Delay on Mandate for Some Interest-Rate Swaps

Packaged trades, which make up around 50 percent of the market in notional volume, won't have to move to SEFs until May 15.

U.S. banks and other financial firms won a three-month delay for as much as half of the interest-rate swap market to meet a federal requirement to trade on platforms designed to increase competition and transparency.

The U.S. Commodity Futures Trading Commission (CFTC) announced in a letter released yesterday that trades consisting of multiple components won’t need to be transacted on swap-execution facilities, or SEFs, until May 15. The agency said it hadn’t ruled out further extending the new deadline in the Dodd-Frank Act requirement originally set to start Feb. 15.

The delay, which estimates have shown will affect between a quarter and half of of the interest-rate swaps market, “allows us more time to figure out what to do,” with the packaged trades, Mark Wetjen, acting chairman of the CFTC, said at a meeting in Washington. “It certainly doesn’t foreclose additional action,” he said, adding that “we have some flexibility with that date.”

The delay comes days before the start of a government mandate to require many types of interest-rate and credit-default trades to occur on the facilities. The 2010 Dodd-Frank overhaul of U.S. financial regulation sought to have most swaps traded on SEFs or other exchanges to increase price competition and transparency in the market after credit-default swaps helped fuel the 2008 credit crisis.

Banks, trading platforms, and asset managers have told the CFTC that the industry lacks the infrastructure necessary to have packaged trades occur by this week on the new platforms. The industry is not yet able to assess the risk of the packages as one unit, Sunil Hirani, chief executive officer of trueEX LLC trading platform, said in an email.

 

‘Much-Needed Relief’

“There is some additional infrastructure that needs to be built out,” Hirani said. “This no-action allows for that much-needed relief.”

Platforms owned by Tradeweb Markets LLC, ICAP Plc, MarketAxess Holdings Inc., trueEX LLC, GFI Group Inc., and Bloomberg LP, parent of Bloomberg News, have temporarily registered with the CFTC. The SEFs facilitate transactions among banks and also between banks and asset managers or other clients.

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. The CFTC’s economist office estimated that packaged transactions comprise 50 percent of the notional volume of the interest-rates market, according to a Jan. 16 statement by Scott O’Malia, a Republican commissioner.

“It’s a sizable chunk of this market that’s getting a three-month delay,” Marcus Stanley, policy director of Americans for Financial Reform, a group including the AFL-CIO labor federation, said in a telephone interview. “There is this pattern that whenever you approach a deadline there is a special exception or delay and you push it back further.”

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