CFTC Chairman Gary Gensler arrived at the Futures Industry Association meeting in Boca Raton, Florida just two days after required clearing began in the U.S. the swaps and over half a trillion dollars of buy-side clearing had occurred without any significant problems.
It has been a year in which participants in the futures and swaps markets have adapted to significant change, he said, and the year ahead promises to be just as busy with clearing of swaps phased in through June and September.
The commission is working on rules to promote pre-trade transparency in swaps through the introduction of swap execution facilities, (SEFs).
“Pre-trade transparency will allow buyers and sellers to meet and compete in the marketplace, just as they do in the securities and futures marketplaces,” said Gensler. “SEFs will allow market participants to view the prices of available bids and offers prior to making their decision on a transaction. Transparency -- a longstanding hallmark of the futures market, both pre- and post-trade – lowers costs for investors, consumers and businesses. It increases liquidity, efficiency and competition.”
The U.S is ahead of Europe in these reforms; European clearing rules won’t take effect until next year, after the American September deadline, but Gensler didn’t see that as a problem.
“We have made really good progress with Europe,” Gensler said. “EMIR covers a requirement for central clearing that is very close to ours, although not identical.”
All the non-financials are to come into central clearing; one difference is that pension funds in Europe will not be covered for a number of years, while in the U.S. small banks are exempted.
“We have consulted very closely with the European Commission, and ESMA and FSA and other regulators about which contracts will be mandatorily cleared.”
While the goal of regulators is harmonisation on policy and timing, he added, the countries have different political structures and cultures and this has led to some differences in timing and some monitor differences in minor details of the regulations.
The swaps reforms cover U.S. affiliates operating offshore, he added.
“If a run starts in one part of a modern financial institution, whether it's here or offshore, the risk comes back to our shores. That was true with AIG, which ran most of its swaps business out of the London neighborhood Mayfair. It was also true at Lehman Brothers, Citigroup, Bear Stearns and Long-Term Capital Management...I believe it’s critical that Dodd-Frank swaps reform applies to transactions entered into by branches of U.S. institutions offshore, between guaranteed affiliates offshore, and for hedge funds that are incorporated offshore but operate in the U.S.”
Where comprehensive home country rules apply, the U.S. can look to substituted compliance,” he added.
“Otherwise, American jobs and markets may move offshore, but, particularly in times of crisis, risk would come crashing back to our economy.”
Non-U.S. swap dealers have been granted relief until July, and some market participants are hoping for a further extension, Gensler didn’t entirely rule out that possibility but he did suggest firms should begin implementing.
“We are encouraging financial institutions to complete what we can before July,” Gensler said after his speech. “Congress gave us one year to get this all in place and two years after we used our exemptive authority to give a third year to foreign swap dealers to sort through some of these matters.”
Referring to Libor, Gensler said regulators are looking for a way to develop a benchmark that is tied to real transactions.
