Commodity Futures Trading Commission
Roundtable Regarding the Made Available to Trade Process
Wednesday, July 15, 2015
Key Topics & Takeaways
MAT Committee Approach: SEC's Seidel described the possibility of a "committee approach" for making MAT determinations, which would provide for a group of diverse market participants to consider objective criteria before proposing to subject an SBS to be MAT
CFTC Involvement in MAT Determination: Russell Investments's Cavallari, said the MAT process should be modified to require "a little more" of the CFTC's "invisible hand." Tradeweb's Friedman said his organization is supportive of a process where the CFTC makes MAT determinations with the opportunity for public comment.
MAT Determination Factors: Morgan Stanley's Senft, said two important market resiliency factors are needed in a MAT determination: that two or more SEFs trade a product; and that each SEF have access to two liquidity providers. J.P. Morgan's Benison, listed the following as additional factors that should be considered in the MAT process: 1) the number of platforms are trading the product; 2) changes in liquidity through the cycle; and 3) the length of time of sufficient trading volume.
Mutual Recognition: Credit Suisse's Tsai noted that international harmonization has been sought after by the industry and encouraged the CFTC to embrace mutual recognition to allow market participants to trade on platforms in other jurisdictions.
- Kazunari Mochizuki, Japan Financial Services Agency
- Nhan Nguyen, Commodity Futures Trading Commission
- Edwin Schooling Latter, U.K. Financial Conduct Authority
- Heather Seidel, Securities and Exchange Commission
- Dr. Darrell Duffie, Graduate School of Business, Stanford University
- Dr. John Hull, Rotman School of Management, University of Toronto
- Amir Khwaja, Clarus Financial Technology
- Kevin McPartland, Greenwich Associates
- Thomas Benison, J.P. Morgan
- Stephen Berger, Citadel LLC
- Lisa Cavallari, Russell Investments
- Douglas Friedman, Tradeweb Markets
- George Harrington, Bloomberg, L.P.
- Sunil Hirani, trueEX LLC
- Vincent Johnson, BP Integrated Supply and Trading, representing the International Swaps and Derivatives Association
- Arthur J. Leiz, Goldman Sachs Asset Management
- Angela Patel, Putnam Investments
- Dexter Senft, Morgan Stanley
- William Shields, GFI Swaps Exchange LLC, representing the Wholesale Market Brokers Association
- Ron Steinfeld, MarketAxess
- Wally Sullivan, Javelin Capital Markets
- Edward Tsai, Credit Suisse
Panel1 - Mandatory Exchange Trading Requirements in Various Jurisdictions
Overview of CFTC MAT Process
Nhan Nguyen opened the panel with an overview of the CFTC's trade execution regime, including process around which a swap would be deemed, "Made-Available-to-Trade" (MAT). Nguyen noted the MAT process allows Swap Execution Facilities (SEFs) and Designated Contract Markets (DCMs) to submit a self-certification, which should consider several important factors regarding whether it is appropriate to require the swap to be subject to mandatory trading requirements, including the frequency and size of transactions, trading volume, the number and type of market participant for that swap and bid/ask spreads. The CFTC may then approve the determination, or provide for a stay, opening a 30-day public comment process. Once a swap is designated as MAT, however, it is required to be traded on a platform (unless no SEFs or DCMs list it).
Nguyen went on to provide some background on the implementation of the MAT process. He noted that the CFTC received five self-certifications following the effective date of the rule, noting that swaps which have been approved are generally considered to be the most standard and liquid. Lastly, Nguyen highlighted that the CFTC continues to monitor implementation, and has provided no-action relief for certain issues relating to package transactions and transactions between certain affiliates.
Heather Seidel, SEC
Heather Seidel, Chief Counsel, Division of Trading and Markets, U.S. Securities and Exchange Commission (SEC), next provided a brief overview of the SEC's mandatory trading proposal for security-based swaps (SBS). Seidel explained that the SEC proposed that MAT determinations should be made pursuant to "objective" standards, as opposed to individual platforms driving the process via listing. The SEC, however, did not define what those standards would entail, explaining that more data would be needed. In response to the Commission's proposal, Seidel highlighted that commenter's largely supported the "objective standard" approach, with many providing examples of what criteria might be considered, including product liquidity, trade frequency, trade size, bid/offer spreads and the number of market makers. Seidel further described the possibility of a "committee approach" for making MAT determinations, which would provide for a group of diverse market participants (i.e., sell side, buy side, end users, etc.) to consider objective criteria before proposing to subject an SBS to be MAT. Lastly, she noted that the SEC continues to analyze comments and are working to determine next steps in this area.
