CFTC Issues Trade Execution Mandate for Certain Interest Rate Swaps

The CFTC Division of Market Oversight (“DMO”) certified Javelin SEF LLC’s (“Javelin”) self-certification of certain interest rate swap contracts has been made available-to-trade (“MAT Determinations”).  The CFTC stated that swaps subject to MAT Determinations, whether offered by Javelin or any other swap execution facility (“SEF”) or designated contract market (“DCM”), will become subject to the trade execution requirement under Section 2(h)(8) of the CEA 30 days after certification.  In the case of these interest rate swap contract MAT Determinations, the requirement will be effective as of February 15, 2014.  The CFTC noted that all transactions involving swaps that are subject to the trade execution requirement must be executed through a DCM or a SEF, including swaps that are part of so-called “package transactions,” or groups of transactions that are executed together for price coordination or other reasons. 

CFTC Commissioner Scott D. O’Malia issued a statement of concern regarding the MAT Determination process, stating that it was “hard to imagine a federal regulatory agency process that is more flawed,” and noting that the legally limited review process permitted under the MAT Determinations rulemaking was little more than a rubber stamp.  He noted that although he is in support of mandatory trading determinations for individual benchmark swaps, the Commission’s process creates significant market uncertainty.  He highlighted in particular the issues created for “package transactions” (which Javelin itself had indicated it wished to exclude), stating “by accepting Javelin’s determination and then immediately contemplating further action with respect to half of the MAT transactions, the Commission creates uncertainty in the market and sets a dangerous precedent for future MAT Determinations.”  He called on the CFTC to carefully review all possible package transactions for legal compliance and technical readiness, seek public comment, and hold roundtables in order to develop well-thought-out solutions to each type of complex transaction.

The CFTC noted that Acting Chairman Mark Wetjen has ordered a public roundtable discussion to address execution issues related to package transactions and whether and under what conditions to grant limited relief for such transactions to ensure proper implementation of the execution mandate.

Lofchie Comment:  The new certifications are another challenge facing Chairman Wetjen.  Either he can go full-speed ahead with these rules risking trading problems that are disruptive to the market; or he can risk criticism by throttling back regulation (in the interest of market safety) by taking market comment on the guidance.

Even if one believes that mandatory SEF trading is of some value in price discovery, it almost certainly does nothing to make the economy safer (see, commentary by New York Times-featured economist, Craig Pirrong).  Accordingly, there is certainly reason for Chairman Wetjen and the CFTC to take some delaying measures before the February 15 “deadline”.

See:  Javelin MAT Approval (and Fixed-to-Floating Interest Rate Swap Table); Commissioner O’Malia’s Statement.

Related news:  Javelin SEF Submits More Limited MAT Determination to CFTC (December 3, 2013); MFA Comment Letter to CFTC on SEF Trading Rules and Onboarding Documentation (January 10, 2014);  MFA Submits Suggestions to CFTC on MAT Submissions (November 26, 2013); SIFMA and ISDA Criticize SEFs’ Made-Available-to-Trade Submissions (November 25, 2013); CFTC Extends Comment Period on Certification from Javelin SEF to Implement Available-to-Trade Determinations (November 4, 2013); SEF Seeks Determination of Mandatory Exchange Trading of Swaps (October 21, 2013).