In a speech at the Swaps Execution Facilities Conference (“SEFCON V”) hosted by the Wholesale Markets Brokers’ Association Americas (“WMBAA”), CFTC Chair Timothy Massad discussed the transparent trading of swaps transactions on regulated platforms. Chair Massad stated that regulated platforms “can bring greater integrity to the trading process and can facilitate straight-through-processing,” adding that more work needs to be done, and that the CFTC is working to fine-tune its rules. In a separate statement, Commissioner Giancarlo suggested that the worldwide swaps marketplace has “started to unravel,” and criticized the CFTC for imposing ill-advised transaction level rules.
Chair Massad outlined the following three principles, which guide his approach to current issues concerning regulated platforms:
- The CFTC’s duty is to implement the law and be faithful to it.
- Dodd-Frank, Chair Massad reminded his audience, created the trading mandate, prescribed core principles, and directed the CFTC to write rules to implement the trading mandate and those core principles.
- Market development takes time.
- Noting that SEF rules are barely a year old, and that the first made-available-for-trade (“MAT”) determinations are only eight months old, Chair Massad pointed out that this is a work in progress – that participants are still adapting and the technology, evolving.
- Markets don’t develop simply as a result of government directives.
- The CFTC, Chair Massad said, must create a regulatory framework that not only implements the statutory trading mandate, but also creates the conditions in which participants wish to trade on SEFs.
Chair Massad stated that his goal is to build a regulatory framework that meets Dodd-Frank’s Congressional mandate and creates a foundation on which the market will thrive. He also spoke about issues that the CFTC intends to address relating to general oversight, products and methods of execution. Lastly, Chair Massad counseled patience, noting that the CFTC is focused on the cross-border implications of its trading mandate rules and that he is committed to harmonizing the CFTC rules as much as possible.
Chair Massad concluded by calling for additional resources. Without additional support, he said, “markets cannot be as well supervised, participants cannot be as well protected, and market transparency and efficiency cannot be as fully achieved.”
In a separate prepared statement, Commissioner Giancarlo suggested that the worldwide swaps marketplace has “started to unravel,” and criticized the CFTC for imposing “ill-advised transaction level rules worldwide” that he said are based on market participants’ U.S. personhood or employee location and the wrong template of the structure of the U.S. futures markets. He also remarked that the CFTC rules included a host of unprecedented swaps trading restrictions, including pushing block trades off platforms.
Commissioner Giancarlo called for a return to the clear framework of Dodd-Frank Title VII and suggested that such a return would:
- “promote healthy global markets by regulating swaps execution in a manner well matched to the underlying market dynamics”;
- “reduce the enormous legal and compliance costs of registering and operating a[n] SEF that is closing the doors of smaller platforms”;
- “encourage technological innovation to better serve market participants and preserve the jobs of U.S. based support personnel”;
- “free up agency resources and save taxpayer money at a time of Federal budget deficits”; and
- “undo much of the global fragmentation in global swaps trading and the resulting increased systemic risk.”
Commissioner Giancarlo stated that such a return also would attract the global trading community to the CFTC’s swaps regime.
Chairman Massad’s comment – that the swap trading rules are mandated by Congress and all the CFTC can do is implement them – is worth considering in a number of ways. One implication is that, at some point, the regulators should go back to Congress and insist (to paraphrase William Congreve) that what is legislated in haste must be repented at leisure; there will come a time to fix at least some of the problems created by Dodd-Frank. Not all of the damage done to the markets can be blamed on the hurried legislation of the statute; some of it must be ascribed to rulemaking that was nearly as hasty. In that regard, suggestions should be put forward as to how to improve the rules. Whether they are made by Commissioner Giancarlo or market participants, those suggestions should be given meaningful attention. While it might be true that the swaps trading rules have been in place for only a year, it is also true that they were criticized broadly before adoption; thus, their problems did not in fact emerge out of the blue.