The Commodity Futures Trading Commission (the “CFTC”) announced its first two “made available for trade” determinations (each, a “MAT Determination”), which mandate that fund managers trade certain benchmark interest rate swaps on behalf of their funds and managed accounts through a swap execution facility (a “SEF”) or a designated contract market (a “DCM”).1 Once a product is subject to a MAT Determination, fund managers will not be permitted to trade such products over-the-counter.2 Fund managers must complete the onboarding process with an appropriate SEF or DCM if they intend to trade swaps subject to the MAT Determinations by Feb. 15 or 21, depending upon the particular interest rate swap. The MAT Determinations apply to funds that are “U.S. Persons,” which include: (1) funds that are incorporated or organized in the U.S.; (2) funds incorporated or organized inside or outside the U.S. that are managed by investment managers that have a “principal place of business” in the U.S.; and (3) funds with a “majority of U.S. investors.”
The interest rate products with an Effective Date of Feb. 15, 2014 on Exhibit A must be traded through a SEF or DCM on Feb. 15:3 Javelin SEF, LLC (“Javelin”) submitted the initial request for a MAT Determination for the interest rate swaps, which was followed by trueEX, LLC (“trueEX”)’s submission. Once the products are subject to the trade execution requirement, fund managers may trade such interest rate swaps on any SEF or DCM that offers such products (fund managers are not required to trade through Javelin’s or trueEX’s SEF platform). Because trueEX’s submission was a subset of the interest rate swaps submitted by Javelin, they are subject to the Feb. 15 deadline. However, trueEX also submitted Market Agreed Coupon (“MAC”) contracts, which will be subject to the trade execution requirement on Feb. 21, 2014 (see the Effective Date for certain swaps of Feb. 21 on Exhibit A).4
Since the submissions by Javelin and trueEX, other SEFs, including Bloomberg SEF, Market Axess and Tradeweb, have submitted MAT Determination proposals. Additional products being considered include other interest rate swaps and CDS (CDX and iTraxx) products. Certain CDS products are expected to be subject to a trade execution requirement in the coming weeks.
In the Javelin CFTC press release, the CFTC stated that it will consider relief for certain “packaged transactions” based upon input to be received at a public roundtable that the CFTC will host Feb. 10, 2014.5 A “packaged transaction” is comprised of two transactions, with one transaction subject to the SEF trade execution requirement and the other transaction that does not trade on a SEF. The issue with splitting a “packaged transaction” such that one swap trades on a SEF and one off-SEF is that the cost may be significantly more expensive and it also may create a hedging mismatch due to the timing of execution. Several large trade organizations, including the Managed Funds Association, SIFMA Asset Management Group and the International Swaps and Derivatives Association, have requested relief.
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