CFTC Commissioner Giancarlo Challenges Restrictive Swap Trading Procedures
Commentary by Bob Zwirb
CFTC Commissioner J. Christopher Giancarlo issued a statement questioning market rules and processes unsupported by Dodd-Frank. The Commissioner issued the statement prior to an upcoming roundtable by the CFTC's Division of Market Oversight ("DMO"). The roundtable will address the CFTC's trade execution requirement and the process of reaching made-available-to-trade ("MAT") determinations.
Commissioner Giancarlo contended that the roundtable should serve as an opportunity for the CFTC to "thoroughly reconsider" rules that are unsupported by Dodd-Frank. He argued that the MAT rulemaking should be focused not on who makes the MAT determination, but on why restrictions are placed on swap execution facilities ("SEFs") concerning the kinds of trading methods that they make available to customers.
Commissioner Giancarlo argued that "there would be no need for the flawed platform-controlled MAT process, if the CFTC did not limit the SEF execution methods for swaps subject to the trade execution requirement." He encouraged the CFTC to allow for more flexible swap-trading rules and methods of execution. According to Commissioner Giancarlo, more dynamic methods of execution for SEFs would allow U.S. markets to access "promising technological advances and further Congress's goals of promoting the trading of swaps on SEFs and pre-trade price transparency."
Commissioner Giancarlo also stressed that the CFTC should focus on harmonizing its rules with those of international regulators. He speculated that if the CFTC failed to take international perspectives into account, it could trigger an "'equivalency' standoff" that would be similar to the current dispute over central counterparty recognition.
See: Commissioner Giancarlo's Statement.
Related news: CFTC to Host Public Roundtable Regarding MAT Process (with Lofchie Comment) (June 22, 2015); CFTC Commissioner Giancarlo Releases Swaps Trading Rules White Paper (with Patel Comment and Delta Strategy Group Summary) (January 29, 2015); SIFMA AMG Submits Comments to CFTC Requesting Extended Relief Regarding the Execution of Package Transactions (October 22, 2014); CFTC Hosts Public Roundtable on Trade Execution Requirement and Package Transactions (with Delta Strategy Group Summary) (February 13, 2014); CFTC Publishes Guidance, No-Action Letter and Interim Final Rule to Promote Trading on SEFs and Support an Orderly Transition to Mandatory Trading (CFTC Letter 14-12) (February 10, 2014).
Commentary
These remarks amplify Commissioner Giancarlo's longstanding view that the CFTC's swap trading rules are "highly over-engineered [and] disproportionately modeled on the U.S. futures market." J. Christopher Giancarlo, Pro-Reform Reconsideration of the CFTC Swaps Trading Rules: Return to Dodd-Frank, at i (Jan. 29, 2015) ("White Paper").
It seems fair to ask whether there is a contradiction between Commissioner Giancarlo's opposition to mandated trading and his support for mandated clearing.
In both cases, the regulatory system and not the market makes the determination as to how to trade. Why not let designated contract markets, SEFs and derivative clearing organizations make these determinations on their own without any binding effect on their competitors or swaps market participants (many of whom would prefer not to be forced into central clearing)? As the Commissioner points out, the market was moving toward central clearing without regulatory mandates before Dodd-Frank. In at least one case, its momentum involved the advocacy of a not-yet-then Commissioner Giancarlo. See White Paper at 2, n.2 (pointing out that "[e]ven before the 2008 financial crisis, [Giancarlo] was involved in an independent effort by non-Wall Street banks to develop a central clearing house for credit default swaps").
Instead of letting these efforts "evolve rationally and organically without the forced, unwarranted and unnecessary MAT [and, one could argue, the mandatory CCP] construct," id. at 31, Dodd-Frank requires decisions to be made inorganically. As Nicholas Taleb explains and Commissioner Giancarlo affirms, it is financial markets that "grow organically through trial and error . . . that [best] adapt and, indeed, thrive, in the face of shock and partial destruction," while "systems artificially directed through untested regulatory prescriptions intended to limit randomness and avoid systemic stress become increasingly prone to fail in the face of sudden shocks." Id. at 61 (citing Nassim Nicholas Taleb, Antifragile: Things That Gain from Disorder (Random House 2012)).