Rollback begins on postcrisis swaps-trading rules
CFTC proposal would loosen requirements
WASHINGTON— Regulators started rewriting postcrisis swapstrading rules on Monday, approving a proposal that would loosen requirements for how trades can be executed.
By a 4-1 vote, the Commodity Futures Trading Commission proposed changes that would allow more ways to trade swaps on electronic platforms known as swap-execution facilities. The proposal would affect the biggest categories of products— interest-rate and credit-default swaps—that are routed through central clearinghouses. Currently, around 85% of those contracts are centrally cleared.
The changes have been championed by CFTC Chairman J. Christopher Giancarlo, a Republican, who has long complained Obama-era rules were harming liquidity in swaps markets. On Monday, he said the proposal would bring “daylight to the marketplace” as Congress intended in the 2010 Dodd-Frank financial law.
The proposal would require more types of trades—including a host of foreign-currency interest-rate swaps—to occur on the platforms, a change that could lead to as much as a 50% increase in daily trade volumes, according to estimates.
Currently, many types of cleared swaps must be traded using one of two execution methods: either by using of a centralized database of contract prices or through a “request for quotation” system that requires buyers to seek price quotes from a minimum of three swap dealers.
Under the proposal, traders wouldn’t be restricted to those methods of execution, a change that Mr. Giancarlo has long ad- vocated because he believes it will make trading on transparent platforms more attractive.
Investment firms and hedge funds have generally benefited from the increased transparency and efficiency that platform trading has brought to the marketplace since the current rule set went into effect in 2013. Firms worry those benefits might disappear if the loosened rules dilute transparency.
“Revisions to the framework should not lead us back to an era where pricing was opaque and liquidity could only be sourced bilaterally,” said Stephen Berger, managing director at Citadel LLC. “That would be a major setback.”
Firms that currently trade on platforms wouldn’t have to change their business models if they prefer not to.
Additionally, firms that currently trade privately may be enticed by the efficiency provided by platforms if the rules are more flexible, according to Kevin McPartland, managing director at Greenwich Associates. It is an open question how platform trading would work for swaps that are traditionally traded over the phone with direct contact between buyer and seller.
The CFTC also voted 5-0 to keep the swap dealer registration threshold at $8 billion (U.S.), a level that was set to drop to $3 billion starting next year under a provision of the Dodd-Frank Act. The higher threshold allows many financial, energy and agricultural companies to avoid registering as swap dealers, providing a reprieve to some firms that use swaps to hedge risks.