The financial landscape has become an alphabet soup of regulators, exchanges and registration categories that range from APs to USD. With the passage of the Dodd-Frank bill we have seen even more added, including some that we don't even know what they will do or what they will look like yet. Two that we are still figuring out are swap exchange facilities and security-based swap exchange facilities, aptly shortened to SEFs and SB SEFs. To be fair, there has been talk for years about moving swaps to exchanges and clearinghouses. Until Lehman Brothers' collapse, though, that's all it really was - talk. Now with a government mandate, the clock is ticking before SEFs are expected to be up and running.
The Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) held a joint round table discussion to gather views from panelists as the two regulators move to start writing rules governing swaps. Gary Gensler, CFTC chairman, released a short statement before the round table saying, "Requiring swaps to be traded on regulated trading platforms will bring transparency and better pricing to the derivatives markets. This will lower risk and costs for businesses. I look forward to hearing panelist views at today's round table to inform our rule-writing in this area."
Panelists were mostly in line with what Gensler is hoping to see transpire, although there was still room for discussion on how SEFs and SB SEFs will operate. Much of that discussion centered around concepts of "fairness," especially as it pertains to exchange access and disclosure. While some advocated open access to anyone, many argued for minimum standards to be put in place, much like those in place on futures exchanges like CME Group. They argued that while this move will mutualize counterparty risk, it will not eliminate it, so the SEFs should work to minimize possible risk.
Panelists stressed, though, their desire to see clear and objective standards put into place. Instead of leaving things to be subjectively decided, most called for clear lines to be drawn to handle eventualities like how a firms growth will be viewed as well as the procedures for breaking trades and removals from the exchange. While there was an understanding that these markets will change and evolve over time, the prevailing desire among panelists seemed to be for clear answers and concrete guidelines. Not surprising considering the period of volatility, fear and often panic we recently saw.
The regulators have a big job in front of them as they have to define almost everything in this previously secretive over-the-counter market, beginning with determining what a swap is and which will be on what exchanges. Those are the questions that will have to be answered first, before questions of disclosure and registration can be definitively answered. To meet the deadline for new rules, the regulators have said they hope to have proposals of the rules drafted by mid-December.