On May 16, 2013, the Commodity Futures Trading Commission (CFTC) approved the ‘made-available-to-trade’ (MAT) rule, which gives the market clarity on which products must be, by law, traded on swap execution facilities (SEFs). Once the CFTC issues a MAT determination, a mandate is established for trading that product on SEF, which prevents it from being traded bilaterally by counterparties subject to the SEF requirements.

By using Depository Trust & Clearing Corporation (DTCC) publicly reported data, ISDA approximates the portion of SEF trading comprised of MAT swaps, and track changes to volume measured as gross notional and daily trade count before and after the February 2014 effective date.

According to the Research Note: Made-Available-to-Trade (MAT): Evidence of Further Market Fragmentation:

• MAT swap volume accounted for 70% of total SEF trading in interest rate derivatives in the week ending March 28, 2014
• During this period, USD MAT swaps comprise 91% of total MAT trading; EUR and GBP MAT swaps account for only 6% and 3%, respectively
• Following the February 15, 2014 implementation date for the first MAT determinations, SEFs likely became more U.S.-centric, with USD MAT volume increasing and EUR MAT volume declining sharply
• A comparison of EUR MAT swaps before and after the rule came into effect reveals the average daily notional traded on SEFs declined by 30%, while the average daily trade count fell by 11%
• The MAT rule appears to have created smaller, less liquid pools for EUR and GBP swaps on SEFs relative to USD swaps and has reduced the dispersion of daily trade size for all MAT swaps

This analysis builds on ISDA’s earlier work on SEFs. Cross Border Fragmentation of Global OTC Derivatives: An Empirical Analysis revealed that changes in trading behavior had occurred between European and U.S. dealers once the SEF regime had come into force on October 2, 2013. European dealers began to trade exclusively with other European counterparties in the market for EUR interest rate swaps and had dramatically moved away from trading with U.S. counterparties. The resulting market fragmentation created separate liquidity pools for U.S. and non-U.S. persons.

Footnote 88 and Market Fragmentation: An ISDA Survey reported that 84% of survey participants believed non-U.S. persons were choosing not to trade on a SEF. Participants predicted this shift away from SEFs would be exacerbated once swaps were made available to trade.