The Managed Futures Association (“MFA”) submitted a comment letter to the CFTC in response to the “made available to trade” (“MAT”) submissions of Javelin SEF, LLC; trueEX, LLC; and TW SEF LLC for certain interest rate swap products.
The MFA letter proposed that the CFTC phase in the trade execution requirement on registered swap execution facilities (“SEFs”) and designated contract markets (“DCMs”) by product and transaction type for the rates asset class, beginning with outright, spot-starting, USD and EUR swaps at the benchmark tenors in the fixed-to-floating interest rate swap class. This initial phase would be followed by progressively phased expansion of the trading mandate to include additional currencies, tenors and forward start dates in the fixed-to-floating swap class, as well as to other swap classes.
The MFA also recommended a similar phase-in to cover “package transactions” (as opposed to outright swaps). The letter compared the MFA’s recommendations to the Javelin SEF, trueEX and TW SEF MAT determinations. Additionally, the MFA letter raised certain operational readiness issues for SEF/DCM trading that the CFTC should address in connection with the phase-in of the trading mandate.
Lofchie Comment: Essentially, the MFA recommends that the CFTC reexamine the extremely low standards that it has established for allowing SEFs to force trading of swaps onto a SEF. Instead, the MFA recommends the CFTC take a more measured approach, in which market participants would effectively experiment with SEF-trading of those swaps having the highest volume. If that goes well, more trades could move onto SEFs gradually. According to the MFA, the CFTC would not be required to amend its rules in this regard; the CFTC could, in effect, temporarily nullify its prior rulemakings through the “issuance of staff no-action relief” (at pages 3-4).
The MFA’s idea of an approach to mandatory SEF trading – that it makes sense to proceed slowly and carefully – is entirely rational and is consistent with the approach urged by SIFMA and the sell-side as well. One could object, as a procedural matter, to the notion that the CFTC should amend its rules through staff no-action letters, but the reality is that the CFTC did not seem to give any serious consideration to the original rulemaking or it would have foreseen the risks raised by the MFA. It would serve the greater good if the CFTC did not risk damaging the markets (as well as the reputation of the CFTC as a regulator) with a massive experiment of which there have been a minimum of trials. See prior comments on this topic here.
See: MFA Comment Letter.