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CFTC Commissioner Giancarlo Releases Swaps Trading Rules White Paper

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

CFTC Commissioner J. Christopher Giancarlo released a white paper titled "Pro-Reform Reconsideration of the CFTC Swaps Trading Rules: Return to Dodd-Frank" (the "White Paper"), which proposes an alternative to the CFTC's swaps trading framework.

The White Paper is critical of the implementation of the swaps trading framework, asserting that there is a "fundamental mismatch" between the CFTC's framework and the "distinct liquidity and trading dynamics of the global swaps market." According to the White Paper, the CFTC framework is "highly over-engineered, disproportionately modeled on the U.S. futures market and biased against both human discretion and technological innovation."

The White Paper identifies a number of adverse consequences of the "flawed" swaps trading rules, and proposes an alternative swaps trading framework that "better aligns with swaps market dynamics and is more true to congressional intent." The alternative framework is built upon five tenets:

  • "comprehensiveness," by subjecting the broadest range of U.S. swaps trading activity to CFTC oversight;
  • "cohesiveness," by removing "artificial segmentation" of swaps trading and regulating all CFTC swaps trading in a holistic fashion;
  • "flexibility," by permitting trade execution through "any means of interstate commerce" and allowing "organic development of swaps products and market structure";
  • "professionalism," by establishing requirements for product and market knowledge through requiring, for example, swaps broker testing, as well as requirements for professionalism and ethical behavior for swaps market personnel; and
  • increased transparency.

    Click here to view a summary of the White Paper prepared by Delta Strategy Group.

    See: "Pro-Reform Reconsideration of the CFTC Swaps Trading Rules: Return to Dodd-Frank" by Commissioner Giancarlo; Commissioner Giancarlo's TabbFORUM Speech; CFTC Press Release.
    See also: Wikipedia article "White paper."

    Commentary

    Rather than comprehensively attack Title VII of Dodd-Frank (Mr. Giancarlo expresses "unwavering" support for increased central clearing of swaps and calls the CFTC implementation of central clearing "generally successful"), the White Paper focuses on a set of issues (i.e., swaps trading) that have been the subject of reconsideration by the CFTC (in voice, if not in action). Seee.g.here (Commissioner Wetjen statement, 1/21/2015), here (Chairman Massad speech, 11/18/2014) and here (Commissioner Wetjen speech, 11/14/2014).

    The White Paper does a good - if lengthy - job of compiling and addressing the numerous problems that the CFTC swap trading rules have created (e.g., methods of trade execution, straight-through processing and the made-available-to-trade process). Beyond the descriptive section, the most interesting - and commendable - part of the White Paper is Mr. Giancarlo's attempt to prescribe an alternative set of ways to regulate swap trading. (To be sure, Mr. Giancarlo is not the only CFTC commissioner to outline a set of sensible swap trading reforms; see the 11/14/2014 Commissioner Wetjen speech cited above.)

    As for the proposals themselves, some of them seem fairly straightforward and generally sensible (if not necessarily politically feasible) for the CFTC to implement, such as (1) formalized rules to implement the infamous "footnote 88" in the SEF rules (which footnote Mr. Giancarlo supports in concept), (2) removing methods of execution (which Mr. Giancarlo argues are beyond the statutory mandate), (3) removing the CFTC staff's "void ab initio" policy, and (4) eliminating the current made-available-to-trade process.

    Other proposals in the White Paper strike a different tone and could require statutory amendments. One idea which may become a point of discussion (it was already a headline on the Wall Street Journal web site) is Mr. Giancarlo's proposal to require an exam for persons involved in swaps brokerage. Mr. Giancarlo bases this idea, in part, as a response to incidents like the LIBOR scandal, which Mr. Giancarlo says suggest "a lack of consistent professional and ethical behavior at the trading level." While it is true that the statutory regime for swaps sales personnel is different from the regime that applies to securities and futures sales personnel, it is also true that there are few (if any) truly "retail" customers when it comes to swaps. It is also not clear that the presence of an exam in securities and futures has caused sales personnel in those industries to be (or perhaps more importantly, be publicly viewed to be) more consistently professional and ethical than their swap counterparts.

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