Gensler Speaks on Swaps Market Reform and Cross-Border Swaps Rules

Posted on November 2, 2012 by Steven Lofchie

CFTC Chairman Gary Gensler delivered a speech before the Ontario Securities Commission (OSC) in Toronto, Canada in which he discussed the progress of major market jurisdictions on the coordinated approach to legislation and implementation of reforms. According to Chairman Gensler, as of October 12, swaps market reform focused on three areas: clearing requirement, transparency initiatives and swap dealer registration.

Chairman Gensler noted that although Canadian dollar interest rate swaps were not included in the clearing of standardized swaps in July, the CFTC will consider (in consultation with regulators in Canada) including them in the future. Second, Chairman Gensler stated that the CFTC has consulted widely with market participants, the SEC and international regulators on how to best finalize rules to promote pre-trade transparency through the use of trading platforms. According to Gensler, the current Canadian authority and the European and Japanese transparency legislative proposals will further align international reform efforts promoting transparency to the public.

Lastly, the CFTC has proposed an approach to phased compliance for foreign swap dealers. Such phased compliance, says Gensler, would allow time for appropriate implementation of substituted compliance, or allowing market participants to comply with Dodd-Frank through comparable and comprehensive foreign regulatory requirements. Gensler notes that the CFTC relies on Canadian authorities with regard to futures regulation, as they are comparable to CFTC requirements. In consultation with the international regulatory community, the CFTC will also move shortly to finalize the cross-border and phased-compliance releases.

Chairman Gensler also raised four questions that market participants and international regulators are focusing on with regard to benchmark interest rates. These questions include: (i) What are the best practices to ensure for a reliable benchmark? (ii) How do the current survey benchmark rates measure up in comparison? (iii) What alternatives might there be for interest rate benchmarks? (iv) How do we ensure for a smooth transition from benchmark rates that may have become obsolete or if markets move to an alternative rate?

Lofchie Comment: Canada has not publicly commented on the CFTC’s proposed cross-border regulations. However, as we had previously reported, a delegation from Canada had visited the CFTC along with a number of non-U.S. regulators who had been publicly extremely critical of the CFTC’s proposed rules. The CFTC has more recently taken a number of steps that might be viewed as far more deferential to non-U.S. regulators, including potentially providing them with what the CFTC Chairman had described as “unfettered access” to U.S. swap trade data. Link here.

See: Chairman Gensler’s Remarks before Ontario Securities Commission (OSC), OSC Dialogue 2012 in Toronto, Canada.

BIS Report: The Future of Computer Trading in Financial Markets – An International Perspective

Posted on November 2, 2012 by Steven Lofchie

The development and application of new technology is arguably causing the most rapid changes in financial markets. High Frequency Trading (HFT) and algorithmic trading (AT) have particularly attracted controversy relating to their possible benefits and risks. The International Foresight Project was commissioned to address two critical challenges: (i) how rapid technological developments, coupled with the ever-increasing complexity of financial trading and markets, affect HFT/AT on financial markets; (ii) the lack of evidence and analysis to inform the development of new regulations (this is of particular concern since good regulation needs to be founded on good evidence and sound analysis).

The Foresight Final Project aims to determine how computer-based trading (CBT) in financial markets across the world could evolve over the next ten years, identifying potential risks and opportunities that this could present. In addition, it aims to draw upon the available evidence to provide advice to policy makers, regulators and legislators on the options for addressing present and future risks while realizing potential benefits. While the effects CBT on financial markets have been the topic of controversy, analysis of available evidence shows that CBT has led to benefits to the operation of markets, notably relating to liquidity, transaction costs and the efficiency of market prices. The report suggests the following priorities for action: (i) limiting possible future market disturbances; (ii) making surveillance of financial markets easier; (iii) improving understanding of the effects of CBT in both the shorter and longer term. Over 150 leading academics from more than 20 countries have been involved in the work which has been informed by over 50 commissioned papers subject to independent peer review.

Click here to view report (links externally to BIS website).

Spies at Bretton Woods

Posted on November 1, 2012 by Kurt Schuler

A fascinating sidelight of the time of the Bretton Woods conference is that the Soviet Union had not only its own delegation to give it information about American positions on various issues related to international finance; it also had several Americans.

Harry Dexter White, Assistant to the Secretary of the Treasury and the chief American negotiator at Bretton Woods, was not formally a spy in the sense of being on the Soviet payroll, taking orders originating from Soviet intelligence agents, or regularly reporting to a spy runner. He did, however, illegally pass classified information to the Soviets, and he used his position to protect persons suspected of espionage and later revealed to have been spies. He may have made his first direct contact with a Soviet spy runner at Bretton Woods. My next post will have more to say about White’s activities, drawn from a minor source I came across in my research that to my knowledge has not so far been used.

N. Gregory Silvermaster, an assistant in the U.S. delegation to Bretton Woods, had been born in Russia. At the time of the conference he was working at the Treasury Department. He was the head of a spy ring that reached into the White House, War Department, Department of Justice, and Department of Agriculture.

Two other spies were members of the conference secretariat rather than the American delegation. V. Frank Coe was the Technical Secretary General, the second-highest official in the secretariat. His regular job was as an assistant administrator in the U.S. Foreign Economic Administration, which gave foreign aid.

William Ludwig “Lud” Ullmann had been Harry Dexter White’s assistant before being drafted into the U.S. Army, where he became a captain.

White is the only one of these who appears in the Bretton Woods transcripts.

The Soviet Union’s well-placed spies at Bretton Woods ultimately yielded it no advantage connected with the conference. Although the Soviet Union signed the IMF and World Bank agreements, indicating its potential willingness to join, it later decided not to join. White and Coe later became high-level officials of the IMF in its early days.

(For more information, see two books by John Earl Haynes and coauthors: Venona [1999] and Spies [2009].)

Basel Committee Reports on Basel III Implementation

Posted on November 1, 2012 by Steven Lofchie

In preparation for the meeting of G20 ministers and governors in Mexico City on November 4^th – 5^th, the Basel Committee on Banking Supervision has published its report on Basel III implementation, which covers all three levels of the Committee’s Basel III implementation review programme: (i) ensuring timely adoption, (ii) assessing regulatory consistency and (iii) assessing the consistency of outcomes.

The Chairman of the Committee noted that significant progress has been made since the last report to the G20 leaders was published in 2012, particularly as many Committee members now have final rules in place. The Committee expects that all other member jurisdictions will finalise their rules quickly, especially those in which global systemically important banks are headquartered.

European Parliament Adopts Revised MiFID Rules re HFT and Position Limits

Posted on November 1, 2012 by Steven Lofchie

In the latest development in the reform of the Markets in Financial Instruments Directive (“MiFID), members of the European Parliament have voted overwhelmingly in favour of additional amendments to the current draft proposals.

Key measures approved by the Parliament include:

ensuring that trading venues set out transparent rules for executing orders;
stipulating that all high speed transactions are valid for at least 500 milliseconds before they can be cancelled or modified; and
imposing thresholds on commodity derivatives trading such as the maximum net position that traders can hold or enter into over certain periods.

Following this vote, three-way talks on the revised proposals will take place between the European Parliament, EU member states, and the European Commission.