Javelin SEF announced that it has amended and limited its “made available to trade” (“MAT”) submission with respect to interest rate swaps to the CFTC. A swap that is made available to trade must be traded on a CFTC-regulated futures exchange or swap execution facility.
Javelin’s original submission, which was criticized for being too broad, initially covered all interest rate swap tenors from one month to 51 years in U.S. dollar, sterling and euro currencies. The updated MAT determination only includes benchmark dollar and euro swaps, along with certain international monetary market (“IMM”) swaps.
According to James Cawley, CEO of Javelin Capital Markets: “What has become clear is that considerable operational hurdles remain as the market prepares for the swap trading mandate. Starting with benchmark swaps is the only thing that makes sense right now.”
The Asset Management Group of SIFMA (“SIFMA AMG”) had submitted comments regarding Javelin’s filing of a narrowed MAT determination, stating that the original Javelin submission was “overbroad” and “should have been rejected by the Commission for failing to make a sufficient showing for the swaps covered thereunder.” SIFMA AMG said that it was therefore “pleased that Javelin has acknowledged the concerns that we and other participants had,” and stated that the association planned to comment on the amended submission when the CFTC opens the comment period.
Lofchie Comment: While it is obviously a positive for the financial markets that Javelin has limited its “MAT” determination, the submission process and the subsequent withdrawal illustrate how remarkably ill-conceived the CFTC’s rulemaking with respect to “MAT” was. In its amended filing, Javelin concedes that “there remain significant operational and logistical issues, with regard to participant readiness to functionally trade various swap products on SEFs in the near term.” Remarkably enough, under the CFTC’s own rules, the fact that the market is not ready to be forced to trade exclusively on SEFs would not have given the CFTC reason to reject Javelin’s submission. In fact, the CFTC was so relaxed about forcing the entire interest rate market in the United States to trade through SEFs that, by the CFTC’s own estimate, preparation of the regulatory submission requiring the transformation of the entire swaps market would cost about $850.
The task of reviewing MAT determinations may ultimately fall to a new Chairman at the CFTC. That Chairman ought to consider whether the CFTC’s review going forward should be limited by the CFTC’s existing review procedures which set a remarkably low standard for mandating a complete transformation of the financial markets by regulatory fiat. Rather than reviewing MAT submissions under the current rules, the new Chairman should revisit the MAT rules. Even regulators who are believers in the benefits of exchange trading will not help their cause if they force trading of swaps onto markets that are not ready to do business.