Javelin, CME Cleared $4.1 Billion Of Rates Trades At High Speed
December 14 2011 - 3:04PM
Dow Jones News
Buyers and sellers of off-exchange derivatives were able to
trade and process $4.1 billion worth of interest-rate swaps in as
little as 12 minutes last Thursday, demonstrating that the link
between execution and clearing can occur in near real time as
regulators have urged.
Javelin Capital Markets, an electronic trading platform for
swaps brought about by the 2010 Dodd-Frank financial overhaul law,
and CME Group Inc. (CME), a swaps clearinghouse owner, were behind
the move, the firms announced Wednesday.
Clearing is when a third party steps in between trading firms,
and agrees to guarantee their financial obligations. Regulators
across the globe have made clearing a key plank of their pending
overhaul of the $708 trillion swaps market under Dodd Frank, in a
bid to reduce risk to the financial system in the wake of the
crisis.
The Commodity Futures Trading Commission, which was tasked by
Congress to write many of the new swaps rules in the U.S., has
specified that it wants to see swaps processed by clearinghouses,
"in a matter of milliseconds or seconds or, at most, a few
minutes--not hours or days." Futures conducted on exchanges are
processed instantaneously.
The average speed with which the rate swaps were accepted by
CME's clearinghouse was just 1.9 seconds, which Javelin and CME
called "a market first." The fastest processing time they achieved
was 1.3 seconds, they said.
Most rate-swaps clearing is handled by SwapClear, a service
provided by CME's London rival, LCH.Clearnet Group Ltd. LCH clears
rate swaps in batches, completing 13 cycles per day that can be as
short as 15 minutes towards the end of the day, a spokeswoman said.
Real-time clearing is a top priority for the firm going into 2012,
she added.
Some 21 trades were conducted on Javelin's platform Thursday,
with average ticket sizes of $195 million, then cleared by CME. The
batch of trades took in an array of maturities across the swap
curve, including $747 million of two-year swaps, a $1 billion of
three-year swaps, $985 million of five-year swaps, a $1 billion of
seven-year swaps and a total notional $377 million 10-year
swaps.
Dealer banks and investment firms who participated did so
anonymously.
The test "shows real-time trade acceptance and puts a time stamp
on what is technologically practicable," said James Cawley, CEO of
Javelin Capital Markets.
The CFTC initially proposed a rule that would have required
swaps to be accepted into clearing immediately upon execution.
Some participants had expressed concern, however, that rushing
the processing of such trades wouldn't give parties enough time to
check that terms had been entered correctly. Nor, they said, would
it give dealers time to check whether clients had exceeded any
pre-determined risk limits in place with their clearing
brokers.
As a result, a collection of dealers suggested that the market
adopt a third-party platform to monitor such credit lines in
real-time, something they referred to as a "limit hub." This hub,
they said, would reduce the chances of a trade breaking before it
was cleared, providing certainty for participants with trades
screened in advance of clearing.
A special document addressing the risk of trade breakage was
published in June by the Futures Industry Association and
International Swaps and Derivatives Association. It was designed to
cover what happens in the gap between trade execution and
confirmation into clearing--something ISDA separately set up an
industry working group to address.
Others, however, were worried that this so-called "tri-party
agreement" from the FIA and ISDA would interfere with users'
ability to trade anonymously.
The commission later updated its proposals saying that clearing
brokers couldn't enter into arrangements that would cause the
identity of their customers' executing counterparties to be
disclosed, or that would limit the number of dealers with whom a
customer would execute its trades.
The CFTC also clarified that it wanted clearinghouses to accept
or reject trades submitted for clearing "as quickly as would be
technologically practicable if fully automated systems were
used."
-By Katy Burne, Dow Jones Newswires; 212-416-3084;
katy.burne@dowjones.com
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