Clearinghouses have lowered risk for the public and fostered competition in the futures markets since the late 19th century.
Central clearing equalizes access to the market and democratizes it by eliminating the need for market participants to individually determine counterparty credit risk.
CFTC rules completed earlier this year requiring that transactions be processed straight through to the clearinghouse were a necessary step toward achieving these goals. Compressing the time between trade execution and acceptance for clearing to, as our final rule says, “as quickly as would be technologically practicable if fully automated systems were used” enables any participant to transact on a level field. Such straight-through processing facilitates pre-trade transparency and the migration of swaps trading to swap execution facilities (SEFs) and designated contract markets (DCMs).
In July, we embarked on the last step toward clearing of standardized swaps when we sought public input on the first set of swaps that will be required to be cleared.
The initial set of clearing determinations for interest rate swaps and credit default swaps may be finalized as early as this month. This would lead to required clearing by swap dealers and the largest hedge funds as early as February. Compliance would be phased in for other market participants through the summer of 2013.
The transparency reforms of the 1930s have increased liquidity and competition in the futures markets for decades. Such transparency – both pre- and post-trade – levels the playing field by giving all market participants access to critical pricing and transaction information.
As of October 12, bright lights began to shine on the swaps market when cleared interest rate and CDS transactions began to be reported to swap data repositories.
By the New Year, the public will benefit from real-time reporting for these transactions, as well as for uncleared swap transactions entered into by swap dealers.
This post-trade transparency will lower costs for the rest of the economy and help financial markets better serve their function.
Staff recommendations on final rules for SEFs and minimum block size are now with my fellow commissioners for their consideration.
These rules will bring pre-trade transparency to the swaps market, which means enhanced liquidity and price competition. By moving the trading of swaps to SEFs or DCMs, market participants can view the prices of available bids and offers. The pre-trade transparency of SEFs and DCMs will build on the democratization of the swaps market that comes with the clearing of standardized swaps.