Kazunari Mochizuki, JFSA
Kazunari Mochizuki, Director for International Financial Markets, Japan Financial Services Agency (JFSA), next provided an overview of the JFSA's trade execution regime. He noted that the mandatory trading framework began in 2012, and that it expected that certain interest rate swaps (IRS) will be MAT in September 2015. Mochizuki went on to note, however, that only financial institutions which pass a threshold of 6 trillion Japanese yen in over -the-counter (OTC) transactions would be subject to the MAT requirements. Mochizuki then highlighted that transactions could be executed via order book or request-for-quote (RFQ) to three, and that trade information would be required to be published "without delay" and include trade date, product category and transaction amount.
Mochizuki next went on to describe the JFSA's MAT process, noting that it is almost identical to its mandatory clearing process, which includes a public comment process, which the JFSA considers before making its final recommendation. Mochizuki next stated the JFSA determined that fixed-to-floating IRS cleared by the Japan Securities Clearing Corporation and 6-month LIBOR (with tenors of 5, 7 and 10 years) are the only products which were suited to become subject to MAT at this time (starting September 1, 2015).
Edwin Schooling Latter, FCA
Edwin Schooling Latter, Head of Markets Infrastructure and Policy, U.K. Financial Conduct Authority, discussed the current status of the EU trading regime, noting that while they are a few years behind the CFTC, their rules would be coming into force over the course of the next 2-3 years. He explained that some of the trade execution requirements are being addressed vie MiFID/MiFIR, while others are part of Regulatory Technical Standards which are not yet finalized (though final standards are expected to be published in September 2015). Latter noted, however, that while not yet final, the broad parameters of the regime are clear.
First, the scope of derivatives covered would be limited to only a subset of those already subject to mandatory clearing rules under EMIR. Next, the MAT process would entail a two-part test: 1) the derivative can be traded on at least one EU trading venue; and 2) it is deemed sufficiently liquid. Latter noted that the standard for "sufficiently liquid" would be similar to the parameters looked at by the CFTC. He distinguished, however, that the EU does not allow for a "bottom up approach" as allowed by the US, explaining that a venue cannot drive the MAT process under the regime.
Latter next highlighted considerations regarding 3rd country/non-EU entities. He noted that non-EU entities would be subject to rules if: 1) the 3rd country entity would have been subject to the EU clearing obligations if they had been an EU entity, and is transacting with an EU- entity that is subject to the EU clearing obligation; or 2)the transaction between entities has a significant connection to the EU (i.e., there is a significant guarantee from an EU financial institution). Latter then noted that equivalence findings will be extremely important moving forward.
When asked about implementation timing and the nexus between clearing and trading determinations, Latter noted that the EU has monitored the CFTC's implementation and phase-in for requirements, and plans to provide for a flexible approach. He explained that ESMA has discretion to determine the appropriate time frame and phase-in on a case-by-case basis when making a trading recommendation.
When asked about methods of execution compared to the CFTC's regime, Latter highlighted that the EU planned to be less prescriptive, allowing for methods including central limit order book, RFQ, and hybrid approaches.
CFTC Commissioner Giancarlo asked whether the EU regime would allow platforms to choose the method of execution that it deems to be in the best interest of the market segment, or achieves a certain purpose, which Latter confirmed was the case.
Panel2 - Assessing MAT: Academic Perspectives on, and Data-Based Assessment of, MAT
Amir Khwaja, Chief Executive Officer, Clarus Financial Technology
Amir Khwaja, Chief Executive Officer, Clarus Financial Technology, noted that his firm has had access to public data through swap data repositories (SDRs) only since the Dodd-Frank Act came into effect and noted that the data needs to be clean in order for it to be comparable across venues. He explained that changes in volumes of trading on SEFs since MAT determinations were put in place depend on the type of product and currency and noted that the MAT determination for credit products "did not impact volumes in a meaningful way."
Khwaja said he would like to see data and information that specifies: 1) whether a trade was dealer to dealer or dealer to customer; 2) if a trade was voice or electronic; 3) if a trade was done through request for quote or a central limit order book; 4) clearing venue; 5) execution venue; and 6) whether a trade was part of a package.
