Packaged MBS Trades Move to SEFs

Terry Flanagan

Following the expiration of no-action relief by the U.S. Commodity Futures Trading Commission on May 15, packaged mortgage backed securities and U.S. Dollar swap transactions must be traded on a swap execution facility or designated contract market.

Tradeweb Markets has added MBS vs. swaps to its TW SEF. Unlike other packages, the MBS vs. swap package trade is received, quoted and executed by counterparties’ MBS desks, representing the first transaction that was traded on-SEF by MBS traders, not by derivatives trading desks.

“Once an RFQ for a MBS vs. swap is received by a market participant, it is quoted and executed by their MBS desk rather than the derivatives trading desk,” said Chris Amen, head of U.S. institutional rates at Tradeweb. “This package is traded similarly to other package trades; the only difference is the group that you’re transacting with.”

The addition of MBS v. swaps expands Tradeweb’s mortgage offering, alongside MBS v. Futures and MBS v. Treasury trades. To-be-announced MBS represents the majority of all institutional residential mortgage trading. There has been more than $211 trillion in transactions executed by asset managers and other institutional clients on the Tradeweb MBS platform since inception. In 2015, monthly trading volumes reached approximately $2 trillion on the electronic multi-dealer-to-customer marketplace.

“Previously, voice trading was the primary way that MBS vs. swap trades were executed. “Following the expiration of the CFTC no-action relief on May 15, if this type of package trade includes a made available to trade (MAT) swap, it needs to be traded on-SEF,” said Amen.

Tradeweb is seeing more buy-side clients trading swaps on its SEF. “It’s clear that there has been real growth in SEF trading since launching in October 2013, increasing from less than 5% electronic to 40% market share for IRS,” said Amen.

The infrastructure build-out has been a major challenge that buy-side firms have had to contend with. “Whether you’re looking at technology or compliance, it was a heavy lift for our clients,” said Amen. “It’s an area we’ve continued to worked closely with them on to help them overcome issues.”

Clients have also had to adjust to the electronic trading of derivatives, but the acceleration in volumes which began last summer indicates that market participants are more comfortable with trading derivatives on-SEFs, he added.

The CFTC’s phased approach has helped ensure that the new regulatory framework has been successful in driving an orderly transition to more efficient and transparent markets on SEFs and electronic trading. “It has allowed both market participants to ease into the process of trading packages electronically, and market operators the time to build and fine-tune the infrastructure to support those types of trades,” Amen said.

There are two upcoming no-action relief dates. The first is at the end of this year for MAT swaps vs. futures package trade which will take place on November 14, 2015, and the second is for MAT swaps vs. primary bond issue packages which will expire in February 2016.

“The gradual phase-in of the package trading mandate will continue to introduce a broader range of transactions to the world of mandatory SEF trading, expanding the MAT universe,” Amen said.

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