trueEX yesterday filed their MAT application to start a CFTC review process alongside the one underway for Javelin’s application. 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).
In a previous post I talk through the merits of Javelin’s approach. 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 other direction. They specifically cite the criteria the CFTC put forward for determining what products should be mandated for trading:
(1) whether there are ready and willing buyers and sellers;
(2) the frequency or size of transactions;
(3) the trading volume;
(4) the number and types of market participants;
(5) the bid/ask spread; or
(6) the usual number of resting firm or indicative bids and offers.
The CFTC says that “one or more factors” must be considered. Javelin’s proposal hits on at least two, trueEX’s probably all 6. But don’t forget, the rule says “one or more”, not “all”.
Having called around a bit it seems most of the larger firms buy and sell side firms are with trueEX on this one. Its not that people won’t trade non-standard (but clearable) contracts on SEFs, just that they’d rather the option to unwind their 2 year, 3 month IRS off SEF while they get used to trading their par swap on SEF. It also seems the CFTC might take this idea to create a phased in approach for mandatory trading; rather than phasing in by participant type over a few months time, they’ll phase in by contract tenor.
I’m a big proponent of some kind of phase in. A big bang for a change of this magnitude is ill advised. Imagine being told that in 30 days you can’t go to the supermarket anymore, you have to buy all of your groceries online. OK in the long run but not ok 30 days from now. The question is what’s the right way to phase in? If done improperly that we could have a big liquidity problem on SEFs right out of the gate.
The biggest issues for SEFs and SEF adoption since 2010 has been uncertainty and confusion regarding the rules and how initial implementation would ultimately be carried out. Of these two approaches, we want the one that is the most straight forward. But depending on who you ask you get two different answers as to which one that is. To that end I thought I’d try something new – a completely unscientific hand vote to guage what everyone is thinking. I post the results to the poll in the post in a few days. What’s a blog without some interactive content right?