January 16, 2014
It is hard to imagine a federal agency regulatory process that is more flawed than the Made Available-to-Trade (“MAT”) determination. The Commission staff has certified all interest rate benchmarks and related packaged transactions for mandatory trading on swap execution facilities (“SEFs”) or designated contract markets (“DCMs”), while at the same time, stated that it will consider some future action for all packaged transactions. And to complicate things further, the Commission has been excluded from a major regulatory decision that significantly reshapes current market infrastructure.
I find this approach especially troubling given the CFTC Chief Economist’s assessment that these packaged transactions comprise 50 percent of the notional volume of the rates market. By accepting Javelin’s determination and then immediately contemplating further action with respect to half of the MAT transactions, the Commission creates uncertainty in the market and sets a dangerous precedent for future MAT determinations.
To be clear, I support mandatory trading determinations for the individual benchmark swaps. Once new products are subject to the clearing mandate, I will continue to support mandatory trading determinations that are based on data and objective standards.
However, as I stated in my dissent to the MAT rule, the MAT determination process “provides illusory comfort that the Commission will have a legal authority to review and, if necessary, challenge a mandatory trading determination . . . the only authority that the Commission has is to ‘rubber stamp’ a SEF or DCM’s initial determination.”1
The Commission is now seeing the effects of this process as staff’s certification of Javelin’s submission leaves unanswered a number of legal questions for the Commission.
Specifically, section 40.6 requires staff to certify an industry submission unless the proposed certification does not comply with the Commodity Exchange Act or Commission regulations.2 In its filing, Javelin expressly stated that it intends to exclude from the MAT determination certain packaged transactions that are composed of one or more MAT instruments. However, according to section 37.9 of the SEF rules, any transaction involving a MAT swap must be executed as a MAT transaction.3 Given this conflict, I question whether staff had sufficient legal basis to certify Javelin’s filing and whether this submission should have been referred to the Commission for further consideration.
In addition, further questions have been raised regarding whether the Commission has legal authority over swap spreads that are composed of a product, such as U.S. Treasury bonds, which are subject to the authority of the Securities and Exchange Commission. Because of the confusion surrounding the MAT determination process and the Commission’s product certification and listing procedures, the Commission is now left with developing a post-hoc solution for widely-traded packaged transactions that may involve products that are outside of the Commission's jurisdiction.
Given this regulatory conundrum, I call on the Commission to carefully review all possible packaged transactions for legal compliance and technological readiness, seek public comment, and hold roundtables in order to develop an appropriate solution for each type of the complex packaged transactions. On January 21st, the Commission's Technology Advisory Committee will discuss the MAT determination as part of its agenda. I hope the Commission will quickly identify the critical components of a solution that involves trading, clearing, and reporting and will enable as many transactions as possible to trade on SEF platforms. Also, the Commission must deter the creation of new trading structures designed to avoid the overly broad mandatory trading determination.
Finally, contemporaneously with the MAT post-hoc review, I urge the Commission to revise the MAT rules to prevent carelessly considered MAT determinations from becoming a regulatory impediment to trading on a SEF. It is imperative for the Commission to not only restore its decision-making authority, but also have the ability to determine the best course of action in encouraging on-screen swaps trading.
2 17 C.F.R. § 40.6.
3 17 C.F.R. § 37.9.
Last Updated: January 16, 2014