Bill Shields, chief compliance officer at GFI Swaps Exchange, talks to Profit & Loss about how swaps regulations could change in 2017.
Profit & Loss: Are you expecting significant changes to swaps market regulations under a Trump administration?
Bill Shields: In large part this will depend on who is leading the Commodity Futures Trading Commission (CFTC). Commissioner Christopher Giancarlo could be named as the long-term head of the agency, and he put out whitepaper outlining a lot the SEF rules that he would like to change or eliminate. If these changes were enacted it could get rid of many of the artificial barriers to trading that the CFTC put in place that weren’t necessarily required by Dodd-Frank. In addition, Commissioner Giancarlo, has spoken about the need to modernize the CFTC’s regulatory regime.
It will be interesting to see if the commission will be able to reform the rules in such a way that it doesn’t affect the structure of the market but allows it to work in a much more flexible manner.
P&L: So you think it’s more likely that the SEF rules will be tweaked rather than overhauled completely?
BS: I don’t think they’re going to completely get rid of the rules, because they provide transparency and help with risk mitigation. But regulators tried to copy and paste the futures market model, which wasn’t the intention of the original regulation and isn’t optimal for the swaps market.
There’s this perception that there wasn’t a real market structure around swaps trading prior to this regulation when in fact there was. But because the regulators tried to replicate this futures market model, the industry had to change its systems to comply with the very strict ways in which the CFTC required trading to occur.
But if regulators can find a way to allow for more flexible models of execution and allow the market to decide with models they like and which ones they don’t like, rather than dictating how execution has to occur, then I think that they could actually achieve the goals set out in Dodd-Frank.
P&L: Do you think if the rules were changes that it would actually result in firms utilising different execution models than they do now?
BS: I don’t know if the change would be immediate, but yes, over time I think that over time you would see it. So far there hasn’t been the revolutionary changes that people expected, but I think that ultimately if the rules are changed to allow more flexibility with regards to execution and the way that firms deal with each other then I think that could lead to a change in how they interact with the different SEFs.
And from a SEF perspective, I think that if we were given more flexibility, we would be able organically grow and provide different technologies, features and functions that may be of interest to the industry.
P&L: You mentioned Giancarlo’s whitepaper. He published that in early 2015, do you think the points that he makes in it are still valid?
BS: I think they are. We’ve seen a lot of no action letters over the past few years that have just extended some of the issues impacting the swaps industry without providing any permanent relief. The no action letters haven’t necessarily addressed all of the issues that Giancarlo outlined in his paper about the Made Available to Trade (MAT) process, or required and permitted transactions, and I think that these issues could still be addressed to create a more fluid environment.
P&L: As a SEF operator, would you like to see more certainty around the rules as opposed to the continued use of no action letters?
BS: I think everyone would like to have a definitive idea of what they need to build in order to comply with the rules, but we also want to make sure that the rules makes sense.
There have been no action letters that have been re-submitted on a number of issues, and that indicates that something is wrong and so as an industry we need to find a fix for this. In some cases it’s an easy fix, making the relief permanent or incorporating it into the rules, but in other cases we need to figure out what makes sense based on the reforms that are made to the swaps market.
P&L: With only two Commissioners currently in place at the CFTC, do you think it will be a while before we see any new rules given that they would both need to agree to any changes?
BS: I don’t think you’ll see anything immediate happen in terms of rule changes, it will take some time. But hopefully some of the work coming before the Commission is not controversial and they can decide those issues immediately.
P&L: Are there any particular regulatory changes that you would like to see in 2017 that you think would help the SEF market?
BS: Although the CFTC did ultimately agree that matching was allowed, I think that the way in which they interpreted the execution methodology needed to fulfill the Dodd-Frank requirements was too prescriptive. The SEF definition allowed execution “through any means of interstate commerce.”
I think that there should be much more flexibility for the market to determine the execution methodologies that they would like to use and let the market determine which systems work and which ones don’t.
Bill Shields will be talking about potential changes to the Dodd-Frank Act in more detail at SefCon VII on January 18th. To view the agenda and register for the event, click here.