SEFs Get Up to Speed

Terry Flanagan

Since the SEF rules were finalized last year, SEF operators and market participants have dealt with issues such as customer onboarding, RFQs, order books, and pre- and post-trade processing.

One of the latest wrinkles to come out has been the treatment of multilegged swap transactions, known as packaged transactions.

“Most of the MAT filings had some commentary about packaged transactions, and there was discussion about the exclusion of packaged transactions from the SEF trading requirement. The CFTC said that it would not per se relieve market participants of the obligation to trade swaps on a SEF or DCM if one of the legs happened to fall under the criteria of MAT,” said Tomas Zikas, managing director at State Street, during a webinar on Thursday.

Zikas added: “The CFTC is in a tricky spot because they can’t open up an infinite loophole for packaged transactions, but the market is concerned that a universal requirement for packaged transactions to go on SEFs without phasing is unacceptable. My view is that the CTFC will not give a broad exemption but may give the market some time to catch up with this requirement.”

Javelin filed its MAT application in October for interest rate swaps, and it was approved on Jan. 16. That kicked off a 30 day clock that will require trading of most interest rate and credit default swaps on SEFs and DCMs by February 17.

“We’re excited that we were involved in a landmark event, but there’s still a lot of work for us and market participants,” said James Cawley, Javelin CEO. “Javelin has signed a number of dealers and customers, and continues to sign both in anticipation of the mandate.”

Javelin SEF is now live with Traiana’s CreditLink service for real time pre-trade credit checks on interest rate swap trades.

Current CFTC rules require clearing firms that clear interest rate swaps to check their customer orders on newly created Swap Execution Facilities, or “SEFs”, for available credit before a trade can be executed.

CreditLink offers Javelin customers a single point of connectivity between the Javelin trading platform and multiple clearing firms. Customers can now onboard to Javelin more efficiently and seamlessly.

“We are delighted that Javelin is joining the Traiana CreditLink network to verify pre-trade credit checks for its customers,” said John Burchenal, global head of alliances & partners at Traiana. “Traiana is committed to helping market participants trading on SEFs to be compliant with the latest regulations.”

“The Traiana deal facilitates customer trading on Javelin by making it easier for their FCMs to comply with rule 1.73,” Cawley said. “We also offer our own credit checking system, and we are working with Markit on their Credit Hub system. Wherever it makes sense for the customer to do business on Javelin, we are easing the friction.”

Javelin SEF is one of the first platforms to register as a Swap Execution Facility under the Dodd Frank Act 2010 with the CFTC. Javelin SEF received a temporary SEF license in September 2013.

“Javelin was founded as a direct result of the Dodd Frank Act in 2009, and it is this opportunity that attracted us as entrepreneurs,” said Cawley.

“Javelin is a SEF,” he said. “We started trading a day before the October deadline. We have dealers who stream prices and are live on our platform now. We have traded $20 billion so far. Rarely in any capital market do you have such a one structural event as mandatory trading on exchanges or SEFs trading.”

“What has taken decades in other markets to occur looks set to happen in weeks or months for interest rate swaps,” he noted. “The key for any entrepreneur is to take advantage of such structural disruption by offering ‘business as usual’ solutions to your customers tied to the benefits of new technologies and operational efficiencies.”

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