CFTC’s Giancarlo Calls U.S. Swap Rules ‘Fundamentally Flawed’

Wall Street has been hurt by U.S. Commodity Futures Trading Commission regulation of the $700 trillion swap market, and the agency should re-write policies adopted after the financial crisis, the panel’s Republican member said.

J. Christopher Giancarlo, a former executive at swaps brokerage GFI Group Inc., said in an 89-page paper that the agency’s regulations have shifted business overseas, made it more expensive to operate exchanges and will encourage high-speed trading that could have an unpredictable market impact.

The regulations are “fundamentally flawed,” said Giancarlo, who joined the agency in June and is set to speak Thursday in New York at a Tabb Forum conference. The CFTC’s approach “stymies the legitimate use of derivatives causing the economy as a whole to suffer.”

The paper is Giancarlo’s most high-profile criticism of the agency’s push to put in place 60 new regulations for the market after largely unregulated swaps contributed to the 2008 credit crisis and prompted the U.S. rescue of American International Group Inc. Most of the rules, required by the 2010 Dodd-Frank Act, were implemented before he joined the panel, where he’s the only Republican alongside three Democrats.

Timothy Massad, the CFTC’s chairman, said in November that the agency is reviewing its trading regulations and would seek to “fine tune” rules. Steve Adamske, a CFTC spokesman, said Massad is reviewing Giancarlo’s paper.

Firms including GFI Group lobbied the CFTC and Congress for more flexible regulations for swap-execution facilities that handle trades by Goldman Sachs Group Inc., JPMorgan Chase & Co. and BlackRock Inc., among others. Giancarlo served as chairman of the Wholesale Markets Brokers’ Association, Americas and testified before Congress on the Dodd-Frank rules.

Hurting Innovation

In the paper, he says the CFTC rules are harming the market’s ability to innovate.

“Governments and regulators should not pick winners and losers in the commercial economy,” he said. “Regulators should not substitute their judgment for the business judgment of commercial entities and participants.”

The CFTC doesn’t have the congressional authority to require that an execution facility be open to all types of buyers and sellers, he said. The market should be allowed to develop platforms that facilitate trading between dealers as well as separate platforms that are for trading between dealers and clients.

He said the law “does not demand that all market participants receive access to every market.”

Giancarlo had already criticized the new CFTC rules in a speech in November.

Proponents of the agency’s trading regulations said the rules would lower costs for investors by making prices transparent to the public and reducing information advantages traditionally held by Wall Street banks.

Bloomberg LP, the parent company of Bloomberg News, operates a swap-trading platform that is regulated by the CFTC.

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