Kevin McPartland, Principal, Greenwich Associates
Kevin McPartland, Principal, Greenwich Associates, noted that his firm interviews sixty thousand firms a year to examine the impact of market structure changes. He cited that 17 percent of firms submitted dealer to client data in 2010, growing to two-thirds in 2015 and noted that 93 percent of index credit default swaps are electronically traded now, up from 10 percent in 2010.
McPartland said that conflicting interests mean MAT submissions will infrequently occur. He explained that his firm thought SEFs would want make as many products MAT as possible to generate revenue, but noted that the SEFs have followed the wants of their customers and have not made many MAT submissions. He said that if the CFTC made MAT determinations it would eliminate conflicts of interest.
Darrell Duffie, Stanford University
Dr. Darrell Duffie, Dean Witter Distinguished Professor of Finance, Graduate School of Business, Stanford University, said that conflicts of interest mean the market will not always resolve issues in the best interests of stability and efficiency, explaining that if SEFs made the decision they may submit too many or inappropriate products. He also noted that dealers would prefer not to compete with one another for "rents of intermediation," and highlighted that network effects cause liquidity to go to whatever structure was in place first, because liquidity follows liquidity.
Duffie explained that the buy-side is hesitant to use central limit order books because of name give-up, but said that in facing a dealer, the buy-side loses the ability to provide liquidity to others and match their own orders. He said the CFTC should be open to different SEF designs and use its own views when making a MAT determination.
John Hull, University of Toronto
Dr. John Hull, Maple Financial Professor of Derivatives and Risk Management, Joseph L. Rotman School of Management, University of Toronto, said there is a danger that the rules in other jurisdictions will be more flexible on execution methods than the U.S., and suggested that the CFTC be more principles based in their regulations. He said that SEFs should be encouraged to try out different trading models to promote competition and that human brokers help improve efficiency and create liquidity.
Hall said he would "abandon" the RFQ-3 model because it makes trading more difficult, as well as move away from the 15 second time delay for block trades. He said the CFTC should allow SEFs to use these models but should not require them to do so, saying that regulating trade execution is less important than reporting and margin requirements.
When asked if the market has changed since new regulations have been implemented, McPartland said that the largest dealers are still interacting with the largest buyers, so the rules have effectively "automated the phone." On the sell-side, he noted, firms are encouraged to trade electronically because profitability of human traders has decreased.
When asked what role the CFTC plays in price discovery, Duffie said that pre-trade price transparency forces quote providers to compete simultaneously, and along with post-trade transparency, has brought down bid/ask spreads.
Panel3 - Industry Analysis of the MAT Process
Roger Smith, Special Counsel, CFTC, began the discussion asking the panel who should make a MAT determination and whether the current approach should be modified.
Lisa Cavallari, Director, Fixed Income Derivatives, Russell Investments, said the process should be modified to require "a little more" of the CFTC's "invisible hand" in MAT process, noting that since the initial MAT submissions there have not been any additional applications.
Sunil Hirani, Chief Executive Officer, trueEX LLC, noted that the first MAT filings were "very subjective" and did not include market feedback or regulatory oversight. He stated that there are "a lot of hurdles" to on-boarding clients to swap execution facilities (SEFs) and that technological readiness factors need to be taken into account during the MAT consideration process. Hirani said that business will go to the incumbents offering certain products and that his SEF does not "feel comfortable" filing additional MAT applications because it does not have all five of the top dealers on their platform.
Douglas Friedman, General Counsel, Tradeweb Markets, said his organization is focused on products that they are already trading and noted the importance of assessing the technology associated with MAT products to ensure the market is ready to trade them. He stated that his organization looked at all six MAT consideration factors spelled out by the CFTC when making a MAT submission, as well as hit rates, quote ratios, and response times.
Angela Patel, Trading Operations Manager, Putnam Investments, expressed concern with the upcoming expiration of no-action relief for package transactions and stressed that the treatment of packages must be looked at in terms of risk.
Edward Tsai, Director and Counsel, Credit Suisse, said all six MAT factors should be mandated, noting that currently just one factor is required. He said other factors that should be considered include: 1) continuity of factors "across the curve" to avoid entire asset classes being made MAT when parts of the asset class are illiquid; and 2) a formalized public comment process.
Arthur J. Leiz, Managing Director, Goldman Sachs Asset Management, said SEFs tend to "paint a rosy picture" when it comes to describing their technological readiness, but stressed that readiness should be judged on having dealers and the buy-side connected as well as ensuring that messaging protocols and matching are in place for products that the market wants to trade.
