CFTC Said Ready to Push Interest-Rate Swaps onto SEFs

After three-month review, agency may decide next month to require interest rate swaps, credit default swaps, and other securities to trade on the platforms.

The U.S. Commodity Futures Trading Commission (CFTC) is poised to push interest-rate and credit swaps onto trading platforms designed to make prices more transparent and competitive.

The agency’s approval would follow a three-month review of plans to mandate that certain types of trades be conducted on swap execution facilities, or Sefs, including those owned by Javelin Capital Markets LLC and trueEX LLC. The change, required under the Dodd-Frank Act, could take place as soon as next month.

The mandate “is a real fundamental shift,” Kevin McPartland, head of market structure research at Greenwich Associates, said in a telephone interview. “It’s going to impact how the clients interact with the banks on a day-to-day basis.”

The CFTC’s staff, which is still reviewing the plans, has found no reason to object to them so far, according to two people with knowledge of the agency’s deliberations. To prevent the requirements from taking effect, the agency would need to decide they are inconsistent with the law and block the first of them by Jan. 16.

Dodd-Frank, the 2010 financial-regulatory overhaul, seeks to increase access and price competition in the swaps market by having interest-rate, credit-default, and other types of swaps trade on Sefs. Largely unregulated swaps helped fuel the 2008 credit crisis and the U.S. rescue of American International Group Inc.


Ready Participants

Javelin, the first platform to submit trades for the mandate, said in its filing that CFTC-registered swap dealers, which include Goldman Sachs Group Inc. and JPMorgan Chase & Co., already regularly act as buyers and sellers in the interest-rate swap market and would be willing traders on new platforms.

Javelin Chief Executive Officer James Cawley said in an e-mail that the agency’s certification will open up the market “to greater transparency, competition, and certainty.”

Buyers and sellers of derivatives have debated which types of trades must occur on the platforms since the first filings were submitted in mid-October. For example, Sunil Hirani, CEO of trueEX, joined executives of BlackRock Inc., Citadel LLC, and Fidelity Investments in a meeting with CFTC officials in November to discuss the mandate, according to agency records.

Javelin narrowed its plans after swap buyers said the original version would cause too many types of trades to occur on the platforms. The revised version would require interest-rate trades—including U.S. dollar-denominated transactions lasting 2, 3, 5, 7, 10, 12, 15, 20, and 30 years—to transact on the Sefs. Javelin filed another revision yesterday that removes transactions called swap spreads, a type of interest-rate swap traded with U.S. Treasury bills, from the mandate.

The agency has also received proposals to make interest-rate and credit swaps available to trade on platforms owned by MarketAxess Holdings Inc., Tradeweb Markets LLC, and Bloomberg LP, parent of Bloomberg News.

The CFTC is debating whether packaged trades that consist of two or more swaps should be subject to the mandate, one of the people said. The Securities Industry and Financial Markets Association and International Swaps and Derivatives Association, two of the financial industry’s largest lobbying groups, asked the agency in November to exempt the packaged trades.

Hirani said in a telephone interview that the industry currently lacks the infrastructure needed to have packaged trades fall under the requirement. The Managed Funds Association, a lobbying group for hedge funds, estimated in November that packaged trades represented a quarter of interest-rate transactions on platforms last year.

Scott O’Malia, a Republican commissioner at the CFTC, has scheduled an agency advisory committee meeting on Jan. 21 in part to oversee the trading decisions and gather feedback from the industry.

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