U.S. Commodity Futures Trading Commission rules were opposed by congressional lawmakers and parts of the derivatives industry for helping exchange-traded futures and threatening the viability of over-the-counter swaps.
GFI Group Inc. (GFIG), a New York-based interdealer broker, and a coalition of trading platforms including one operated by Bloomberg LP told a U.S. House Financial Services subcommittee in testimony for a hearing today that CFTC rules are hurting the swaps market and encouraging a shift to futures. The companies say futures face fewer customer protections and less stringent margin rules.
“After nearly 2 1/2 years of rulemaking, the CFTC’s cumulative approach to swaps regulation has imposed such high costs on the industry that the U.S. swaps market is on the verge of becoming too costly and too regulated (particularly as compared with futures) to be a viable means for end user to hedge and manage their financing risk,” the Companies Supporting Competitive Derivatives Markets said in testimony.
In addition to GFI and Bloomberg, the group includes Thomson Reuters Corp. (TRI), ICAP Plc (IAP) and Tradeweb Markets LLC among others, according to the testimony. Bloomberg LP is the parent company of Bloomberg News.
“If all derivatives were supposed to be traded on an exchange then they would be futures,” Representative Spencer Bachus, an Alabama Republican and chairman of the full committee, said at the hearing. “Derivatives are different from exchange-listed products, and imposing the listed futures or equities market model onto derivatives is not the mandate.”
The CFTC and Securities and Exchange Commission are required under the Dodd-Frank Act to complete rules to increase transparency in the swaps market by having trades conducted on exchanges or other so-called swap execution facilities. The agencies missed a July 2011 deadline to complete most of Dodd- Frank regulations and rules governing swaps-trading are unfinished.
The agencies also faced questions about the international reach of their rules after European and Asian regulators criticized the CFTC’s cross-border guidelines. The CFTC needs to “clarify and limit the scope of cross-border applicability,” Samara Cohen, a Goldman Sachs Group Inc. (GS) managing director, said in testimony submitted to the panel.
CFTC Chairman Gary Gensler said in written testimony that the cross-border reach of some rules are intended to protect taxpayers from overseas risks returning to U.S. markets. “We are committed to working through any instances where the CFTC is made aware of a conflict between U.S. law and that of another jurisdiction,” Gensler said.
The CFTC intends to finish the swap-trading rules in January or February, Gensler told the committee.
Meanwhile, the SEC is preparing to release a rule on the overseas reach of its regulation of some credit-default and equity swaps. The SEC will conduct an economic analysis of its rules, Robert Cook, the SEC’s director of the division of trading and markets, said in testimony. CFTC in June proposed interpretive guidance without a cost-benefit analysis.
Futures are derivatives traded on exchanges and guaranteed at clearinghouses such as those owned by CME Group Inc. (CME) and Intercontinental Exchange Inc. Until Dodd-Frank was enacted in 2010, swaps were largely unregulated, often uncleared and traded directly between banks and other consumers of derivatives. Dodd- Frank requires traders including Goldman Sachs and JPMorgan Chase & Co. (JPM) to have most swaps cleared and traded on exchanges or swap-execution facilities.
Intercontinental Exchange and CME both announced shifts of energy swaps to futures before Oct. 12 when some Dodd-Frank swap rules began to take effect. The switch was in response to rules requiring companies to tally their swaps to determine if they exceed $8 billion, requiring that they register as dealers.
“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 or public good,” J. Christopher Giancarlo, GFI Group’s executive vice president, said in testimony to the committee on behalf of the Wholesale Market Brokers’ Association, Americas.
Gensler said the CFTC is watching the change in some of the futures contracts. “The market should innovate,” Gensler said at the hearing. “We’re not deciding if it’s futures, swaps or futures on swaps. We are certainly looking at the development.”
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