Like many people working in or covering the Futures industry, gaining a stronger understanding of how the swaps world works is one of those things that have been on my todo list. But as the long slog of Dodd-Frank rule writing has drawn out there has always been a reason to avoid this tedious task.
First off the Commodity Futures Trading Commission (CFTC) approached this in an odd fashion, putting together rules before actually defining who and what those rules would apply to. And there was always more immediate and pressing matters: MF Global, Peregrine Financial Group and the CFTC’s obsessive focus on position limits as its regulatory world burned around them (more on that soon). All these things were more pressing as well as interesting and understandable. There was the issue of who it would apply to and the ongoing no-action relief and missed deadlines and threats to the agency’s budget allowing a bit of procrastination. Even the brokers hoping to tap this business were taking a wait and see approach. Why get prepared for business, when you don’t know the rules and may not qualify to play in the field?
Many swaps are already being cleared and the vast majority involve plain vanilla interest rate products where an end user transfers floating rate risk for the certainty of a fixed interest rate with so-called swap dealers serving as market makers.
More difficult than the actual products is placing the players in the appropriate registration bucket. Many folks helping facilitate swaps trades are now having to register as introducing brokers even though they do not really fit that description.
That is only one issue and I would not attempt to begin to explain swaps but the most coherent presentation on swaps I have heard was part of the Chicago-Kent College of Law of the Illinois Institute of Technology put on its 5th annual Conference on Futures and Derivatives.
National Futures Association Senior Risk Advisor for Swaps David Mengle did a nice job describing these products and the remaining issues to be worked out to an audience of legal an compliance professionals at the event. Mengle formerly was Head of Research at the International Swaps and Derivatives Association and has done a tremendous amount of research and education in the world of swaps.
Below is a link to his prepared presentation and past research on swaps as well as final rules and definitions from the CFTC. It is not a good as being there but if you are someone who has been avoiding learning more about swaps it is a good place to start.
Swaps for Futures Professionals slides