The U.S. Commodity Futures Trading Commission may need to re-propose rules, required under the Dodd-Frank Act, to allow more flexibility in swap-trading systems, said Jill E. Sommers, one of five agency commissioners.
The rule defining so-called swap execution facilities is “overly restrictive” and may limit the number of swaps that can be traded on the new platforms, Sommers said in a speech prepared for OpenLink’s 2011 Worldwide User Conference in New Orleans.
Financial regulators “should adopt a model that provides the maximum amount of flexibility as to the method of trading for swaps, whether cleared, uncleared, liquid or bespoke,” said Sommers, one of two Republican commissioners. The agency is required under the law to finalize rules by mid-July. Gary Gensler, CFTC chairman, has said that some rules will be adopted later in the year.
The CFTC and Securities and Exchanges Commission are leading U.S. efforts to write new derivatives rules after largely unregulated swaps helped fuel the 2008 credit crisis. Dodd-Frank, enacted last July, requires both agencies to adopt rules governing swap-execution facilities as an alternative to traditional exchanges for trading in interest-rate, credit and other swaps.
In December, the CFTC proposed allowing participants in the facilities to request price quotes from a minimum of five possible sellers. The SEC on Feb. 2 proposed a rule that would allow buyers to request a quote from a single seller.
Greater flexibility in rules may allow banks to preserve trading revenue. The largest swaps dealers make a collective $30 billion a year by executing fixed-income swaps with customers, compared with $3 billion to $5 billion a year from trading fixed-income futures, Robert Urtheil, a partner at Oliver Wyman consulting firm, said in an interview in February.
“Flexibility gives SEF participants the ability to minimize information leakage and avoid adverse price movements,” Edward J. Rosen, a lawyer at Cleary Gottlieb Steen & Hamilton, wrote to the SEC and CFTC on April 5, on behalf of 13 banks and brokers, including Deutsche Bank AG, Wells Fargo & Co. and Credit Suisse. Oliver Wyman is a unit of Marsh & McLennan Cos., the second-biggest insurance broker.
Setting a minimum number of recipients for a request for quotes "could harm market participants, particularly end-users, by requiring action that signals their trading interest,’’ the International Swaps and Derivatives Association and Securities Industry and Financial Markets Association said in an April 4 letter to the SEC.