A commissioner from the U.S. Commodity Futures Trading Commission (CFTC) will publish a white paper calling for an alternative to the current execution regime for certain over-the-counter (OTC) derivatives.
In a speech intended to be delivered at an industry conference this week, Commissioner Christopher Giancarlo argued the current rules for U.S. swap execution facilities (SEFs) has largely divided the global swaps market between U.S. and European traders. He was set to speak at the WMBAA’s SEFCON V conference in New York, but because of his past association with the WMBAA he was prohibited.
“The CFTC’s flawed SEF framework is causing unintended adverse consequences. For one, it is ensuring that big platforms get bigger and small platforms squeezed out because of the sharply increased legal and compliance costs of registering and operating a SEF,” he says in the speech.
“The CFTC’s swaps trading framework is the cause of abrupt fragmentation of global swaps markets between U.S. persons and non-U.S. persons.”
He argues the result of a fragmented market is smaller, disconnected liquidity pools, less efficient and more volatile pricing, “posing a significant risk of failure in times of economic stress or crisis.”
Giancarlo has been a long-time critic of the SEF rules that were implemented last October under the previous Commission led by Gary Gensler. However, he supports the mandates for overhauling the swaps markets through clearing houses and trade reporting.
Since the enforcement of SEF rule last October, platforms run by Bloomberg, Tradeweb and interdealer brokers such as ICAP, Tradition and BGC have dominated the market, leaving smaller platforms with little or no liquidity.
Furthermore, he argues the CFTC’s ‘one-size-fits-all’ approach to SEF principles does not reflect the trading and market structure characteristics of the underlying swaps market.
Giancarlo plans to issue a white paper that will formally criticize the agency’s SEF framework, arguing that it must rethink its “prescriptive rules-based approach to SEFs modelled on futures exchange practices that are unsuitable for the way swaps actually trade,” and calls for a more flexible alternative to the current SEF principles.
CFTC’s Giancarlo Calls for Re-Write of U.S. SEF Rules
A commissioner from the U.S. Commodity Futures Trading Commission (CFTC) will publish a white paper calling for an alternative to the current execution regime for certain over-the-counter (OTC) derivatives.