Christopher Giancarlo, acting chairman of the Commodity Futures Trading Commission (CFTC), gave a candid assessment of the regulator’s recent performance in a speech in New York last week.
Speaking at Profit & Loss’s SEFCon VII, he outlined the direction he would take the regulator if he is made permanent chairman – something that has a good chance of happening, considering he has been serving as its only Republican commissioner.
Giancarlo outlined five priorities for the regulator, all of which will have profound implications for the FX markets and beyond: provide customer choice in trade execution; fix swaps data reporting; achieve cross-border harmonization; encourage fintech innovation; and cultivate a forward-thinking regulatory culture.
He stressed he supports the principles of swap data reporting, central counterparty clearing and registration of swaps dealers, as outlined in Dodd-Frank, but he cited the flawed implementation of the swaps trading rules and missteps in cross-border harmonization as areas of CFTC implementation that have not worked.
He also criticised the regulator’s inattentiveness to the deterioration in trading liquidity and increased market fragmentation and market concentration, especially among futures commission merchants.
Giancarlo reasserted his commitment to ideas first outlined in a white paper in January 2015. In that paper he argued there was a fundamental mismatch between the CFTC’s swaps trading framework and the distinct liquidity, trading and market structure characteristics of the global swaps market.
This is characterized by its rules around swap execution facilities (SEF), which requires SEFs to offer an order book for all swaps. “The CFTC’s swap trading rules thwart trade execution flexibility and limit necessary human discretion,” he said.
|David Clark, WMBA|
David Clark, chairman of the Wholesale Markets Brokers’ Association (WMBA), says: “Although there have been political and regulatory developments since the publication of the white paper, the opportunities that the new CFTC would look for would be to change the more onerous requirements of SEFs with the objective of making them easier to use, more appropriate to the marketplace – particularly in swaps – and eventually lining them up to achieve more effective equivalence with other regulations, notably in the EU.”
Specifically, Giancarlo proposed reforming the system to give traders more choice about the manner of trade execution best suited to their swaps trading and liquidity needs, which he argues would align with the spirit and the letter of Dodd-Frank.
In his 2015 paper, he had noted that Congress mandated “impartial” access to swaps markets, not “open” access, and did not require SEFs to merge dealer-to-client and dealer-to-dealer markets. “There is no mandate or impetus for an all-to-all swaps market structure in the Dodd-Frank Act,” he wrote.
FX products such as non-deliverable forwards (NDFs) have been at the heart of the debate around SEFs and how they are regulated, with market participants arguing they do not fit the one-size-fits-all execution style the regulator has mandated.
Giancarlo argued: “If SEFs could offer flexible execution methods, then participant resistance to clearing and trading mandates would likely be diminished. Moreover, flexible SEF execution methods would eliminate the need for the unworkable and legally unsound made-available-to-trade process, because execution methods could be tailored to the liquidity characteristics of all swaps products.”
This gives a strong indication of what changes Giancarlo might bring about as CFTC chairman, which “will help to attract, rather than repel, global capital to US trading markets”, he told his audience in New York.
Chris Matsko, head of FX trading services at Portware, a technology company, says the views Giancarlo expressed on the implementation of the Dodd-Frank provisions look more in-line with how the FX industry operates, predicting they will make the transition into this new regulatory regime more palatable for many.
Singling out his comments about embracing fintech innovation in particular, Matsko says: “We would welcome the introduction of a US-based innovation hub where new frameworks and tool sets could be tested in a regulatory sandbox.”
WMBA’s Clark says: “Any changes are unlikely to make a great deal of difference to activity in the FX market, although it should make trading in NDFs more flexible.
“The biggest challenge will be to reunite liquidity in the US and non-US persons marketplaces. This has been a negative consequence of SEFs, and liquidity will be much better assured if the new rules are able to overcome this particular difficulty.”
He adds: “It would also mean an easier alignment between SEFs, organized trading facilities and multilateral trading facilities.”
On the theme of regulatory harmonization, Giancarlo had admitted the CFTC’s cross-border approach too often has been over-expansive, unduly complex and operationally impractical.
So as leaders around the world digest the ‘America First’ rhetoric that characterized president Donald Trump’s inauguration speech, they might also reflect on the words of his new CFTC chief, which indicate the US will still look to cooperate with the rest of the world.
Giancarlo said: “I generally believe the best route to regulating the trading of swaps in global markets is thoughtful deference to fellow G20 regulators within the Pittsburgh Summit’s goal of rule consistency.”