The countdown to mandatory trading on swap execution facilities started last month when Javelin Capital Markets became the first Sef to file a product list with US regulators. Its chief executive, Jamie Cawley, tells Peter Madigan why market participants have nothing to fear A spectre was often invoked in the fierce debate that followed the publication of final rules for swap execution facilities (Sefs) in June – a bogey-Sef, a rogue platform, a disruptive force that would list an array of unsuitable products for trading, potentially forcing other Sefs to follow suit (Risk July 2013, pages 21–24). The inspiration behind these campfire tales may have been Javelin Capital Markets and its chief executive, Jamie Cawley, who has proven no respecter of incumbency since his venture launched in 2010. A vocal advocate of strong reform for the over-the-counter derivatives markets, Cawley has made few friends among dealers and brokers – and he ruffled feathers again on October 18, when Javelin became the first Sef to submit a made available to trade (MAT) determination to the US Commodity Futures Trading Commission (CFTC). Once the CFTC has agreed MAT status for a product, it can only be executed on a Sef or an exchange, unless it is big enough to qualify as a block trade. This is the mechanism dealers feared a bogey-Sef might abuse to corner the market in a given product and, after the Javelin MAT filing, some brokers may have felt that Cawley and co were close to proving those fears well founded. Cawley’s retort – put in nuanced terms – is that Javelin only ended up going first because other platforms were worried about rocking the boat. “Given the lively debate Javelin’s MAT submission has sparked among market participants, I think it is fair to question how it is that Javelin got to go first with its filing in this highly competitive landscape. With the MAT submission clearly a major event for the market, how did we get to go first given other platforms got their temporary Sef approval months before we did?” asks Cawley. He insists the firm’s MAT submission is reasonable. Under the CFTC’s self-certification process, Sefs are able to use six criteria – largely relating to liquidity – when deciding what products to list. Rather than compiling an exhaustive list of all the possible interest rate swap variants that fit the bill, Javelin took the broader approach of outlining certain characteristics a swap must fulfil to meet its MAT definition. At the simplest level, it would cover any contract where a floating rate is exchanged for another floating or fixed rate, denominated in US dollars, sterling or euros, referencing US Libor, sterling Libor or Euribor and with a tenor between one month and 51 years – as long as it also meets the six CFTC criteria and is offered to be cleared by at least one clearing house. The afternoon the CFTC received Javelin’s MAT submission, it immediately issued a stay on the application and opened a 30-day public comment period. The stay can remain in place for up to 90 days, but derivatives lawyers have interpreted the commission rules to mean the comment period and the stay cannot overlap. With the Javelin MAT comment period ending on November 18, an additional 90-day stay would put the effective date for mandated Sef execution of captured interest rate swaps sometime in mid-February 2014. “The question is, when does the commission certify the MAT? It could theoretically lift the stay any time after the conclusion of the comment period, which is 30 days. Add in the one-month effective period and a window for final MAT compliance opens from mid-December through to mid-February,” Cawley says. Other Sefs have since submitted MAT applications – TrueEx on October 21 and Tradeweb on October 29, both for a narrower list of products. Comment periods are now open for all three MAT submissions and Cawley insists the market has nothing to fear. “With the Dodd-Frank Act three years old already, it’s not a surprise to anyone that swaps must trade on Sefs. Asserting MAT, which mandates Sef trading, is the next logical step in a progression that already includes swap trade reporting and clearing. Is the execution mandate really going to disrupt the market structure that much, given so many participants are already trading on Sefs without a mandate? I don’t think so,” he says. Biography – Jamie Cawley 2010–present: chief executive, Javelin Capital Markets 2005–2010: chief executive, IDX Capital 1998–2005: chief executive, Direct Cellars.com 1996–1998: emerging markets group, Bank of America 1992–1995: investment-grade trading group, Lehman Brothers...
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