The Commodity Futures Trading Commission (CFTC) is expected to pass all ‘made available to trade’ (MAT) filings for new swap execution facilities (SEFs), but uncertainty around leadership could affect the initial period of mandatory trading on the new platforms.
Mandatory trading on SEFs is expected to occur for some interest rate swaps (IRS) products from 16 February and credit default swaps (CDS) from 26 February after a 30-day grace period from the CFTC’s ruling on the submitted MAT filings.
Ron Steinfeld, chief compliance officer for credit-focused SEF operator MarketAxess, told theTRADEnews.com all signs suggested the CFTC would green light all CDS MAT applications, which have been submitted from his firm, Bloomberg and Tradeweb and revolve around eight core CDS products.
“There’s very little argument as to whether those products should be MAT products because these are the instruments everyone assumed would be designated MAT,” he said.
The first IRS MAT application due, for Javelin SEF, is expected on January 16. Reports from sources inside the Commission have also suggested the CFTC may push to include ‘packaged trades’ on the new platforms – those that include a number of swaps in a single trade.
Leadership concerns
But, despite widespread expectations for the MAT filings, uncertainty related to changes in Commission leadership may affect how participants engage on SEF platforms, Steinfeld warned.
One specific concern raised in recent months from a number of market participants has revolved around the CFTC’s ability to reverse an unsuitable MAT decision and this may emerge a key challenge for the next Commission chair. Currently, there is no mechanism by which the CFTC can remove products classed as MAT, even if they fail to attract liquidity on SEFs.
Commissioner Mark Wetjen has taken on the role of acting chair until the former chair Gary Gensler’s replacement, Timothy Massad, formally takes office.
This coincided with Commissioner Bart Chilton deciding to step down by the end of 2013 – a move he has delayed to assist with Massad’s transition. When he departs, lawyer Sharon Bowen will likely take his role after receiving support from the Obama administration in December.
Last week, acting chair Wetjen also promoted long-time aides Joseph Cisewski and Scott Reinhart to co-chiefs of staff and co-chief operating officers for the Commission.
“There’s a concern the changes to CFTC leadership will have an impact on SEFs, but at the moment we just don’t know what the outcome will be,” Steinfeld said. “There’s still a lot of questions and the biggest one is when are we going to see new commissioners at the Commission?” he said.
Sean Owens, director of fixed income research for consultancy Woodbine, believes the leadership shifts will have a muted impact on SEFs as most of the preparatory work has been completed. He said the major regulatory changes within the breadth of Dodd-Frank would naturally lead to some teething problems for the regulator, but no major issues have yet arisen, despite on-going calls for more resources.
Owens said a smooth MAT process would also aid the beginning of mandatory SEF trading in coming months.
“It’s unlikely the CFTC will refuse any of MAT application, as those submitted have been limited to the most liquid, most generic swaps in line with how the industry wants to proceed with SEFs trading,” he said.
Extraterritorial headaches
One area of on-going pain for the Commission will remain the application of cross-border swaps rules. In December, the Commission laid out a plan for which jurisdictions it would let non-US swap dealers comply with their home country regulation when dealing with non-US counterparts for six key areas including Europe and Japan.
However, Jennifer Choi, senior associate counsel for buy-side trade body the Investment Company Institute, told theTRADEnews.com that the recent round of substituted compliance decisions did not tackle the clearing and trade execution obligations.
“Substituted compliance determinations do not address many different areas of cross-border derivatives transactions and there is much more work that needs to be done,” Choi said.
Last week, the Commission published a request for comment around cross-border guidance and a CFTC exemptive order, which commissioner Scott O’Malia claimed in a statement of dissent was a “strategic move by the Commission to try to duck blame for consistency circumventing the fundamental tenets” of the Administrative Procedures Act – the legal guide for CFTC rule making.