Which MAT Will Survive? Amendments, Comments, and Confusion
As of early 2014, the mandatory trading initiative on SEFs and DCMs will take effect. For this to occur, Make Available to Trade (MAT) determinations must be filed and approved. Once a specified swap is made available to trade, it must be traded on an exchange (either a SEF or DCM). In an effort to be the first mover, Javelin SEF filed the first MAT application with the CFTC on October 18, 2013. In doing so, it attempted to MAT the entire rate curve, instead of parsing out individual, liquid points on the curve. Javelin attempts to make all points on the curve from 0 to 51 years available for trade in its MAT application, which includes interest rate swaps denominated in US dollars, Euro, and the British Pound (Javelin's most recent amendment eliminated the British Pound from the MAT filing). Javelin has since retreated slightly with respect to a number of parts of its filing, including specifically limiting tenor to 0 to 30 years, instead of the original 51, then most recently, limiting the tenor to particularly liquid parts of the curve.
TrueEx SEF quickly followed Javelin’s filing with one of its own, taking a slightly different approach. TrueEx's application only purports to MAT the most liquid points on the curve, some of which are Market Agreed Coupon Swaps (MACs). MACs are swaps that have common, pre-agreed terms. In April, 2013, the International Swaps and Derivatives Association (ISDA) developed a MAC confirmation contract as an alternative for market participant desiring to use OTC interest rate swaps that have common, pre-agreed terms. Because MACs account for the most used - therefore the most liquid - points on the interest rate curve, they easily meet the factors required by the CFTC for a MAT application.
Factors to Be Considered for MAT Application
The factors to be considered when filing a MAT application with the CFTC are:
(1) Whether there are ready and willing buyers and sellers;
(2) The frequency or size of transactions;
(3) The trading volume;
(4) The number and types of market participants;
(5) The bid/ask spread; or
(6) The usual number of resting or indicative bids and offers.
A SEF or DCM applying to MAT certain swaps must show that the swaps in the application meet the factors listed above.
One issue that may find its way to the surface with the Javelin application is how to show liquidity in the products it is attempting to MAT. One of the requirements of the MAT application is to show that there are ready and willing buyers and sellers for the product that a SEF or DCM is attempting to certify. Showing that there are ready and willing buyers and sellers for each point on the interest rate curve from 0 to 51 years, as its original MAT filing undertook, is an extremely onerous task.
Javelin claimed it can list the entire curve of interest rate swaps is because the CFTC permits SEFs to consider swaps in groups or categories if the required CFTC factor is readily applied to all swaps within that particular group or category. In this case, the factors to be considered can be applied any tenor of swap in each specified category. Javelin reasons that because 2 year interest rate swaps have ready willing buyers and sellers and they are in the 0-5 year tenor grouping, that all swaps in that group have ready and willing buyers and sellers.
There have been several comments to the proposed MAT filings including a detailed comment attempting to show why Javelin’s MAT filing should be rejected by the CFTC. One of these comments gives specific examples showing how Javelin’s filing does not meet the above listed factors, specifically touting that there are no willing buyers and sellers for specific contracts listed within Javelin’s filing. For example, this public comment from Morgan Stanley shows that there are clearly no ready and willing buyers and sellers for a contract in GBP with a tenor of 27 years, 4 months, and 13 days, a forward start of 8 months and 5 days, and a notional size of $110 million. Simply placing this contract in a “bucket” and claiming that all contracts within that bucket are sufficiently liquid does not meet the qualifications required by the CFTC to be made available to trade.
Based on these comments, Javelin has subsequently amended its filing a third time. Its MAT application is now limited to certain, explicitly stated tenors much like TrueEx’s filing. The derivatives industry is indicating that the first MAT determinations must be simple, generic, and straightforward. Once the first filings are accepted, SEFs and DCMs desiring to include other swaps can make additional filings. The industry is simply not ready for anything but generic swaps to be made available to trade.
With all that said, the public comment time period for each of the first MAT filings will be ending soon. The CFTC determinations on these filings will play a huge role in how swaps are traded in the future and these determinations are something the industry is keeping close watch on.