U.S. Commodity Futures Trading Commission rules will face criticism at a congressional hearing from segments of the derivatives industry for helping exchange-traded futures and hurting over-the-counter swaps.
GFI Group Inc., a New York-based interdealer broker, and a coalition of trading platforms including one operated by Bloomberg LP told a U.S. House Financial Services subcommittee in written testimony for a hearing today that CFTC rules threaten the viability of the swaps market. The companies say futures face fewer customer protections and less stringent margin rules.
"After nearly 2 1/2 years of rulemaking, the CFTC's cumulative approach to swaps regulation has imposed such high costs on the industry that the U.S. swaps market is on the verge of becoming too costly and too regulated (particularly as compared with futures) to be a viable means for end user to hedge and manage their financing risk," the Companies Supporting Competitive Derivatives Markets said in testimony.
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In addition to GFI and Bloomberg, the group includes Thomson Reuters Corp., ICAP Plc and Tradeweb Markets LLC among others, according to the testimony. Bloomberg LP is the parent company of Bloomberg News.
The CFTC and Securities and Exchange Commission are required under the Dodd-Frank Act to complete rules to increase transparency in the swaps market by having trades conducted on exchanges or other so-called swap execution facilities. The agencies missed a July 2011 deadline to complete most of Dodd-Frank regulations and rules governing swaps-trading are unfinished.
The agencies will also face questions about the international reach of their rules after European and Asian regulators criticized the CFTC's cross-border guidelines. The CFTC needs to "clarify and limit the scope of cross-border applicability," Samara Cohen, a Goldman Sachs Group Inc. managing director, said in testimony submitted to the panel.
CFTC Chairman Gary Gensler said in written testimony that the cross-border reach of some rules are intended to protect taxpayers from overseas risks returning to U.S. markets. "We are committed to working through any instances where the CFTC is made aware of a conflict between U.S. law and that of another jurisdiction," Gensler said.
Meanwhile, the SEC is preparing to release a rule on the overseas reach of its regulation of some credit-default and equity swaps. The SEC will conduct an economic analysis of its rules, Robert Cook, the SEC's director of the division of trading and markets, said in testimony. CFTC in June proposed interpretive guidance without a cost-benefit analysis.
Dodd-Frank Impact
Futures are derivatives traded on exchanges and guaranteed at clearinghouses such as those owned by CME Group Inc. and Intercontinental Exchange Inc. Until Dodd-Frank was enacted in 2010, swaps were largely unregulated, often uncleared and traded directly between banks and other consumers of derivatives. Dodd-Frank requires traders including Goldman Sachs and JPMorgan Chase & Co. to have most swaps cleared and traded on exchanges or swap execution facilities.
Intercontinental Exchange and CME both announced shifts of energy swaps to futures before Oct. 12 when some Dodd-Frank swap rules began to take effect. The switch was in response to rules requiring companies to tally their swaps to determine if they exceed $8 billion, requiring that they register as dealers.
"This event was unprecedented in that a vital U.S. market changed its entire trading activity largely to avoid pending regulatory structure rather than for significant commercial or economic advantage or public good," J. Christopher Giancarlo, GFI Group's executive vice president, said in testimony to the committee on behalf of the Wholesale Market Brokers' Association, Americas.
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