Hedge Fund Push on Swaps Trades Hits Snag With CFTC’s Giancarlo

Hedge fund lobbying hasn’t persuaded a key U.S. regulator that the government should step in to curb Wall Street banks’ power over the $700 trillion swaps market.

At issue is a requirement that customers disclose their identities when they buy and sell derivatives on some swap-execution facilities. D.E. Shaw & Co. and Citadel LLC want the Commodity Futures Trading Commission to end the practice, which they say gives banks access to proprietary-investing strategies and discourages trading.

In an interview, Republican CFTC Commissioner J. Christopher Giancarlo said he wants the industry to work out a solution on its own because new policies may hurt the market.

“Government action could have an adverse impact on liquidity whereas a natural evolution in the marketplace will be driven by the liquidity demands of the market,” Giancarlo, a former swaps-brokerage executive, said last week. “What I favor is voluntary action that doesn’t cause any jolts to liquidity.”

Bank Domination

Giancarlo’s comments come as the CFTC debates whether changes are needed to encourage more trading on SEFs. The platforms were set up under the 2010 Dodd-Frank Act to increase competition and transparency for a market dominated by Wall Street banks. Hedge funds say those goals have been undermined by demands that they disclose their identities.

CFTC Chairman Timothy Massad has said the matter is under review, while Mark Wetjen, a Democrat on the panel, supports letting traders buy and sell anonymously. Earlier this month, Sharon Bowen, the third Democrat sitting on the commission, held a panel discussion on the topic, known as “name give-up.”

Giancarlo, the only Republican at the CFTC, said the agency should consult a wide range of market participants, including banks and asset managers, before making any changes.

“As a regulator, our job is to look at all stakeholders in the marketplace and determine what is best for the market,” he said. “I’m not opposed directionally, but I would take any government effort very carefully.”

‘Death Duel’

Swaps trading between banks has been traditionally handled by five large brokers: ICAP Plc, BGC Partners Inc., GFI Group Inc., Tullett Prebon Plc and Cie. Financiere Tradition SA.

Darcy Bradbury, a managing director at D.E. Shaw, said at the CFTC discussion this month that it’s unlikely any single inter-dealer broker would allow anonymous trading, because their platform would risk losing business to competitors.

“They’re in some kind of death duel,” Bradbury said. “It’s obviously a very competitive industry and I think it’s very difficult for any one platform to step up.”

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