Chairman Gensler and Commissioner Chilton Speak at the CFTC Roundtable on Futurization
Commentary by Bob Zwirb
The CFTC staff hosted a public roundtable on January 31 to discuss the "futurization" of the swaps market. The roundtable consisted of four panels, which discussed the following topics:
- General industry views and concerns regarding the conversion of swaps to futures in each asset class;
- Clearing and different margin requirements for swaps and futures;
- Transaction-related matters including appropriate block rules for swaps and futures; and
- The effect of the conversion of swaps to futures on end-users.
In his opening statement, Chairman Gary Gensler stated it was "critical that we [the CFTC] preserve the pre-trade transparency that has been at the core of the futures market." Commissioner Bart Chilton echoed Gensler's sentiments, and further commented on the benefits of having "a more harmonious regulation of futures and swaps" in support of preventing "inappropriate futurization and inappropriate swapification of the futures markets."
See: Chairman Gary Gensler's Opening Remarks and Commissioner Bart Chilton Statement.
Commentary
The migration of swaps to futures is a recent trend that has been driven by the implementation of Dodd-Frank rules applicable to swaps. ICE's conversion, at the time of of the CFTC's promulgation of its swap product definitions rules last October. of certain energy swaps into futures contracts is illustrative of the migration. (See our news story at that time: ICE OTC Market – Guidance on Swaps to Futures Transition: Position Limits, Accountability Levels and Hedge Exemptions).
The interesting issues from a policy standpoint are (i) the motivations underlying this trend of swaps into futures [to what extend is the trend driven by irrational regulatory distinctions between the products], (ii) the results of the trend [is it safer for the economy? cheaper for end users?], and (iii) the CFTC's views on the trend (at a minimum, the CFTC appears to tolerate and perhaps encourage it, albeit with some angst emanating from Commissioner Chilton).
Although the meeting was held to discuss the "futurization of swaps", the discussion focused primarily on rules relating to block trades and margin. Unfortunately, the supposed reasons for the conference, including the role of the Dodd-Frank Act and the burdens that the new swaps regulatory regime impose on the OTC market, received less attention. We would have expected considerably more discussion of the non-market-based incentives that Dodd-Frank rules have created on market participants to transform swaps into futures, and whether such transformation is a good development. Certainly a number of speakers at the meeting who represented commercial interests indicated that the burdens imposed on the swaps market were costly for many users, and that the CFTC's rules could force a significant exodus of the swaps markets from the United States.
One might also ponder whether regulatory arbitrage, which polite conversation treats as something to be avoided, might actually be a positive force here. Normally, regulatory arbitrage involves the practice of taking advantage of differences in regulatory systems in order to circumvent unfavorable regulation, e.g., moving one's IPO business from the U.S. to London to escape the burdens of Sarbanes-Oxley. Regulators publicly oppose this practice and sometimes collude with each other to prevent it under the guise of achieving "regulatory harmony" (unless of course they are competing to attract business). Here the arbitrage is taking place within the CFTC's regulatory space, with regulated firms converting their swaps into futures in an effort to avoid Dodd-Frank. While such a move improves the situation for them, it also sends a signal that the regulatory scheme may be inefficient in arbitrarily favoring one product over another. The better way would be to design the swaps regulations so that commercial entities are not forced into doing futures when swaps would be more efficient. While the regulators may describe this product shift as a "normal realignment," market participants forced out of swaps may take a different view.