CFTC to Assess ‘Futurization’ of Swaps Market

Terry Flanagan

The ongoing ‘futurization’ of the OTC swaps market is creating upheaval to the traditionally bilaterally traded derivatives model, and market groups are working feverishly in preparation.

The U.S. Commodity Futures and Trading Commission will hold a roundtable discussion on the topic today to solicit 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.

Christopher Giancarlo, executive vice president, GFI Group

Christopher Giancarlo, executive vice-president, GFI Group

Following the October 12, 2012, effective date for certain CFTC regulations regarding the OTC derivatives markets, there occurred a migration of trading activity in U.S. natural gas and electric power markets from cleared swaps to economically equivalent futures products, said Christopher Giancarlo, executive vice-president at interdealer broker GFI Group, in a comment letter. Giancarlo is also chairman of the Wholesale Market Brokers’ Association, Americas.

“This event was unprecedented in that a vital U.S. market changed its entire trading activity largely to avoid pending regulatory structure rather than for significant commercial or economic advantage,” said Giancarlo. “It suggests even greater migration and potential disruption to U.S. capital markets if replicated in other swaps products.”

Major dealers may have in excess of 10,000 counterparties with whom they have signed master agreements, and many end users may be counterparties with multiple dealers.

To facilitate these additional bilateral delivery requirements, the International Swaps and Derivatives Association (Isda), a trade body, and Markit, a financial data vendor, have developed a system as part of the Markit Counterparty Manager that automates the information gathering process and provides sharing of submitted data and documents to “permissioned” counterparties.

Called Isda Amend, the compliance service makes use of the Markit Document Exchange platform to facilitate the secure sharing of numerous documents with a multitude of counterparties electronically.

“Part of the challenge for the buy side is the velocity of change and rapid approach of key compliance deadlines,” said Lansing Gatrell, co-head of Markit Document Exchange. “The new external business conduct rules, for example, result in multiple dealers making complex, simultaneous demands on their buy side clients. We’ve designed the Amend solution to streamline what the buy side has to do.”

Isda’s Dodd-Frank documentation initiative provides a standard set of amendments, in the form of protocols, to facilitate updating of existing swap relationship documentation for Dodd-Frank compliance.

The first such protocol, formally titled ‘Isda August 2012 DF Protocol’, allows swap market participants to simultaneously amend multiple Isda master agreements.

The protocol consists of a series of amendments to existing documentation, as well as standardized questionnaires that must be completed by counterparties to satisfy new regulations. These questionnaires must be delivered to each relevant counterparty for the amendments and compliance to be effective.

On December 18, 2012, the CFTC provided interim final rules for swap dealers and major swap participants, extending the compliance date for various external business conduct provisions from January 1 this year until May 1.

In addition, the interim final rules extend until July 1 for compliance dates for regulations related to portfolio reconciliation and swap trading relationship.

“This relief has been given with the expectation that the industry will continue to diligently pursue readiness,” said Isda on its website. “With that in mind, we encourage market participants to adhere to the Isda August DF Protocol and provide questionnaires to counterparties well in advance of the May 1 compliance deadline.”

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