A Tale of Two SEFs: Javelin and TrueEX on Swap Trading

Two startups, Javelin Capital Markets and TrueEX, are taking different approaches to offering interest-rate swaps on their new swap trading venues, which could spark debate on whether to list the most liquid contracts or the entire interest rate curve.

On Friday, Javelin Capital Markets said it filed a 'Made-Available-to-Trade' (MAT) submission with the Commodity Futures Trading Commission (CFTC), specifying which interest-rate derivatives instruments that it wants to trade on its swap execution facility (SEF), which could speed up the migration of derivatives to exchanges or electronic trading venues. The Javelin filing covers interest rate swaps denominated in US dollars, British Sterling and Euros from one month to 51 years in duration.

"This is the natural next step for a derivatives market that already enjoys trade reporting and broad clearing. Javelin has gone first—we expect others to follow," stated James Cawley, CEO of Javelin Capital Markets in the firm's announcement on Friday.

If approved by the CFTC, Javelin's request could force hundreds of trillions of the same type of swaps to trade on exchanges or SEFs, according to Bloomberg News.

Yesterday, TrueEX Group LLC filed an application to offer the most liquid interest-rate swaps on its exchange platform. TrueEX is seeking to list benchmark swaps with tenors (aka, maturities) of 2, 3,5,7, 10,15, 20 and 30 years on its platform. TrueEX also is seeking to list Standard Coupon Standard Maturity swaps with 1,2,3,5,7, 10, 15, 20 and 30 years.

"We're taking a futures like approach," said Sunil Hirani, CEO of TrueEX in an interview this afternoon. "What would be considered the closest to listed futures? "Those are the benchmark securities as well as standard coupon standard maturity swaps," explained Hirani. "It's a fundamentally different approach," he said. As supporting evidence, TrueEX looked at the swap data repository (SDR) data, we looked at benchnark securities with Treasuries and we surveyed our clients in writing and verbally," he said. "If you look at the treasury (futures) market, the majority for the volumes are in half a dozen instruments," said Hirani. "There should be less than two handfuls or 10 swaps that have a majority of the volumes," said Hirani.

The decision by SEFs to list a broad list of swaps touching all the points on the yield curve versus focusing on the most active swaps is a topic likely to cause some debate.

"This will add a huge amount of fuel to the debate on whether or not all points in the rate curve should be mandated for trading out of the gate (Javelin) or only the most standard contracts (TrueEX)," wrote Kevin McPartland, head of market structure research at Greenwich Associates in his blog today.

"Making most of the yield curve available to trade on its platform, could force illiquid swaps to trade on SEFs," wrote McPartland yesterday. When considering Javelin's MAT filing, McPartland wrote that "Some believe only the most liquid points on the curve (e.g. 2,5, 7, 10, 15, 30) or the standardized Market Agreed Coupon (MAC) contracts (published by ISDA in April 2013) would have been a more reasonable place to start." McPartland suggests it could be more confusing for buy-side firms to have certain interest-rate swaps trade on SEFs, and others trade via voice. "I think of the buy side trader doing a swap spread trade, left trying to figure out what has to be done on the SEF and what can be done on the phone. Yes, they are smart and capable, but why make this complicated shift even more confusing," wrote McPartland.

In today's blog, McPartland's response changed after he factored in the TrueEX filing. " If we have to trade IRS on SEFs, than let's keep it simple and trade the whole lot of them within the currencies in question. But TrueEX has put together a pretty compelling argument for taking this in the As for the SEFs, the question is whether all points on the interest rate curve should be mandated for trading "out of the gate," or only the standard contracts, wrote McPartland.

In the MAT filing, Javelin said that swap dealers are buyers and sellers are ready and willing to provide a price for a swap, including Bank of America Merrill Lynch, Barclays, BNP Paribas, among others. It noted that the CFTC has 79 registered swap dealers who routinely act as willing buyer and sellers in the IR swaps marketplace and that these dealers can be found providing liquidity on at least 13 temporarily registered SEFs. Many dealers also have their own single dealer platforms through which they are buyers and sellers.

To push the debate along, and to avoid some of the uncertainty that could derail SEFs, McPartland is conducting a vote —What to MAT First — on his blog site. What do you think? Should SEFs make the entire interest rate curve available to trade at the outset, or should they focus on the most active swaps? Let us know by commenting on this article? Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio