The overdue reset of swaps regulation

The overdue reset of swaps regulation

The gloves are off – even those who served as commissioners in the earlier term are throwing the work of the CFTC under the bus, write Allan D Grody.

Never have we seen a US agency issue so many no action letters, exemptive orders and extensions of time for implementing regulations as did the CFTC under Chairman Gensler’s reign.

Current Commissioner Wetjen, formerly acting Chairman in the transition, has portrayed the Commission’s earlier rules as flawed but attributed it to other jurisdictions less comprehensive regulatory regimes

“It does appear to be largely rooted in the fact that there is currently more comprehensive regulation of the derivatives markets in certain locales, particularly the U.S., as other jurisdictions continue implementing G20 reforms,” he said last week.

However, newly installed CFTC Commissioner Chris Giancarlo was less accommodating to the work of the past CFTC regime, even titling his recent Financial Times Op-ed Flawed US rules fragment swaps market”.

In a more recent Wall Street Journal Op-ed Commissioner Giancarlo repeated his use of the term flawed…the CFTC issued a benign-sounding ‘Staff Advisory Notice’, which imposed flawed and overly complex rules on trading activity in swaps and other derivatives….” 

To be fair, the legislation rushed through was, with hindsight, an overreaction to the panic of the financial crisis.

All government workers who served under our global leaders caught the hurry-up-and-assure-the-public-that-all-has-been-fixed bug. 

Similar false starts and knee jerk legislation had been promulgated throughout Europe.

A thorough reading of the public comments and consultative papers accumulated in the aftermath of the financial crisis show an overreliance on best practices of the past masquerading as best thinking for the future of swaps legislation.

Ideas from listed futures and equity markets where quickly enlisted to serve as templates for a new swaps structure. 

No matter that listed markets evolved over centuries, were quite liquid and had broad interest from individuals as well as commercial and institutional speculators and hedgers.

As Commissioner Giancarlo said in a recent paper “It is a square peg being forced into a round hole”.

Those ‘pegs” are the pillars of the new swaps infrastructure, the technology one not the regulatory one.

Technology considerations were left out from the debate until it became apparent that what was in the legislation and then the regulations could not be implemented without technology.

Importantly, the new swaps regime was to be the first new market that was to be globally overseen by regulators, making standards of identification of market participants and contracts, and uniformity of data representation of paramount importance.

Regulators and industry practitioners alike, in swaps and all other traded markets, are now hostage to a technology dependent financial system. 

Without understanding how the factory is to turn out the legally described regulations in technically designed solution, we are at a stall point in implementing many of these regulations.

As Chairman Massad said recently in an interview on CNBC “It’s a huge information technology challenge”.

The issue of data dependency has been recognised across the regulatory landscape, no longer an afterthought to be considered after regulations are enacted.

David Wright, Secretary General of IOSCO said in a recent speech in Asia: “I do think there is a general data issue…I think we don’t have a sufficient understanding of market-based financial .”

Former CFTC Commissioner O’Malia, upon becoming the CEO of ISDA stated in his resignation letter to President Obama his commitment to technology “I have also advocated for transforming the commission into a 21st century regulator by utilizing automated systems to identify threats posed by the concentration of risk and to perform the critical market surveillance duties.” Advocacy, however, just like regulations, has to be translated into implementable technology solutions and data standards.

It is refreshing to see the recognition of past excesses of regulatory dictatorship and misunderstandings of market practices.

Now comes the hard parts: thoughtful regulations that recognises globalisation is here to stay; regulations that are written with the understanding that technology ultimately underpins and makes regulation implementable; that transparency of transaction data is the means to observe that which regulators are mandated to oversee; and, finally, that data standards are paramount to implement all of the above. 

Allan D. Grody is the President of Financial Intergroup Holdings Ltd.

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