Vincent Johnson, Head of Regulatory & Policy Affairs, BP Integrated Supply and Trading, representing the International Swaps and Derivatives Association (ISDA), cited ISDA's petition on MAT and said market participants should be part of the MAT process and that a public comment process should be established. He also said it would be helpful to make consideration of what firms are consistent liquidity providers and market makers.
Stephen Berger, Director, Government and Regulatory Policy, Citadel LLC, said the current language that does not require all six factors to be considered is "fair," noting that there are some circumstances where some factors are more important than others and agreeing that it would be helpful for the CFTC to formalize a public comment period.
Dexter Senft, Managing Director, Fixed Income Electronic Trading, Morgan Stanley, said two important market resiliency factors are needed in a MAT determination: 1) that two or more SEFs trade a product, in case one SEF has issues and cannot trade; and 2) that each SEF have access to two liquidity providers.
Thomas Benison, Managing Director, Global Credit Trading and Syndication, J.P. Morgan, said all six MAT factors should be analyzed using as much objective data as possible and that the factors should be consistent across a group of swaps. He listed the following as additional factors that should be considered in the MAT process: 1) the number of platforms are trading the product; 2) changes in liquidity through the cycle; and 3) the length of time of sufficient trading volume. When asked if data on trading done away from SEFs is relevant, Benison answered that it is and that overall volume and platform activity should be assessed.
Leiz suggested that a product should be listed on a SEF for at least six months, to show that the platform is capable of handling trading, before it can be MAT. When asked by Srinivasan how to assess liquidity if voice trading depth cannot be seen, Leiz said that swap data repository information can be used.
Consideration of Other Jurisdictions
When asked if the CFTC should consider the actions of other jurisdictions to mandate trading of certain products, Tsai noted that international harmonization has been sought after by the industry. He said concerns center on whether regulation will promote or impede trading, but said that harmonization would reduce operational and regulatory complexity. He encouraged the CFTC to embrace mutual recognition because without it market participants will not be able to trade on different platforms. He also noted that the impact differs based on what conditions are allied to MAT trades in different jurisdictions, noting that the CFTC's rules restrict the type of trading methods allowed.
Berger said the market will find solutions to international structures, noting that some platforms are dually registered to allow market participants across jurisdictions to interact.
Senft said there is no impact if both jurisdictions mandate trading and that if the U.S. mandates trading but others do not, the U.S. should "stand by" its decision. He added the only case for concern is a situation where other jurisdictions mandate trading but the U.S. does not.
Quantitative MAT Factors
When asked if MAT determination factors should be quantitative, Senft said he thinks there can be certain thresholds, including: 1) having two SEFs trading the product; 2) requiring the SEF to have two liquidity providers; 3) having natural buyers and sellers in the market representing 10 times the daily amount of trading volume; and 4) having daily trading volume of $10 million a day for 30 days.
Leiz stated that all six factors should be required to be considered and that there should be a minimum of five dealers making a market in the product. He also said the prescriptive nature of the trading requirements is preventing innovation.
Senft stated that, with an objective criteria for MAT, there must be a process to "de-MAT" or "make unavailable to trade" (MUT), if the product falls below these thresholds.
Initiating the MAT Process
When asked who should initiate the MAT process, William Shields, Chief Compliance Officer, GFI Swaps Exchange LLC, representing the Wholesale Market Brokers Association, answered that the venues have the best ability to make MAT determinations but that the CFTC should approve any determinations.
Cavallari recommended that the determination should be a collaborative process where the CFTC has veto power, noting that if the CFTC has a role in clearing determinations then it should also have a role in the MAT process.
Leiz agreed that it should be a collaborative effort and supported the establishment of a MAT advisory committee comprising market participants to evaluate submissions.
Senft said that the SEFs, the CFTC, and trade associations such as ISDA are the organizations with the capabilities to make proposals.
Ron Steinfeld, Chief Compliance Officer, MarketAxess, added that with stricter criteria, the CFTC can be an arbiter because a swap will effectively "MAT itself."
Friedman said that Tradeweb is supportive of moving to a process where the CFTC makes MAT determinations with the opportunity for public comment.
Timing of MAT Requirements
When asked how much time the market needs before a product can be MAT, Johnson suggested that once a clearing determination is made, the swap should be subject to the compliance schedule of 60 days before the CFTC can make a MAT order, and then the market should be given 30 days after the CFTC's order to comply.
Tsai said that package transactions should be assessed separately and given a longer grace period.
For more information on this roundtable, please click here