CFTC warns swaps markets to ensure all traders can participate

Enforcing the spirit of open access

The U.S. Commodity Futures Trading Commission warned owners of government-mandated swaps platforms set to go live next week that they must ensure all types of buyers and sellers can participate.

The main U.S. derivatives regulator reminded swap execution facilities and brokers in a letter dated Sept. 26 to not violate the spirit of open access at the heart of the Dodd-Frank Act. The regulator didn’t identify any companies with potentially objectionable arrangements by name.

Lobbyists for market participants have asked the CFTC for a broad postponement of the Oct. 2 deadline for when they must start trading on SEFs, rather than privately on over-the-counter platforms, according to letters they sent the regulator. The CFTC, which late yesterday announced several temporary delays related to the data-reporting and enforcement responsibilities of the SEFs, has so far denied the request.

“What we’ve found in the last two weeks is there was some pushing back on the other side,” Gary Gensler, chairman of the CFTC, said yesterday after giving remarks at a conference held at the U.S. Chamber of Commerce in Washington. Some swaps users “were suggesting that everybody on a swap execution facility had to have a credit arrangement with everybody else on a swap execution facility,” which would limit the number of participants, he said. The systems “need to have impartial access.”

Dodd-Frank

The Dodd-Frank Act of 2010 has provisions designed to move swaps, which helped fuel the 2008 credit crisis, from largely unregulated trading negotiated off exchanges to more transparent systems including SEFs, which are also overseen by the U.S. Securities and Exchange Commission. The CFTC completed rules governing the transactions in May, opening up competition in a market with $633 trillion of over-the-counter derivatives contracts outstanding.

The SEF proposed by Bloomberg News parent Bloomberg LP is among 17 venues -- including those from IntercontinentalExchange Inc., MarketAxess Holdings Inc. and Javelin Capital Markets LLC -- that have won temporary approval from the CFTC, according to the regulator’s website. The CFTC said yesterday that markets from Thomson Reuters Corp. and ICAP Plc won authorization, leaving only CME Group Inc. and LatAm SEF LLC awaiting an answer, according to the site.

In its Sept. 26 letter, the CFTC reminded the banks that provide clearinghouse access to their customers that they must perform pre-trade credit checks to ensure users are in good standing before accepting their trades.

Another issue of concern to the CFTC is whether some SEFs try to limit participants’ trading by requiring them to have execution agreements with other SEF users, Gensler said yesterday.

Impartial Access

The sheer number of agreements necessary “would probably tip toward only the dealers” being able to transact among themselves, he said. “It really is central,” he added. “Is there going to be impartial access to these markets or not?”

The International Swaps & Derivatives Association and the Securities Industry & Financial Markets Association are among groups that say their members need more time to prepare for the transition to SEF trading. Sifma has asked for the deadline to be extended until April, according to a letter sent from the group’s Asset Management Group.

“As the potential SEFs themselves are not clear about how to interpret certain of their obligations under the SEF final rules, our members are unable to determine how to implement the transition to swap execution on SEFs,” Sifma, whose members oversee about $20 trillion in assets, said in a Sept. 23 letter to the CFTC. “We firmly believe that without sufficient time and guidance necessary to address key implementation challenges and interpretive questions, an orderly transition will not be possible.”

Gensler said yesterday that it’s “appropriate” for the regulator to keep the Oct. 2 deadline. The CFTC will review individual requests for more time on a case-by-case basis, he said.

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