Javelin Scales Back MAT Submission

Terry Flanagan

Javelin Capital Markets has scaled back its Made Available to Trade submission with the Commodity Futures Trading Commission after a barrage of criticism that the original submission was too broad.

Based on feedback Javelin received from a broad group of institutional buy-side firms, Javelin has streamlined its MAT submission to include only benchmark dollar and euro swaps along with certain IMM swaps.

“What has become clear is that considerable operational hurdles remain as the market prepares for the swap trading mandate,” said James Cawley, CEO of Javelin Capital Markets. “Starting with benchmark swaps is the only thing that makes sense right now. We can discuss Day Two only after we have safely got past Day One.”

Javelin also determined that insufficient visibility currently exists, on many operational fronts, to commit to a future timetable for a phasing in of additional swap instruments at this time.

Javelin filed its MAT (Made Available to Trade) submission with the CFTC on October 18 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.

Once a MAT determination is final, all other DCMs and SEFs are obligated to determine whether they list or offer the same, or an economically equivalent swap, and if so, they must treat the swap or economically equivalent swap as having been made available to trade.

The incentive for a DCM or SEF to make MAT determinations are underscored by the history of central execution markets, which reflects that a significant, and perhaps insurmountable first-mover advantage exists for the trading facility that first brings a given product to market.

Once a trading facility begins offering a new product, and establishes itself as the market for that product, it becomes very difficult for another facility to capture market share. Consequently, DCMs and SEFs have powerful incentives to capture first-mover advantage by making MAT determinations before their competitors do.

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.

‘The OTC market is a cocktail of ticking timed bombs mired in opacity. Allowing banks to trade non-regulated derivatives off-balance sheet was a major breach against their banking license and reserve requirement,” said Karim Taleb, principal at Robust Methods, am investment management firm specializing in absolute returns strategies for private and institutional investors. “These hidden transactions generated huge amounts of fees to the large banks, but eventually came to roost in the crisis of 2008.”

“The SEF system is hence overdue and a good first step,” said Taleb. “In addition to developing execution facilities, it is imperative for such new tools to provide unique identifiers for collateral, tracking technology, hypothecation status, collateral risk assessment, and leverage ratios.”

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