Gary Gensler spent much of the past month fending off WallStreet's campaign to slow the move to electronic swaps trading. Sowhen the platforms went live last week, the top U.S. derivativesregulator wasn't going to let a government shutdown stop him frommonitoring its progress.

With most of the staff at the Commodity Futures TradingCommission's Washington headquarters on furlough, Gensler, in hisfinal months on the job, had to pick up the phone and call aroundto make sure the system was working. He pronounced himselfsatisfied.

“It was a very good start,” he said in an interview. “Though theCFTC is in darkness with the shutdown, we've been able to bringsome additional light to the marketplace.”

Market participants were more tentative.

Tom Zikas, managing director and head of eRates at State StreetGlobal Exchange whose firm received one of Gensler's calls, saidtraders were still adjusting to the new rules and holding off onthe new platforms. “It was a dead slow day everywhere,” Zikassaid.

It was a quiet start for one of the Dodd-Frank Act's mainsolutions for making derivatives transactions less opaque.BlackRock Inc., the world's largest money manager, and clients ofbanks including Goldman Sachs Group Inc. decided to execute manytrades the old-fashioned way, over the phone. The Securities andExchange Commission also spooked some venues by saying they may beviolating securities laws.

While that didn't immediately fulfill Gensler's goal of bringing$633 trillion in derivatives trading out in the open, the lowvolume gives the market time to adjust with fewer disruptions,traders said.

“This is just the start of a ramp-up,” Kevin McPartland, head ofmarket structure and research at Greenwich Associates, said in atelephone interview. “The last thing the industry needed was a bigbang.”

The CFTC, to ease the transition, granted a series of delays forwhen traders must use platforms, including those owned by TradewebMarkets LLC, GFI Group Inc., ICAP Plc. and Bloomberg LP, the parentcompany of Bloomberg News. The Sefs needed to register with theagency by Oct. 2.

Most money managers decided against using the platforms on thefirst day, according to a poll conducted by Boston-based researcherand consultant Tabb Group LLC. Of the 36 investment firms in thesurvey, 77 percent said they didn't use a Sef, 14 percent said theydid, and 9 percent said they sent only test trades. The investmentfirms in the poll manage more than $6 trillion.

Blind Agency

The agency is unable to keep a close eye on the markets becauseof the shutdown.

“We have no ability at this point in time to monitor markets, todo surveillance and investigations,” Gensler said in an interview.“We're but a skeleton staff. In many departments we have no peopleat all. And in others, we have people to just insure the technologyand property is secure.”

About 30 of the agency's 700 employees were working after theOct. 1 shutdown, with most floors of the building staffed by one ortwo workers, according to people with knowledge of the matter.

Many divisions have a handful of people on hand to monitormarkets or legal issues. The communications and legislative affairsdivisions are shut down, while some senior staff members for theagency's four commissioners have been furloughed.

One hiccup for the Sefs' debut occurred after the SEC warned twoof the new facilities — run by ICAP and GFI Group — that they mayrun afoul of securities regulations by offering swaps contractsthat are supposed to be overseen by the securities regulator,rather than the CFTC.

According to two people familiar with the issue, SEC officialsraised questions about a half dozen contracts, including varianceswaps, dividend swaps and swaps tied to indexes on asset-backedsecurities, the people said. Also on the SEC's list were options oncredit indexes — the same type of derivatives traded by JPMorganChase & Co.'s so-called London Whale, Bruno Iksil.

While the Sefs disputed some of the SEC's conclusions, theyremoved the swaps from their electronic trading platforms so as notto anger the SEC, the people said. The agency only supervises about5 percent of the market and it hasn't completed rules forelectronic trading for those products, known as security-basedswaps. For now, that means they are mainly being traded via thetelephone.

'Complicated Rule'

The SEC “was saying, hold on a second, you've got to do your duediligence,” said Julian Hammar, an attorney at the Morrison &Foerster LLP law firm and former assistant general counsel at theCFTC who helped draft Dodd-Frank regulations. “It is a complicatedrule.”

John Nester, an SEC spokesman, said agency officials decided toreach out to the Sefs after being given a list of products theywere offering by the CFTC and noticing that a number of them werebased on securities.

The CFTC, which normally would have been involved, was unable toparticipate in the calls because of the U.S. government shutdown,he said.

Since the initial calls, the SEC has been in touch with most ofthe new Sefs to review the guidelines for which products fall underthe jurisdiction of which agency, Nester said.

Bloomberg News

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