As the new CFTC rules took shape, ICE and CME in October began moving swap contracts to the futures market. During the first half of January, ICE said, 52 percent of its energy futures volumes came from contracts that prior to Oct. 15 were traded as swaps. CME said about 90 percent of energy trades on its ClearPort system are executed as futures, compared with 10 percent before the switch.
Firms setting up swap execution facilities that would compete with CME and ICE have raised concerns about the futures conversions, saying they could move beyond energy swaps and increase risk to the financial system by requiring inadequate collateral. CME has introduced a so-called swap future contract tied to interest rates, while ICE announced a plan to tie futures to indexes of credit defaults.
A group, Companies Supporting Competitive Derivatives Markets, told a House Financial Services Committee hearing in December that the shift to futures was a consequence of the CFTC’s regulations. The agency should re-examine its rules because conversions could reduce transparency and competition in swaps, the group said in its testimony.
The coalition included interdealer brokers and companies with trading platforms, such as GFI Group Inc., Icap Plc, Thomson Reuters Corp. and Bloomberg LP, the parent of Bloomberg News.
The CFTC should revise rules governing collateral for swaps guaranteed at clearinghouses, George Harrington, global head of fixed income trading at Bloomberg LP, told the CFTC in a letter yesterday. Final CFTC rules require five-day margin for financial swaps, while financial futures typically require one or two days depending on the contract.
The CFTC should adopt an order requiring clearinghouses impose the same margin requirements for financial swaps as financial futures, Harrington said. “We believe that the disparity in the margin rule on its face will be the strongest driver of the forced ’futurization’ of economically equivalent financial swaps,” he said in the letter.
Terrence Duffy, executive chairman of CME, said in written testimony to the congressional committee that the exchanges are focused on promoting choices for their customers. Critics of the futures conversion are speaking out of self-interest rather than concern for all risks in the market, Duffy said.