Last week, the Commodity Futures Trading Commission (CFTC) certified two additional available to trade determinations (MAT determinations). The latest MAT determinations cover additional interest rate swaps (IRS) and, for the first time, certain credit default swaps (CDS) based on certain indices.  The IRS and CDS covered by the latest MAT determinations (to the extent not covered by prior MAT determinations) must be executed on a swap execution facility (SEF) or designated contract market (DCM) that lists those products beginning on February 26, 2014.1 The following is a brief overview of the latest MAT determinations and next steps market participants should consider as they prepare to use SEFs and DCMs to execute certain IRS and CDS.

The MAT Determinations

On January 28, 2014, the CFTC certified a third MAT determination for certain IRS and CDS in response to an application submitted by TW SEF LLC (the Third MAT Determination). The Third MAT Determination certifies a number of IRS that were previously included in the CFTC’s first and second MAT determinations issued in response to applications submitted by Javelin SEF, LLC and trueEX, LLC, respectively.2  However, the Third MAT Determination also covers IRS with (i) additional tenors in each of the USD IRS categories; and (ii) spot starting Sterling (GBP) fixed-to-floating IRS for a range of tenors. In addition, the Third MAT Determination covers, for the first time, CDS that are limited to certain CDS indices of corporate debt (not including any single-name CDS products) for four main CDS indices for the most liquid tenor, the five-year indices.

Next, on January 30, 2014, the CFTC certified a fourth MAT determination for certain credit default swaps in response to an application submitted by MarketAxess SEF Corporation (the Fourth MAT Determination). The Fourth MAT Determination, which does not include IRS, covers the same CDS previously certified in the Third MAT Determination summarized above.

Sutherland has prepared two tables that identify all of the IRS and CDS that must be executed on a SEF or DCM beginning in February, available here. Note that in the first table, which covers IRS, additional IRS covered by the Third MAT Determination appear in bold in the last row of the first table.

Next Steps

In the interim, market participants should be taking steps to prepare to use SEFs or DCMs to the extent that they engage in the IRS and CDS transactions that are covered by the certified MAT determinations. Such steps may include:

  • SEF Onboarding. To the extent applicable, market participants must identify and prepare to onboard with SEFs that offer the IRS and/or CDS that are listed in the tables linked above. It is important to note that the onboarding process for SEFs requires a great deal of due diligence, including, among other things, reviewing a SEF’s rulebooks and signing a participant agreement with a SEF. Market participants should be aware that, in most cases, by executing a relatively short SEF participant agreement, they typically will be subject to lengthy SEF rules that vary from SEF to SEF. Below is a list of provisionally registered SEFs that plan to offer, or are offering, trading of certain IRS and/or CDS:
  • o BGC Derivatives Markets, L.P. o LatAm SEF, LLC
           
    o Bloomberg SEF, LLC o MarketAxess SEF Corporation
           
    o DW SEF, LLC o SwapEx, LLC
           
    o GFI Swaps Exchange, LLC o TeraExchange, LLC
           
    o ICA Global Derivatives Limited (UK) o tpSEF Inc.
           
    o ICAP SEF US, LLC o Tradition SEF, Inc
           
    o ICE Swap Trade LLC o trueEX, LLC
           
    o Javelin SEF, LLC o TW SEF, LLC
  • Ensure Operational Preparedness. Market participants should begin to develop and put in place the required personnel, policies and procedures for successful execution of IRS on a SEF or DCM.
  • Stay Tuned. There is one additional MAT determination outstanding. The CFTC is expected to certify a MAT determination for certain IRS and CDS in response to an application submitted by Bloomberg SEF, LLC by March 5, 2014. In addition, the CFTC’s Technology Advisory Committee has rescheduled, to February 10, 2014, its public meeting to discuss swap execution facilities, among other items. An agenda for the meeting is available on the CFTC’s website. Finally, the CFTC announced that it will host a public roundtable on February 12, 2014, regarding the trade execution requirement and “package transactions” (i.e., transactions that involve more than one swap or financial instrument and at least one leg of the transaction is subject to a MAT determination).