US Commodity Futures Trading Commission (CFTC) Commissioner J. Christopher Giancarlo today released a white paper that analyzes flaws in the CFTC’s implementation of its swaps trading regulatory framework under Title VII of the Dodd-Frank Act and proposes a more effective alternative better aligned with swaps market dynamics and truer to congressional intent.

His 89-page proposal, “Pro-Reform Reconsideration of the CFTC Swaps Trading Rules: Return to Dodd-Frank,” is available in its entirety on TabbFORUM, the global capital markets site created by TABB Group, the independent capital markets research and consulting firm, for peer-to-peer thought leadership on current issues, now tracked daily by 25,000 professionals.

He will also discuss his proposal in a keynote speech today at the TabbFORUM fixed income industry conference, “Perfect Storm” Navigating the Confluence,” in New York at The TimesCenter.

According to the Commissioner (@giancarloCFTC on Twitter), there is a fundamental mismatch between the CFTC’s swaps trading regulatory framework and the distinct liquidity and trading dynamics of the global swaps market. He believes that the Commission’s framework is highly over-engineered, disproportionately modeled on the U.S. futures market and biased against both human discretion and technological innovation. “As such,” he writes, “the CFTC’s framework does not accord with the letter or spirit of the Dodd-Frank Act.” In saying, his paper identifies 10 adverse consequences of flawed swaps trading rules that include:

  • Driving global market participants away from transacting with entities subject to CFTC swaps regulation.
  • Fragmenting swaps trading into numerous artificial market segments.
  • Increasing market liquidity risk.
  • Making it highly expensive and burdensome to operate SEFs.
  • Hindering swaps market technological innovation.
  • Opening the U.S. swaps market to algorithmic and high-frequency trading.
  • Wasting taxpayer money when the CFTC is seeking additional resources.
  • Jeopardizing relations with foreign regulators.
  • Threatening U.S. job creation and human discretion in swaps execution.
  • Increasing market fragility and the systemic risk that the Dodd-Frank regulatory reform was predicating on reducing.

He follows with an alternative, pro-reform swaps trading framework that offers a comprehensive, cohesive and flexible, five-point alternative, better aligned with swaps market dynamics and truer to congressional intent:

  • Comprehensiveness: Subject the broadest range of U.S. swaps trading activity to CFTC oversight.
  • Cohesiveness: Remove artificial segmentation of swaps trading and regulate all CFTC swaps trading in a holistic fashion.
  • Flexibility: Return to the Dodd-Frank Act’s express prescription for flexibility in swaps trading by permitting trade execution through “any means of interstate commerce,” allowing organic development of swaps products and market structure, accommodating beneficial swaps market practices and respecting the general nature of core principles.
  • Professionalism: Raise standards of professionalism in the swaps market by establishing requirements for product and market knowledge, professionalism and ethical behavior for swaps market personnel.
  • Transparency: Increase transparency through a balanced focus on promoting swaps trading and market liquidity as Congress intended.

The Commissioner further believes that implementing this pro-reform agenda would yield a broad range of benefits to:

  • Align with congressional intent to promote swaps trading under CFTC regulation.
  • Promote vibrant swaps markets by regulating swaps trading in a manner well matched to underlying market dynamics.
  • Reduce global and domestic fragmentation in the swaps market.
  • Foster market liquidity.
  • Reduce burdensome legal and compliance costs of registering and operating CFTC-registered SEFs.
  • Encourage technological innovation to better serve market participants and preserve jobs of U.S.-based support personnel.
  • Free up CFTC resources and save taxpayer money at a time of large federal budget deficits.
  • Provide another opportunity for the CFTC to coordinate with other jurisdictions that are implementing their own swaps trading rules.
  • Reverse the increasing fragility of the U.S. swaps market by allowing organic development and growth for greater U.S. economic health and prosperity.

Market participants are encouraged to submit comments and feedback through the TabbFORUM site.

Note: The views expressed in the white paper reflect the views of Commissioner J. Christopher Giancarlo and do not necessarily reflect the views of the Commodity Futures Trading Commission (CFTC), other CFTC Commissioners or CFTC staff.

TabbFORUM is the site for peer-to-peer, contributed thought leadership on current issues affecting global capital markets, covering electronic trading, market structure and regulation from fixed income and equities, to derivatives, futures, currencies, commodities, IT, risk, data and analytics. Launched by TABB Group in February 2010 exclusively for capital markets professionals, the FORUM is “where capital markets speak,” the community for the exchange of ideas and information and engaging in lively debate. In October, 2013, QuantFORUM went live, an online channel exclusively for the global quantitative investing community.

Martin Rabkin, 914-420-5739
[email protected]