Swaps Traders Get Reprieve as Top Regulator Looks to Ease Rules

(Bloomberg) -- The U.S.’s top derivatives regulator on Thursday laid out his vision for loosening the litany of swaps rules his agency approved after the 2008 financial crisis, following years of complaints from Wall Street and other industries that the requirements had made it far too difficult to trade.

Swaps Traders Get Reprieve as Top Regulator Looks to Ease Rules

If enacted, the plan by Commodity Futures Trading Commission Chairman J. Christopher Giancarlo would likely mark the biggest policy shift for the agency during the Trump administration. In one key element, Giancarlo called for easing some restrictions on swaps execution facilities -- trading platforms known as SEFs that were meant to increase transparency and bring more order to a market that is widely blamed for fueling the meltdown a decade ago.

Giancarlo, a former executive at a swaps broker, said Thursday at an industry event in Miami that his goal is to boost market liquidity and remove barriers to trading on SEFs.

“The futures market looks like the stock market -- continuous liquidity from the time the market opens to the time the market ends,” he said. “Swaps look more like the bond market. It’s an episodically liquid market.”

Summer Release

Regulators should remove "ad hoc constraints" that don’t reflect the realities of the swaps market, according to the 114-page white paper co-authored by Giancarlo and CFTC Chief Economist Bruce Tuckman. The CFTC also proposed increasing the types of swaps that must be cleared under the agency’s rules. Giancarlo said Thursday he expects to issue a formal rule proposal by “summer.”

"The CFTC grafted into its SEF rules a number of market practices from highly liquid futures markets that are antithetical to episodically liquid swaps trading," the paper says. "It interpreted core principles in ways that are not conducive to environments in which swaps liquidity is formed and price discovery is conducted."

Giancarlo has long complained that the CFTC rules passed after the crisis were too prescriptive, failing at their intended purpose of pushing more trading onto SEFs. He wants to eliminate a requirement that SEFs have to maintain an order book, where possible trades are listed. The CFTC chairman also wants to revisit a demand that traders solicit a minimum number of bids before they can execute a transaction on a SEF.

Much of the proposal echoes previous statements by Giancarlo, who issued a 2015 white paper that praised aspects of the Dodd-Frank Act but was also critical of the CFTC’s swaps trading rules. More recently, in an October speech, Giancarlo said regulations governing the clearing and trading of derivatives had triggered some “unintended consequences.”

Long Process

On Thursday, Giancarlo and Tuckman proposed exempting small financial firms from some clearing and margin requirements. Such a change would give the companies a reprieve that already exists for non-financial firms.

While the paper provides a framework for how Giancarlo, a Republican made chairman by President Donald Trump, wants to revamp rules, any changes would still need to go through the agency’s lengthy rule-writing process. A majority of CFTC commissioners would need to vote to propose rule changes, take public comment and then again vote for the revisions to take effect.

Bloomberg SEF LLC operates a swap execution facility that is registered with the CFTC.

©2018 Bloomberg L.P.