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Regulatory Watch

CFTC Announces Swaps Rules Overhaul

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April 27, 2018

CFTC Chairman wants new rules to be more markets-based, less prescriptive

Leatherbound booksCommodity Futures Trading Commission (CFTC) Chairman J. Christopher Giancarlo is looking to deliberate. Gone are the days when the commission operated in calamity mode, popping out regulations like donut holes. In releasing his so called “Reg Reform 2.0 Agenda” at the International Swaps and Derivatives Association (ISDA) annual meeting, Chairman Giancarlo said now was the time for a more thoughtful process to devising and implementing new swap rules.

“I'm committed to a deliberative process and getting back to regular order at the agency,” Mr. Giancarlo said in an interview at the meeting with former CFTC Commissioner and current ISDA Chairman Scott O’Malia. “We're not in the wake of a crisis right now – we need to take the time to get this right.”

Chairman Giancarlo’s new reforms take aim at swap rules implemented after the 2010 Dodd-Frank law that the industry says has put a damper on liquidity. Chairman Giancarlo himself has said the current rules are overly prescriptive and run counter to what Congress intended by Dodd-Frank.

That Chairman Giancarlo was interviewed by one of his predecessors was likely not lost on the crowd. When Mr. O’Malia was at the CFTC, he was the leading dissenter. While Mr. O’Malia, like Chairman Giancarlo, supported Dodd-Frank swaps market reforms, he didn’t think the rulemaking and implementation processes were done in a considered fashion.

Over the course of his CFTC career – from 2009 to 2014 – then-commissioner O’Malia gave dissenting statements to rule decisions on at least 23 occasions. In fact, if one were to type “dissent” into the search box on the CFTC.gov website, except for a few dissenting statements from former CFTC commissioner Jill Somers, most of the entire search result is made up of O’Malia dissents. One of his chief bugaboos was that after Dodd-Frank, rulemaking was done too hastily and didn’t consider market impact. He didn’t like the CFTC’s approach to the Volcker Rule: “I do not support the commission's version of the Volcker rule. It is an unworkable solution that is entirely too complex and provides the commission with little or no means to enforce or to deter violations of this rule.”

And Mr. O’Malia also thought the swap rules in Dodd-Frank were a “vague, overbroad and truthfully, unprecedented regulatory reach of the Dodd-Frank rules.” He also felt that they would “trample on foreign regulatory authority and put US financial institutions and commercial firms at a competitive disadvantage.”

In Chairman Giancarlo’s plan, “Swaps Regulation Version 2.0: An Assessment of the Current Implementation of Reform and Proposals for Next Steps,” co-authored with CFTC Chief Economist Bruce Tuckman, there is a similar bent toward simplifying both past and present swap rules. The new guidelines will “strike a balance between systemic safety and stability and market vibrancy and economic growth.” The authors also say that regulators “have a duty to apply the policy prescriptions in ways that enhance markets and their underlying vibrancy, diversity and resiliency.” And previous rules will be reviewed to make sure they remain applicable to “purposes intended.”

Finally, all rules will be flexible enough to handle “changing market dynamics” and be able to absorb the “impact of technological innovation.”

“We have an ambitious timetable,” Chairman Giancarlo said in his interview with Mr. O’Malia. However, “we will get this done, but we will do this right. We will move forward in regular order and in good order - we will get this done.”

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