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CFTC Chair Giancarlo Seeks to Extend SEF Comment Period, Move Forward on Cross-Border Framework

nihal.patel@cwt.com's picture
Commentary by Nihal Patel

CFTC Chair J. Christopher Giancarlo will seek an extension (to March 15) of the comment period for a proposal to amend various aspects of the rules governing the trading of swaps (the "SEF Proposal"). He also intends to move forward with amendments to the CFTC cross-border framework.

In a keynote address at the ABA Business Law Section Derivative & Futures Law Committee Meeting, Mr. Giancarlo highlighted aspects of the SEF Proposal and his approach to cross-border regulation.

On cross-border matters, Mr. Giancarlo reiterated points he raised in a 2018 white paper, "Cross-Border Swaps Regulation Version 2.0." He recommended changes to the rules to avoid the fragmentation of liquidity across borders, which, he argued, results in smaller liquidity pools with less efficient and more volatile pricing. Mr. Giancarlo said he remains open to refinements of his approach, particularly as it relates to "arranged, negotiated or executed" transactions. Mr. Giancarlo said he would direct the CFTC staff to prepare "as soon as possible . . . various new cross-border rule proposals." He said these proposals will address a range of issues, including the registration and regulation of swap dealers, swaps central counterparties and swaps-trading venues.

On the SEF Proposal, Mr. Giancarlo said that recent deliberations with market participants showed widespread agreement that "the current framework is flawed, clunky and would benefit from substantial revision." He noted general support for (i) replacing existing guidance and no-action letters with final rules, (ii) more flexible methods of execution, (iii) easing the burdens of swap execution facility ("SEF") compliance and (iv) broker proficiency exams.

Mr. Giancarlo said that market participants expressed their concerns with (i) the process and timing of any new rules, (ii) proposed restrictions on pre-trade communications and (iii) "overly simplified" changes to the standard for "impartial access."

He welcomed comments on, among other things:

  • certain minimum conditions with adequate timing for connectivity and onboarding that could be imposed before swaps became subject to mandatory trading;
  • the pre-trade communications rule, which, he said, was not intended to "disintermediate essential client relationships;"
  • whether encouraging liquidity and price formation on SEFs is sufficiently furthered without a need to ban pre-trade communications off SEFs; and
  • whether the imposition of minimum membership standards (to the extent consistent with an SEF statutory right to establish such criteria) would improve the proposed standards.

In light of the interest in the proposal, Mr. Giancarlo will seek to extend the comment period to March 15. (The comment deadline for the SEF proposal is currently February 13, 2019.)

Commentary

Mr. Giancarlo is making cross-border rulemaking and swaps trading his two primary goals as his time at the CFTC winds down. (His term is scheduled to expire later this year.) The cross-border rule rewrite has been long awaited, and it is important that Mr. Giancarlo remains engaged.

On the SEF Proposal, Mr. Giancarlo's comments are exactly the kind of effort one wants to see from a regulator about a proposed rulemaking. He highlights the overall policy aims of his proposal and engages in details that market participants care about. He describes significant issues with the proposal, based on feedback and criticism heard from market participants. He then goes on to explain both the CFTC intent behind these policies and how that intention may have led to flawed results. As a result, he expresses an openness to reconsider various aspects and directs commenters to provide further detail.

This is good! Notice-and-comment rulemaking can look (at least publicly) like a 3-step discussion (propose, comment, finalize). Mr. Giancarlo's speech is an example of something that adds additional - and perhaps most importantly, public - debate to the process.

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