01.30.2015
By Terry Flanagan

CFTC’s Giancarlo Calls for SEF Rules Revamp

U.S. Commodity Futures Trading Commission Commissioner J. Christopher Giancarlo has issued a white paper analyzing 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.

“I am critical of the CFTC’s swaps trading rules because they increase market fragility and the systemic risk that the Dodd-Frank reforms were predicated on reducing,” Giancarlo said in a release. “The rules also do not comply with the clear provisions of the law. My proposed swaps trading framework is pro-reform. It offers a comprehensive, cohesive and flexible alternative that betters aligns with swaps market dynamics and is more true to Congress’s stated intentions.”

Giancarlo, a Republican and a staunch critic of the CFTC’s SEF rules, proposes congressionally authorized flexibility to permit trade execution through “any means of interstate commerce.”

“SEFs, not regulators, should decide what methods of swaps execution are most suitable for the instruments they seek to execute and most useful to the particular customers they choose to serve,” he said in the white paper. “SEFs, not regulators, should decide in which promising new business methods and technologies to invest or not to invest. Similarly, market participants must not be denied the flexibility to choose what execution method is best suited to their swaps trading and liquidity needs.”

Other recommendations include allowing products to evolve naturally, letting market structure be determined by the market, accommodating beneficial swaps market practices, and treating core principles as general principles.

The International Swaps and Derivatives Associations applauded Giancarlo’s paper, calling it “a constructive step forward in the ongoing discussion about the appropriate market structure for swaps and derivatives trading.”

Isda said that the proposals recognize the unique characteristics and importance of swaps, and seek to restore flexibility and choice in trade execution. The proposals would increase transparency, ensure the integrity of the swaps markets and enable derivatives users to more effectively hedge their business and financial risks.

In addition, the principles-based approach to SEF rules espoused in Giancarlo’s paper is consistent with that taken by the G-20 with regards to derivatives reform, according to the Isda statement. This approach significantly advances the process of building a harmonized and consistent framework of rules for derivatives trade execution across borders, thereby avoiding market fragmentation.

Isda said it remains hopeful that the CFTC will revisit the SEF rules and looks forward to reviewing and analyzing the paper in more detail.

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