CFTC Commissioner Christopher Giancarlo addressed three “mega-trends” that are transforming global financial markets: technological disruptions, changing market liquidity and global fragmentation. In a speech before the ISDA Trade Execution Legal Forum, Commissioner Giancarlo called on the CFTC to “revisit its flawed swaps trading rules to better align them to market dynamics.”
In focusing on these mega-trends, Commissioner Giancarlo made clear that regulators must: (i) foster best practices for and harness the power of new trading technologies for the benefit of market participants and regulators; (ii) address the diminishing liquidity in trading markets; and (iii) review and reduce poorly designed rules and regulations that are causing “service-provider concentration and market fragmentation.”
Commissioner Giancarlo argued that “market regulators cannot continue to ignore the growing systemic risk caused by [global] market fragmentation,” and noted the importance of allowing U.S. swap intermediaries to “fairly compete” in world markets to reverse this fragmentation. Commissioner Giancarlo stated:
“Only with clear-eyed attention to the true challenges facing contemporary markets can we ever restore the market vitality that will be necessary for broad-based economic prosperity. Flourishing capital markets are the answer to U.S. and global economic woes, not diminished trading and risk transfer.”
In his criticism of post-crisis regulation, Commissioner Giancarlo observed that overseas market participants continue to avoid firms “bearing the scarlet letters of ‘U.S. person'” in certain swap markets to “steer clear” of the CFTC’s “problematic” regulatory regime.
On market liquidity, Mr. Giancarlo blamed prudential restrictions on bank capital along with the CFTC’s “flawed and restrictive swaps trading rules,” the evolution of some trading markets from dealer to agency models, and the impact of U.S. and European monetary policy for sudden volatility shocks that occur in today’s markets. He decried the practice by U.S. and foreign regulators to plow ahead with “capital constraining regulations” rather than to acknowledge and study the causes of changing market liquidity.
On disruptive technology, Mr. Giancarlo reiterated his opposition to proposed a Reg. AT provision allowing the CFTC to obtain trading system source code without a subpoena. He urged financial regulators to foster a regulatory environment “that spurs innovation” and allows market participants to develop and test innovation solutions “without fear of enforcement action and regulatory fines.”
He noted that the upcoming March 1, 2017 deadline for uncleared swap variation margin requirements “will pose a massive challenge for market participants.” Mr. Giancarlo concluded that “safe, sound and vibrant” global markets are needed for investment and risk management to escape the “new mediocre” of prolonged stagnation.
Lofchie Comment: During his term as Commissioner, Mr. Giancarlo pulled off a trifecta. He: (i) prevented the CFTC’s rules from getting any worse (i.e., neither the position limits rule nor Regulation AT was adopted in part because of Mr. Giancarlo’s work in calling attention to their deficiencies); (ii) kept the focus on issues affecting the market currently and likely to affect the market in the future; and (iii) remained civil yet steadfast with those with whom he had deep policy disagreements. In the new administration, his presence at the CFTC will be integral to the reexamination of the agency’s rules in order to determine what has been working and what has not.