CFTC Announced Package Trade MAT Phasing
CFTC unveiled its approach to removal of the package trade exemptive relief on the SEF MAT obligation. The short term focus is on MAT swap vs mandated cleared swap package and swap spreads vs US Treasuries.
What is becoming MAT and when?
Summarizing out the legalistic terminology from the CFTC website entry, the go live schedule for packages is:
- Already live: individual MAT swap
- May 16th: MAT swap vs MAT swap
- June 2nd: MAT swap vs non-MAT swap subject to CFTC clearing mandate
- June 16th: MAT swap vs US Treasury bond (MAT swap spreads)
- November 16th: MAT swap vs other non-swap (apart from US T-bond)
- November 16th: MAT swap vs non-CFTC-exclusive swap
What does this mean?
According to Amir Kwaja, CEO of Clarus, the main products caught by the May 16th and June 2nd deadlines are swap curve / butterfly trades and unwind / offset packages (so long as at least one of the swaps is MAT). Amir's interesting post on the Clarus website, looks at the economics of curves / butterflies and also makes the point that they both will challenge credit checking infrastructure. This is because curves and butterflies are typically net DV01 neutral trades but not totally risk neutral so only more sophisticated risk limits e.g. bucket specific DV01 limits or incremental IM methods will be effective for credit checking them. Currently limits are typically at best incremental net DV01 methods. In addition, credit checking has to be done per trade rather than just at the package level further inhibiting the true effectiveness of credit checking.
Apart from credit checking, there are no doubt other infrastructure challenges of meeting regulatory demands within the SEF and CCP flows for these products - given presumably that all the package component trades have to clear so there are dependencies of one trade on the other getting stuck at any stage. The void rule in particular - where on trade temporarily failing clearing could invalidate the whole package - is an obvious example. In addition, SEFs have work to do to make the package execution protocols meet regulations hence new temporary relief which expires September 30th which allows SEFs to temporarily continue to execute packages in the old way and be submitted for clearing. So in particular the credit checking per trade within doesn't hit until September.
On unwind / offset packages, I wonder whether this will give TrueEx's PTC (Portfolio Termination and Compaction) service a boost (or a problem). I also wonder whether this has an impact on TriOptima's TriReduce service for line-item compression of CCP cleared portfolios.
The non-CFTC-exclusive swaps doesn't - as I had first thought - refer to swaps which are partly CFTC and partly ESMA regulated e.g. a swap between a US person and an EU bank. It in fact refers to swap packages where one leg is a non-CFTC product e.g. single name CDS vs indexes. If this is what this is about - who knows what kind of CFTC vs SEC complexities this might cause. Kevin McPartland touches on this in his Greenwich Associates blog post.
I would speculate that the increase in SEF scope can only mean the continuation of the prior dual trend: with USD trades shifting a little more on-SEF while non-USD trades migrating a little more off-USA. In other words: more regional bifurcation. The numerical evidence is publically available so we shall see.
On the face of it, CFTC swap vs CFTC swap packages might work ok here (if the credit checking piece and voiding issues can be tackled). It looks like cross-regulator trades i.e. swap spreads vs UST and cds index vs single name packages will stretch participants and maybe even regulators alike.