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Giancarlo Calls for Reassessment of “Flawed” Swaps Rules

CFTC Commissioner Christopher Giancarlo has
called for the Commodity Futures Trading Commission to revisit the Made
Available to Trade (MAT) and swaps trading rules in a speech delivered at Forex
Network Chicago.

Discussing the “platform-controlled process” of MAT, Giancarlo
noted that a SEF may certify a MAT determination to the CFTC after considering
one or more of six factors and that consideration by the SEF of any one of the
factors is sufficient under the rules.

Giancarlo pointed out
that the CFTC reviews the SEF’s determination, but may deny the certification
only if it is inconsistent with the Act or regulations. “It is doubtful,
however, that the Commission could find that a MAT submission is inconsistent
with the CEA or Commission regulations because neither the Act nor the
regulations contain any objective or quantitative criteria on which to base a
MAT determination,” he told delegates. “Nevertheless, once deemed available to
trade, these swaps must be executed on a SEF pursuant to the limited execution
methods permitted by CFTC rules for “Required Transactions,” that is, they must
be executed in an order book or in a request for quote system in which a quote
is sent to three participants operating in conjunction with an order book.

“The MAT process, in
combination with the CFTC’s limited execution method approach, is problematic
for several reasons,” he added. “It forces swaps to trade through a limited
number of execution methods even where a product lacks the liquidity needed to
support such trading.

“Since the MAT process
is platform-controlled, a nascent SEF attempting to gain a first-mover
advantage in trading liquidity may force certain swaps to trade exclusively
through the SEF’s restricted methods of execution before the appropriate
liquidity is available to support such trading,” he continued.

Giancarlo also noted
that this approach has also “created an unnecessary tension between the
clearing mandate and the trading requirement”, adding, “The determination of
whether trading liquidity in an instrument is sufficient to calculate initial
and variation margin to permit central clearing is a wholly different analysis
than whether trading liquidity is appropriate for mandatory trade execution
through an order book or RFQ system.”

Highlighting concerns
raised by a roundtable hosted by CFTC’s Division of Market Oversight to discuss
the MAT process, Giancarlo told delegates that participants “argued
persuasively for the establishment of a process that would require
consideration of objective, quantitative criteria, public comment and
Commission approval before a swap is subject to mandatory SEF trading”.

Whilst noting that he
was “very sympathetic” to the concerns raised at the roundtable, Giancarlo also
declared that the choice between a platform-controlled or a CFTC-controlled MAT
process is “a false choice”.

“There would be no
need for the flawed platform-controlled MAT process if the CFTC did not limit
in the first place the SEF execution methods for swaps subject to the trade
execution requirement,” he stated. “If SEFs and their customers had the
flexibility to transact swaps through the ‘means of interstate commerce’ that
best suited the liquidity characteristics of the particular swap product, then
there would be little resistance to conducting all swaps on SEFs as ‘Required
Transactions’. In fact, there would be no reason at all to maintain the
artificial dichotomy between “Required” and “Permitted” Transactions.

Giancarlo argued that
it is “imperative” that the CFTC take the opportunity to correct the “inflexibility
of the CFTC’s swap trading rules”, adding, “Failing to do so will not make the
harm go away.

“It is increasingly
clear that Organised Trading Facilities under European swaps trading rules will
not be similarly hidebound in methods of trade execution, nor will swaps
platforms in Singapore or Hong Kong,” he added. “This mismatch between CFTC and
European rules may well be the basis down the road for another ‘equivalency’
standoff similar to the currently prolonged dispute over central counterparty

“Such a wrangle would
not be in the spirit of global regulatory reform or in the interests of healthy
and efficient markets…it is crucial that key regulators across the globe
coordinate the timing and consistency of the mandates. Anything else will
perpetuate global swaps market fragmentation.”

Giancarlo also told
delegates that while CFTC staff has initiated “some small efforts to improve
the rules” following his white
paper issued in January
, “Unfortunately, the CFTC’s actions to date have
fallen short overall of the changes needed to truly improve swaps trading. The
CFTC’s tweaks of the swaps trading rules in the last seven months, mostly in
the form of staff no-action letters, have failed to fix the underlying issues
with the trading rules.

“Last month, I
released a Six Month Progress Report that reviews in detail the CFTC’s measures
to date and assesses the degree to which they ameliorate rule flaws,” he added.
“The Progress Report’s title sums it up: Incomplete
Action and Fragmented Markets

“The CFTC must make a
more concerted effort to fix its swaps trading rules in accordance with the
letter and spirit of Title VII of the Dodd-Frank Act in order to align its
regulatory framework with the distinct liquidity, trading and market structure
characteristics of the global swaps markets,” Giancarlo stressed. “If not, US
swaps trading and liquidity will continue to suffer and Congress’s goal of
promoting swaps trading on platforms and pre-trade price transparency will not
be realised.

“Furthermore, as
mentioned, the CFTC will have a difficult time achieving equivalence with
European and other foreign swaps trading regimes, which are not following the
CFTC’s prescriptive approach to swaps trading.” Twitter @lamboPnL

Colin Lambert

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