On January 27 and 29, 2014, swap “made available-to-trade” determinations (“MAT Determinations”) submitted by TW SEF LLC (“TW SEF”) and MarketAxess SEF Corporation (“MarketAxess”) to the Commodity Futures Trading Commission (“CFTC”) became effective. As a result, the specific categories of interest rate swaps and index credit default swaps covered by these MAT Determinations will become subject to mandatory execution on a swap execution facility (“SEF”) or designated contract market (“DCM”) (the “Trade Execution Requirement”) beginning February 26, 2014 (i.e., transactions in such swaps will become “Required Transactions”). This is in addition to the MAT Determinations submitted by Javelin SEF LLC (“Javelin”) and trueEX LLC (“trueEX”) for certain interest rate swaps that became effective earlier in January and which will be implemented February 15 and 21, 2014, respectively.1 On these dates, bilateral over-the-counter trading in the covered swaps — absent an applicable exemption or exception — will become unlawful, and market participants wishing to trade covered swaps will need to have access to one or more SEFs or DCMs. This change is part of the CFTC’s continued implementation of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
This Sidley Update describes the types of swaps covered by these most recent MAT Determinations and the implications for market participants.
What Swaps Are Covered by TW SEF’s and MarketAxess’s MAT Determinations?
TW SEF’s MAT Determination covers the following types of interest rate and index credit default swaps:
- GBP/LIBOR fixed-to-floating interest rate swaps with a “spot starting” trade start type, with certain available tenors;
- Tenors of the EUR/EURIBOR and USD/LIBOR swaps in addition to those covered by the previous Javelin and trueEX MAT Determinations;
- Untranched credit default swaps on the following indices, with 5-year tenors:
- CDX North America Investment Grade;
- CDX North America High Yield;
- iTraxx Europe; and
- iTraxx Europe Crossover.
MarketAxess’s MAT Determination covers untranched credit default swaps on the same indices, and in a January 30, 2014 press release, the CFTC’s Division of Market Oversight (the “DMO”) clarified that in its view the swaps covered by MarketAxess’s MAT Determination were already within the scope of TW SEF’s MAT Determination, and therefore such swaps will become subject to the Trade Execution Requirement when TW SEF’s MAT Determination comes into effect on February 26, 2014.
The following chart sets forth the specific contract terms of all interest rate swaps currently subject to certified MAT Determinations, updated to include those swaps covered by TW SEF’s MAT Determination.
Click here to view table.
The following chart sets forth the specific contract terms of all index credit default swaps currently subject to certified MAT Determinations, updated to include those swaps covered by TW SEF’s and MarketAxess’s MAT Determinations.
Click here to view table.
During the comment period for these initial MAT Determinations, several market participants submitted comments to the CFTC and the DMO regarding the applicability of the Trade Execution Requirement to so-called “packaged transactions” involving more than one swap or financial instrument, where at least one of the instruments in the packaged transaction is a swap that is subject to a MAT Determination. In the DMO’s January 16, 2014 press release announcing the expiration of the CFTC stay of the Javelin MAT Determination, the CFTC staff explained that structuring a swap subject to a MAT Determination as part of a packaged transaction would not per se relieve the counterparties from the Trade Execution Requirement with respect to the portion of the packaged transaction for which a MAT Determination is in effect.2
The DMO has scheduled a public roundtable on February 12, 2014 at 9:00 am at the CFTC’s headquarters in Washington, D.C. to discuss the definition of packaged transactions, whether such transactions pose challenges in clearing or execution that are distinct from those applicable to the clearing or execution of stand-alone swaps subject to the Trade Execution Requirement, and potential solutions for trading packaged transactions on or pursuant to the rules of a DCM or SEF.3
Pending MAT Determinations
Additional MAT Determinations may be forthcoming in the coming months. As of the date of this Sidley Update, a CFTC stay remains in place preventing a MAT Determination filed by Bloomberg SEF LLC (“Bloomberg”) covering additional interest rate swaps and index credit default swaps from becoming effective, allowing the CFTC additional time to analyze Bloomberg’s submission. Assuming the CFTC does not take any additional action, this stay will automatically expire on March 9, 2014, and the swaps covered by the Bloomberg MAT Determination will become subject to the Trade Execution Requirement 30 days later, on April 8, 2014.
SEFs and DCMs may in the future issue additional MAT Determinations covering other interest rate swaps and index credit default swaps that are already subject to the CFTC’s clearing mandate.4 Market participants should continue to monitor the CFTC’s website,5 as well as the websites of the SEFs and DCMs, for notices regarding the submission of MAT Determinations. Although the CFTC issued temporary stays with respect to the MAT Determinations listed in the charts above, CFTC rules allow a SEF or DCM to make a MAT Determination by self-certifying a rule change with the CFTC and there is no rule requiring the CFTC to stay those determinations. Absent issuance of a stay by the CFTC, such a MAT Determination would become effective 10 business days after being filed with the CFTC, and the Trade Execution Requirement would go into effect for swaps subject to that MAT Determination 30 calendar days later (i.e., approximately 44 days after the MAT Determination was filed). Due to the brief lead time that is possible between a MAT Determination and the imposition of the resulting Trade Execution Requirement, we urge market participants to begin preparing for Trade Execution Requirements for swaps that are not yet subject to effective MAT Determinations but that are or may quickly become subject to a clearing mandate.
The updated chart below sets forth the implementation dates of the Trade Execution Requirement for all interest rate swaps and index credit default swaps covered by an effective MAT Determination, as well as projected implementation dates for the interest rate and index credit default swaps covered by the pending Bloomberg MAT Determination. On these dates, bilateral over-the-counter trading in the covered swaps — absent an applicable exemption from or exception to the clearing mandate or Trade Execution Requirement — will become unlawful.6
Click here to view table.