As the industry continues to speculate on the trajectory of the swaps market, what’s in store for the final package trade exemption expiring on November 15, 2014, when packages consisting of swaps against futures (so-called ‘invoice spreads’) must be traded on a SEF?

The problem with invoice spreads is that the futures component (typically treasury note futures) is ‘owned’ by, and must be executed on, the CME while the swap component (e.g. a 5-year fixed/floating interest rate swap) must be executed on a SEF. Historically such package trades were executed by voice, and in aggregate. The futures component could be executed off-exchange as part of a (transitory) EFRP (exchange for related position, or in this case, an EFR – exchange of futures for risk). But with the CME ruling you can’t do transitory EFRPs, the swaps leg can’t be contingent on the futures leg and you must execute the futures leg on-exchange. And the CFTC’s recently announced no-action relief on some STP pieces of clearing packages doesn’t change the fundamental problem. Following next month’s trade exemption expiry market participants will need workflow solutions to allow them to execute both the swaps leg and the futures leg simultaneously, as a synthetic strategy/spread.

As far as predicting market volumes after that date it’s possible, but by no means certain, that fewer invoice spreads will be transacted. Interestingly, when the June 15 swap spread package exemption (swaps against cash treasuries) expired, SEFs didn’t necessarily see a huge increase in swap volumes. In other words, the SEF volume story is, and will continue to be, uncertain.