Clock Ticking Toward Swap Execution

Terry Flanagan

As the countdown continues toward the expected February mandatory trade execution deadline for cleared swaps, futures commission merchants (FCMs) require new workflow and order management capabilities.

“These last 12 months have picked up remarkably because of all the regulations,” said Justin Llewellyn-Jones, chief operating officer and global head of derivatives at Fidessa. “The CFTC SEF rules essentially dictate FCMs need an order management system; they basically need an audit trail. In equities, they’ve had this for years. In the derivatives world, they haven’t had that workflow mentality.”

Justin Llewellyn-Jones, Fidessa

Justin Llewellyn-Jones, Fidessa

Congress required that certain standardized swaps must be executed on a SEF or designated contract market (DCM). The trade execution requirement covers all swaps that are subject to mandatory clearing and made available to trade.

There are now 19 temporarily registered SEFs where more than a quarter of a trillion dollars in swaps trading is occurring on average per day. Four SEFs have made filings for a wide range of interest rate and credit index swaps to be determined made available for trading.

“With 90 registered swap dealers, including the world’s largest liquidity providers in interest rate and credit index swaps, sufficient liquidity exists across the entire interest rate swap curve to support these filings,” said CFTC chairman Gary Gensler. “Thus, I anticipate that by next February, there will be a trade execution requirement for a significant portion of the interest rate and credit index swap markets.”

The buy side, for its part, is trying to shield itself from the complexities associated with the SEF execution rules that the Commodity Futures Trading Commission set in motion in May.

“Everyone is bored of SEFs,” said Llewellyn-Jones. “The buy side doesn’t want to have to deal with complexity; they want want the brokers to deal with complexity, since there are now 19 SEFs. The SEFs are pushing out screens requesting that the buy side hook up to them directly, and the buy side doesn’t want to do that.”

Fidessa has put together a working group among its clients dealing with SEF aggregation. “The idea is that Fidessa would be a utility to pull all the information together in a consistent manner,” Llewellyn-Jones said. “These last few years, we’ve been migrating out of our equities space into derviatives, and bringing our managed services solution to bear on futures and exchange-traded derivatives in general.”

Electronic trading of swaps will soon be mandatory and industry participants need to get ready, Fidessa Senior Analyst Mark Brennan said in a recent blog post. Javelin kicked off the process on October 18, filing its MAT (Made Available to Trade) submission with the CFTC for a broad range of interest rate swaps, including spot and forward starting swaps and variable notional swaps, with tenors ranging from 1 month to 51 years.

TrueEX and Tradeweb made MAT submissions for “benchmark” IRS tenors, Brennan noted. TrueEX included its so-called “SCSM” (standard coupon standard maturity) swaps and both MarketAxess and Tradeweb ‘MAT-ed’ CDS index swaps.

As expected, the CFTC issued 90 day “stays” on each submission, prior to issuing its approval, so the first available to trade swaps will be approved mid/late January next year. With a 30-day “implementation period” following the determination, mandatory trading could kick in as early as mid-February 2014.

“Without dwelling further on the specifics of the MAT submissions or their revisions, it’s important to reiterate the most salient point: some profound organizational and technological changes are coming next year and market participants need to be prepared for them,” said Brennan.

It’s critically important to distinguish those swaps that will become “Required Transactions” under the CFTC’s SEF rules, from so-called “Permitted Transactions.”

“That is, the only swaps that will come under the trading mandate are those already mandated for clearing under Part 50 of the CFTC’s regulations, namely IRS, Basis, OIS and FRAs for USD, EUR, GBP and JPY currencies, and CDX and iTraxx CDS indices,” Brennan said.

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