Swapping Opinions

The Commodity Futures Trading Commission’s (CFTC) Bart Chilton shares his thoughts on proposed measures to regulate the swaps market, including the Swap Database Rules, Swap Execution Facilities and coordinating with European regulators.

Bart Chilton1How will the database rule improve risk management at a macro level?
One of the big problems during the Financial Crisis in 2008 was that regulators, such as the CFTC, Treasury, and the Federal Reserve Bank, did not know what was going on in the off-exchange, dark markets. This uncertainty contributed to the panic, hampered the efforts to resolve the crisis, and slowed efforts to restore confidence in markets. No one knew the big picture, and incomplete knowledge bred fear and uncertainty.

That is why the Swap Database Rules (SDRs) were created in Dodd-Frank. They give regulators a front row view of everything that is going on in these markets on a 24/7 basis. It is a new world out there. Bad actors must understand that they are being watched unlike ever before. There will not be anywhere to run and hide. Regulators will have this view into trading and the authority to go along with it. We will use it if necessary to protect the financial integrity and well being of our economy.

How is the CFTC working with European Securities and Markets Authority (ESMA) and others to coordinate the oversight of the swaps market?
The key to international regulation is coordination. Each country must resist the short-term temptation to go easy and pursue a ‘race to the bottom’ strategy at the expense of others. The United States has taken a lead by enacting Dodd-Frank over a year ago. It sets high standards, and we are working with our counterparts worldwide to make sure strong and effective regulation of these markets prevails everywhere that it matters. There is too much at stake for every nation’s economic well-being to allow lax standards to flourish and regulatory loopholes to fester.

What adjustments will traders have to make in response to the establishment of SEFs?
Swap Execution Facilities (SEFs) level the playing field for traders. Transparency – the open flow of price information – is what SEFs are all about. Markets thrive when information is plentiful and open to everybody.

A key to public confidence in the markets is fair and open pricing. That is why SEFs were created, to shed light on how these markets work. Competitive pricing and openness are essential components of effective market regulation. They are also good for the economy overall because people have more confidence when markets operate openly and fairly. Open markets mean better prices. That is good for everyone.

Most compliance will be handled through dealers. Traders will not incur anything near prohibitive compliance costs. That is contrary to what the dealers and Wall Street’s lobbyists are saying in Washington, I know. Nevertheless, it is true. End-users will benefit big time from the better prices that openness and transparency will bring. That is what free markets are all about: competition and efficiency.

What concern do you hear most frequently from financial professionals about the implementation of new swaps rules?
There is a lot of concern over costs. This has been stoked by the dealer community that has enjoyed healthy profits from these dark markets. Once our rules are implemented, people will see swap prices and costs become much more fair and reasonable overall.

What is the next step in fleshing out the regulations for swaps, per Dodd-Frank?
We are working hard to get our rules finalized. It is a big project, and naturally it takes more time than we had hoped. We missed our deadline in July, but we will have much of the work done by early 2012. We are making good progress now.

Are there any swaps regulations that may have to be  revised or redrafted in the coming months, years?
Most of what we have been working on so far have been proposals, which we have published for public comment. While we have done our best to get our proposals right, we are not perfect and we will definitely be modifying the proposals in response to the very valuable input that we have received fromthe public. Before we go final, we want to do the best that we can.

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