Regulators Police Swaps Markets

Terry Flanagan

Manipulation and market abuse have been a long time priority of regulators, including the U.S. Commodity Futures Trading Commission, and now that focus has turned to potential abuse in the swap markets. Such attention creates regulatory risk for swap market participants, where it hadn’t existed previously.

Industry self-regulatory organizations’ most important role will be in examination of the new swap entities, especially swap dealers. The National Futures Association in particular will be looking at swap dealer compliance with the various requirements that have been imposed on dealers.

“In terms of enforcement in general, the bigger enforcement items, the more high-profile or market-impacting enforcement inquiries are typically taken up by the Commission itself,” Michael Loesch, partner at Washington, D.C.-based law firm Norton Rose Fulbright, told Markets Media.

One of the more vexing questions facing market participants is the issue of packaged transactions. On May 1, 2014, the CFTC granted no-action relief permitting Swap Execution Facilities and Designated Contract Markets to establish a “new trade, old terms” procedure for legs of a package transaction that had been rejected from clearing because of the sequencing of submission of the legs of a package transaction. In granting that relief, the CFTC said it considered efforts by industry to implement solutions which would allow the legs of a package transaction to be measured together.

Since the grant of the no-action relief, market participants have continued efforts to develop and implement technological solutions that would allow for the legs of a package transaction to be measured together, the CFTC said in a statement. According to market participants, however, these technological solutions will not be implemented by the expiration date, as previously anticipated, of the relevant no-action relief.

Therefore the agency has extended this time-limited relief to February 16, 2015 for the clearing of package transactions.

There’s clearly an intense focus on manipulation and enforcement at each of the agencies that oversee the derivatives markets, the SEC and CFTC. The agencies have new tools to utilize under Dodd-Frank to go after market abuse and manipulation.

Most significantly, the CFTC now has fraud-based anti-manipulation authority. “As a result, they now have a much broader scope of conduct that is within the range of potential violations,” said Loesch.

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