The CFTC has posted notice on its website that Javelin SEF, LLC (Javelin), a new swap execution facility (“SEF”) whose registration has been granted temporary approval by the CFTC, has certified that a very significant portion of interest rate swap contracts should be “made available to trade”; i.e., required to be traded on a swap execution facility or futures market. Interested parties may comment, on what the CFTC describes as a “novel or complex issue,” until November 19, 2013.
The made available to trade determination will apply to fixed to floating swaps, where the floating leg is tied to USD LIBOR, Sterling LIBOR and Euribor, and the currency of the trade is dollars, pounds or Euros, subject to a variety of other conditions such as standard day count conventions and holiday calendars. The term of the swaps could be up to 51 years.
Notably, Javelin was not required to say anything about itself, or its ability to handle trading, in order for it to make the determination required by the CFTC’s rules.
Lofchie Comment: When the CFTC adopted its “made available to trade” rule, we commented that the CFTC had set the bar for requiring trades to be executed on an exchange at a remarkably low level. Here is the proof of it. A new exchange, of whose existence likely most of the market is not even aware, has made the determination that a great amount of the interest rate swaps trading in the United States must be done on an exchange even though (i) the CFTC has not finalized approval of even a single SEF application, (ii) according to CFTC Commissioner O’Malia, the CFTC has not even reviewed the rules of a single SEF, and (iii) even though the SEF rules are still very much in flux. Or to put this a different way, if the issue of mandatory exchange trading is “novel or complex,” as the CFTC describes it, the CFTC has not allowed sufficient time for the issue to be reviewed.
Under these conditions, the approval of the SEF’s application seems imprudent. Yet under the CFTC’s own rules, there would not seem to be any reason to reject or delay the application. So it would seem that the CFTC must either approve the application or concede that its process for requiring swaps to be traded on an exchange was not well-considered. Hopefully, the CFTC will take the second course. Hopefully, the CFTC will also rewrite the relevant rules, so that SEF trading can not become mandatory until the CFTC has reviewed the various SEF applications and finalized the SEF Rules. This should not be another round of the CFTC allowing a deadline to approach, while the market waits to see if the CFTC will issue a last minute no-action letter.
See: CFTC Press Release; Javelin Letter to CFTC determining that Certain Swaps are “Made Available to Trade”
See also: theJavelin.com (the home page for Javelin).