Short-Cut to Swaps Supervision

A prominent criticism of the Commodity Futures Trading Commission's (CFTC) swaps rulemaking as commanded by the Dodd-Frank Wall Street Reform and Consumer Protection Act is that many key definitions of terms remain blank while tangential provisions are vetted. It could be likened to setting standards for dogs when no one is quite sure what a "dog" is.

For example, what is a "swap"? The CFTC is addressing dealers in them, major participants in them, execution facilities for them etc. but has yet to put a ring fence around what are swaps. All we know is that Dodd-Frank treats them as "different" from the instruments - like futures contracts - that the CFTC has overseen for generations.

Suppose we scrapped Dodd-Frank and began a fresh review of the subject. A swap is a commitment between two parties to make payments between them once or at stated intervals until an agreed termination date based on changes in some reference point (e.g., interest rates, oil, gold etc.).

Now, define a "futures contract." They turn out to be remarkably similar in structure and behavior. In fact, on at least three occasions, the CFTC has flirted with declaring swaps to be futures contracts for this reason.

A few swaps, most notably credit default swaps, are structured and behave like options - another instrument already within the CFTC's remit (unless on securities).

Suppose we treated swaps as futures or options for statutory purposes. This was a problem some years ago when trading away from a CFTC-regulated market was automatically a felony but the CFTC now can grant exemptions from that requirement.

So, let me offer a "technical corrections" bill as a substitute for Dodd-Frank that begins with repeal of the latter and then provides:

"All instruments heretofore referred to as 'swaps' shall constitute futures contracts under the [Commodity Exchange] Act if payments there under provide approximately equal but opposite results to the parties, or shall constitute options under the Act if results to the parties are not approximately equal."

All existing Act provisions would automatically apply including - in addition to the CFTC's flexible exemption power - the reservations of jurisdiction to the Securities & Exchange Commission, the Treasury Department etc. that are already present.

No need, then, to create a slew of new institutions, among other burdens.

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