval, provides market participants with access to interest rate, credit default, foreign exchange and commodity swap liquidity. Since launching in October, more than $400 billion in cross-asset volume has been executed and 270 global firms have signed on to use Bloomberg’s SEF.

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