Mandated SEF rates trading “chaotic” as credit deadline approaches

Market participants saw a shaky start to swap execution facility trading this week, while mandated credit trading next week poses new challenges.

Market participants saw a shaky start to swap execution facility (SEF) trading this week, while mandated credit trading next week poses new challenges. 

Tuesday marked the first day of mandated trading on SEFs in certain interest rate swaps (IRS) for firms that fall under the Commodity Futures Trading Commission’s jurisdiction under the ‘made available to trade’ (MAT) rule.

A MAT application, approved by the Commission from Javelin SEF that included US dollar and euro swaps and swap spreads with tenors between two and 30 years, came into effect last Saturday. This was bolstered by additional IRS MAT products included in the trueEX SEF submission, which today comes into force.

James Cawley, CEO of Javelin SEF, told that there have been some problems but market infrastructure has proved capable as participants executed their first products under the MAT regime.

“It’s been a bit chaotic and there have been a few operational issues across the board but overall trading in MAT products has progressed well,” he said.

“We’ve managed to trade between US$500-600 million since Tuesday, which is a positive sign,” Cawley said, adding that the market had experienced a dip in IRS volumes as participants adjusted to mandated SEF trading for certain IRS products. 

CDS begins

On Wednesday certain credit default swaps (CDS) will be mandated for trading on SEFs, according to a Tradeweb MAT proposal, which includes a number of US and European CDS indices.

Grigorios Reppas, CDS product manager for MarketAxess, told buy-side clients were focused on testing connectivity and processes between themselves, SEFs and futures commission merchants (FCMs) ahead of Wednesday’s MAT deadline.

“Participants want to make sure everything works so there is a lot of testing happening this week. Clients are still getting their IRS [trading] up and running too, which is also a focus for the buy-side,” he said.

Grigorios added that many of the larger and more active participants were ready to trade CDSs on SEFs, but smaller buy-side firms would take longer to come online as they traded OTC credit derivatives less frequently. 

He said the onset of mandatory SEF-based credit trading would impact CDS market activity.

“It’s possible there may be a drop in liquidity on Wednesday, but that would be in line with similar deadlines the industry experienced when central clearing for swaps came online in March and June last year,” he said.

In total, five SEFs have submitted MAT applications, four of which have received approval from the regulator – Javelin, trueEX, Tradeweb and MarketAxess – while a submission from Bloomberg SEF has yet to be approved.

At present, 21 SEFs have gained temporary approval from the CFTC, although not all are actively executing trades. SEFs are required to offer both the request-for-quote trading model and the CLOB model, the latter of which is expected to become the dominant model in the future for liquid OTC derivatives. 

On Thursday, UBS processed its first IRS swap on trueEX’s anonymous order book through the UBS Neo platform, whereby the bank operate as an introducing broker for clients. This lets UBS route swaps trades in what the firm calls “agency style execution” on SEFs by offering pre-trade clearing certainty as a standby clearer before the trade is executed and sent to a clearing house.