Enter to open, tab to navigate, enter to select
New MATs Likely to Expedite Exchange Trading of CDS and Interest Rate Swaps
Practical Law Legal Update 9-548-0405 (Approx. 4 pages)
New MATs Likely to Expedite Exchange Trading of CDS and Interest Rate Swaps
by Practical Law Finance
| Published on 06 Nov 2013 • USA (National/Federal) |
Two SEFs submitted the first made-available-to-trade (MAT) determinations for credit default swaps (CDS) that, if approved by the CFTC, would require mandatory exchange trading of certain CDS under Title VII of the Dodd-Frank Act. Javelin SEF, LLC also reduced the scope of its previously submitted MAT determination covering interest rate swaps.
New submissions continue under the CFTC's made-available-to-trade (MAT) determination process by which certain swaps become subject to mandatory exchange trading under Title VII of the Dodd-Frank Act. Under the MAT process, a CFTC-registered exchange (either a designated contract market (DCM) or a swap execution facility (SEF)) submits a MAT determination for one or more types of swaps for CFTC review. If not objected to by the CFTC, those swaps may no longer be entered into bilaterally in a private transaction, but must be entered into on a DCM or SEF.
The first MAT determinations were submitted last month by Javelin SEF, LLC and trueEX, LLC (a DCM) for certain interest rate swaps (see Legal Update, First SEF Available-to-trade Determination Could Move Most Interest Rate Swaps onto Exchanges). Since that time, two SEFs have submitted MAT determinations that would move many credit default swap (CDS) onto exchanges, and the Javelin MAT has been downsized. Some market participants have expressed concern that newly created, upstart SEFs are driving the move of swaps to exchanges. If the CFTC does not object to the MAT submissions, they will become effective for submitted interest rate swaps on February 15, 2014 and for CDS on February 26, 2014.
Under CFTC Regulation 40.6, SEFs and DCMs may make an initial determination that certain types of swaps have been designated to be MAT on that exchange. The exchange's MAT determination, if not objected to or stayed by the CFTC, becomes effective ten days after submission. Under CFTC Regulations 40.6(c) and 40.7(a)(2)(iii), the CFTC has the authority to stay MAT submissions for 90 days in order to request comment and gain additional time to analyze the submissions. MAT determinations are not exchange-specific. So if a MAT determination goes into effect, all swaps covered by that MAT determination must be exchange traded. However, the swaps subject to the MAT determination are not required to be traded on the exchange that submitted the MAT determination for those swaps.
Specifically, the new MAT determinations include a:
- Revised Javelin MAT determination. Javelin has revised its MAT, reducing the number of interest rate swaps to which its MAT determination applies. The original Javelin MAT (see Legal Update, First SEF Available-to-trade Determination Could Move Most Interest Rate Swaps onto Exchanges) included all interest rate swaps with tenors between 1 day and 51 years, payable at various intervals, including monthly, quarterly, semi-annually and annually and denominated in:
- US dollars, with a floating rate index based on LIBOR;
- British Pounds, with a floating rate index based on LIBOR; and
- Euros, with a floating rate index based on EURIBOR.
However, Javelin's revised MAT determination excludes variable notional swaps, reduces the maximum swap tenor of the interest rate swaps that are subject to its MAT from 51 to 31 years and requires that swaps subject to its MAT have forward start dates within ten months (for a press release on the revised Javelin MAT, see the Javelin website). While the revised MAT submission reduces the number of swaps that Javelin has deemed MAT, it still covers most standard interest rate swaps for those currencies. The Javelin MAT also makes a determination on a range of interest rate swaps instead of individually selecting only the most liquid interest rate swaps. The CFTC has exercised its power to extend the consideration period to 90 days from submission for the Javelin MAT determinations and is accepting public comment until December 2, 2013. Comments on the revised Javelin MAT determination can be submitted on the CFTC website. - Tradeweb CDS and interest rate swap MAT determination. SEF Tradeweb Markets LLC submitted a MAT determination, which includes CDS contracts based on the Markit CDX and the Markit iTraxx Europe indices. Tradeweb has MAT both the current series and the series that will replace the current series for CDS on the following indices:
- CDX.NA.IG 5Y;
- CDX.NA.HY 5Y;
- iTraxx Europe 5Y; and
- iTraxx Crossover 5Y.
Tradeweb has also determined to MAT various interest rate swaps. For fixed-to-floating and basis swap interest rate swaps, Tradeweb has deemed MAT swaps based on LIBOR and EURIBOR with tenors of 2, 3, 4, 5, 6, 7, 10, 15, 20, and 30 years. Additionally, Tradeweb deemed MAT overnight index interest rate swaps based on Fed Funds and Eonia with stated tenors of 1, 3, 6, 9, 12, 18 and 24 months. The CFTC has exercised its power to extend the consideration period to 90 days from submission for the Tradeweb MAT determinations and is accepting public comment until November 29, 2013. - MarketAxess CDS MAT determination. MarketAxess SEF Corporation has submitted a MAT determination for different series of the same indices that Tradeweb has deemed MAT. MarketAxess has determined that the current series and the series immediately preceding the current series have been MAT for the same indexes as Tradeweb listed above. The CFTC has exercised its power to extend the consideration period to 90 days from submission for this MAT determination and is accepting public comment until December 2, 2013.
The swaps that are subject to these MAT determinations are all currently available to trade on exchanges but they may still be entered into bilaterally until the CFTC review period has ended. Of the four market infrastructures that have submitted MAT determinations, three have utilized a narrow approach, individually selecting only the most liquid swaps for MAT determinations. On the other hand, Javelin has utilized a blanket approach, determining that an entire range of interest rate swaps with a certain range of tenors are to be MAT. By including the entire range of interest rate swaps, Javelin's determination would move large segments of the interest rate swaps market onto exchanges and set a precedent for doing so. In contrast, by only making the most common and liquid swaps available to trade, the other infrastructures' approaches would be more gradual, but would also create uncertainty for market participants during the transition. This could pose particular problems for commercial end users that are less familiar with the swaps market or that may not be current on specific MAT certifications.
To learn more about mandatory swap clearing and exchange trading under Title VII and related rulemaking, see Practice Note, Summary of the Dodd-Frank Act: Swaps and Derivatives: Swap Clearing and Exchange Trading under Title VII.
For more information on SEFs, see Legal Update, SEFs Go Live, CFTC Issues Limited No-action Relief from Some SEF Rules.