Gary Gensler spent much of the past month fending off Wall Street’s campaign to slow the move to electronic swaps trading. So when the platforms went live last week, the top U.S. derivatives regulator wasn’t going to let a government shutdown stop him from monitoring its progress.
With most of the staff at the Commodity Futures Trading Commission’s Washington headquarters on furlough, Gensler, in his final months on the job, had to pick up the phone and call around to make sure the system was working. He pronounced himself satisfied.
“It was a very good start,” he said in an interview. “Though the CFTC is in darkness with the shutdown, we’ve been able to bring some additional light to the marketplace.”
Market participants were more tentative.
Tom Zikas, managing director and head of eRates at State Street Global Exchange whose firm received one of Gensler’s calls, said traders were still adjusting to the new rules and holding off on the new platforms. “It was a dead slow day everywhere,” Zikas said.
It was a quiet start for one of the Dodd-Frank Act’s main solutions for making derivatives transactions less opaque. BlackRock Inc., the world’s largest money manager, and clients of banks including Goldman Sachs Group Inc. decided to execute many trades the old-fashioned way, over the phone. The Securities and Exchange Commission also spooked some venues by saying they may be violating securities laws.
While that didn’t immediately fulfill Gensler’s goal of bringing $633 trillion in derivatives trading out in the open, the low volume gives the market time to adjust with fewer disruptions, traders said.
“This is just the start of a ramp up,” Kevin McPartland, head of market structure and research at Greenwich Associates, said in a telephone interview. “The last thing the industry needed was a big bang.”
The CFTC, to ease the transition, granted a series of delays for when traders must use platforms, including those owned by Tradeweb Markets LLC, GFI Group Inc., ICAP Plc. and Bloomberg LP, the parent company of Bloomberg News. The Sefs needed to register with the agency by Oct. 2.
There will be no delay for hedge funds and overseas branches of banks, including JPMorgan Chase & Co. and Citigroup Inc., from an Oct. 10 deadline to guarantee interest-rate and credit swaps at clearinghouses, Gensler said. The American Bankers Association, a Washington lobbying group, has pressed the CFTC and Treasury Department for a delay, arguing that U.S. banks will suffer competitively against overseas banks.
“Non-U.S. customers have already started to respond by taking their business to non-U.S. trading counterparties, to the disadvantage of U.S. banks with overseas branches,” Frank Keating, the association’s president, said in a Sept. 6 letter.
Gensler said in the interview that the deadline “is firm for the banks.”
Most money managers decided against using the platforms on the first day, according to a poll conducted by Boston-based researcher and consultant Tabb Group LLC. Of the 36 investment firms in the survey, 77 percent said they didn’t use a Sef, 14 percent said they did, and 9 percent said they sent only test trades. The investment firms in the poll manage more than $6 trillion.
The agency is unable to keep a close eye on the markets because of the shutdown.
“We have no ability at this point in time to monitor markets, to do surveillance and investigations,” Gensler said in an interview. “We’re but a skeleton staff. In many departments we have no people at all. And in others, we have people to just insure the technology and property is secure.”
About 30 of the agency’s 700 employees were working after the Oct. 1 shutdown, with most floors of the building staffed by one or two workers, according to people with knowledge of the matter.
Many divisions have a handful of people on hand to monitor markets or legal issues. The communications and legislative affairs divisions are shut down, while some senior staff members for the agency’s four commissioners have been furloughed.
One hiccup for the Sefs’ debut occurred after the SEC warned two of the new facilities -- run by ICAP and GFI Group -- that they may run afoul of securities regulations by offering swaps contracts that are supposed to be overseen by the securities regulator, rather than the CFTC.
According to two people familiar with the issue, SEC officials raised questions about a half dozen contracts, including variance swaps, dividend swaps and swaps tied to indexes on asset-backed securities, the people said. Also on the SEC’s list were options on credit indexes -- the same type of derivatives traded by JPMorgan’s so-called London Whale, Bruno Iksil.
While the Sefs disputed some of the SEC’s conclusions, they removed the swaps from their electronic trading platforms so as not to anger the SEC, the people said. The agency only supervises about 5 percent of the market and it hasn’t completed rules for electronic trading for those products, known as security-based swaps. For now, that means they are mainly being traded via the telephone.
The SEC “was saying, hold on a second, you’ve got to do your due diligence,” said Julian Hammar, an attorney at the Morrison & Foerster LLP law firm and former assistant general counsel at the CFTC who helped draft Dodd-Frank regulations. “It is a complicated rule.”
John Nester, an SEC spokesman, said agency officials decided to reach out to the Sefs after being given a list of products they were offering by the CFTC and noticing that a number of them were based on securities.
The CFTC, which normally would have been involved, was unable to participate in the calls because of the U.S. government shutdown, he said.
Since the initial calls, the SEC has been in touch with most of the new Sefs to review the guidelines for which products fall under the jurisdiction of which agency, Nester said.