Pro-Reform Reconsideration of the CFTC Swaps Trading Rules: Return to Dodd-Frank - A White Paper by CFTC Commissioner Giancarlo

By J.C. Giancarlo, CFTC

Originally published on TABB Forum

In a new white paper, CFTC Commissioner J. Christopher Giancarlo analyzes flaws in the CFTC’s implementation of its swaps trading regulatory framework under Title VII of the Dodd-Frank Act and proposes a more effective alternative. He identifies the adverse consequences of the flawed swaps trading rules and proposes an alternative swaps trading framework that better aligns with swaps market dynamics and is more true to congressional intent.

The views expressed in this Executive Summary and White Paper reflect the views of Commissioner J. Christopher Giancarlo and do not necessarily reflect the views of the Commodity Futures Trading Commission (CFTC), other CFTC Commissioners or CFTC staff.

Read the full White Paper at the end of this executive summary.

Market participants are encouraged to submit their comments and feedback below.This White Paper is written by Commodity Futures Trading Commission (CFTC or Commission) Commissioner J. Christopher Giancarlo, a public supporter of the swaps market reforms passed by Congress in Title VII of the Dodd-Frank Act, namely clearing swaps through central counterparties, reporting swaps to trade repositories and executing swaps transactions on regulated trading platforms. The author supports the CFTC’s implementation of the first two reforms, but is critical of the CFTC’s implementation of the third, as explained in this White Paper.

This paper (a) analyzes flaws in the CFTC’s implementation of its swaps trading regulatory framework under Title VII of the Dodd-Frank Act and (b) proposes a more effective alternative.This paper begins with a broad overview of the complex structure of the global swaps market. It then reviews the clear legislative provisions of Title VII of the Dodd-Frank Act. Next, it reviews in detail the Commission’s flawed implementation of the Dodd-Frank Act’s swaps trading provisions. This paper asserts that there is a fundamental mismatch between the CFTC’s swaps trading regulatory framework and the distinct liquidity and trading dynamics of the global swaps market. It explains that the Commission’s framework is highly over-engineered, disproportionately modeled on the U.S. futures market and biased against both human discretion and technological innovation. As such, the CFTC’s framework does not accord with the letter or spirit of the Dodd-Frank Act.   This paper identifies the following adverse consequences of the flawed swaps trading rules:

• Driving global market participants away from transacting with entities subject to CFTC swaps regulation. 
• Fragmenting swaps trading into numerous artificial market segments.
• Increasing market liquidity risk.
• Making it highly expensive and burdensome to operate SEFs.
• Hindering swaps market technological innovation. 
• Opening the U.S. swaps market to algorithmic and high-frequency trading.
• Wasting taxpayer money when the CFTC is seeking additional resources. 
• Jeopardizing relations with foreign regulators.
• Threatening U.S. job creation and human discretion in swaps execution.
• Increasing market fragility and the systemic risk that the Dodd-Frank regulatory reform was predicating on reducing.

This White Paper proposes an alternative swaps trading framework that is pro-reform. It offers a comprehensive, cohesive and flexible alternative that better aligns with swaps market dynamics and is more true to congressional intent. The framework is built upon five clear tenets:

• Comprehensiveness: Subject the broadest range of U.S. swaps trading activity to CFTC oversight.
• Cohesiveness: Remove artificial segmentation of swaps trading and regulate all CFTC swaps trading in a holistic fashion.
• Flexibility: Return to the Dodd-Frank Act’s express prescription for flexibility in swaps trading by permitting trade execution through “any means of interstate commerce,” allowing organic development of swaps products and market structure, accommodating beneficial swaps market practices and respecting the general nature of core principles.
• Professionalism: Raise standards of professionalism in the swaps market by establishing requirements for product and market knowledge, professionalism and ethical behavior for swaps market personnel.
• Transparency: Increase transparency through a balanced focus on promoting swaps trading and market liquidity as Congress intended.

This White Paper asserts that its pro-reform agenda would yield a broad range of benefits. It would:

• Align with congressional intent to promote swaps trading under CFTC regulation.
• Promote vibrant swaps markets by regulating swaps trading in a manner well matched to underlying market dynamics.
• Reduce global and domestic fragmentation in the swaps market.
• Foster market liquidity.
• Reduce burdensome legal and compliance costs of registering and operating CFTC-registered SEFs.
• Encourage technological innovation to better serve market participants and preserve jobs of U.S.-based support personnel.
• Free up CFTC resources and save taxpayer money at a time of large federal budget deficits.
• Provide another opportunity for the CFTC to coordinate with other jurisdictions that are implementing their own swaps trading rules.
• Reverse the increasing fragility of the U.S. swaps market by allowing organic development and growth for greater U.S. economic health and prosperity.

Of Note:

1. Commissioner Giancarlo asserts that the CFTC’s swaps trading rules do not accord with Title VII of the Dodd-Frank Act. He calls for greater adherence to the express language of Title VII in conformance with congressional intent.
2. Commissioner Giancarlo contends that the CFTC’s swaps trading rules increase rather than decrease the systemic risk that the Dodd-Frank Act was premised on reducing.
3. Commissioner Giancarlo contends that the CFTC’s restrictive and over-engineered swaps trading rules have failed to achieve their ostensible objective of meaningful pre-trade price transparency.
4. Commissioner Giancarlo contends that the CFTC’s swaps trading rules add unprecedented regulatory complexity without meaningful benefit wasting taxpayer money at a time when the CFTC is seeking additional funding.
5. Commissioner Giancarlo contends that the CFTC’s rules open the U.S. swaps market to algorithmic and high-frequency trading that is not otherwise present.
6. Commissioner Giancarlo is the first CFTC Commissioner to call for and put forth a proposal to raise the standards of professional conduct for swaps market personnel.
7. Commissioner Giancarlo proposes a comprehensive, cohesive and transparent swaps trading framework that is pro-reform and better aligns with swaps market dynamics and the express provisions of Title VII of the Dodd-Frank Act.