A bit more than a week after a criticism on the lack of progress resolving swap-related issues by one of its commissioners, the Commodity Futures Trading Commission (CFTC) issued its fifth round of no-action relief on one of several requirements related to new swap rules that threaten to further fragment swap market liquidity.
The CFTC issued no-action relief August 13 that delays the applicability of transaction-level requirements in certain cross-border swap situations until as late as September 30, 2016. Specifically, the regulator issued Staff Advisory No. 13-69 in November 2013 that sought to clarify when a list of transaction-level requirements would apply to non-US swap market participants.
Particularly problematic was the staff’s view that a non-US swap dealer executing a transaction using agents located in the US to “arrange, negotiate, or execute” a swap with a non-US counterparty, such as a corporate, would have to comply with those requirements. A financial center such as New York is home to many global banks’ trading desks, potentially subjecting those banks to the requirements. In multiple areas such as trade execution, portfolio reconciliation and compression, and real-time public reporting, the requirements are burdensome and threaten to fragment the swap market, reducing liquidity and potentially raising costs and risks for market participants.
CFTC Commissioner J. Christopher Giancarlo soon after issued a statement noting his repeated advice to withdraw the staff advisory, adding it represents a threat to American jobs and vital financial markets.
“When a regulatory action needs five delays, I think we all can admit that it is just not workable and should be scrapped,” Mr. Giancarlo said. “Doing so would be a good first step to helping market participants cope with an increasingly complex, conflicting and costly array of CFTC cross-border regulations.”
Mr. Giancarlo ’s statement followed a longer statement he issued August 4 that decried the CFTC’s slow pace in resolving eight issues currently impacting or potentially impacting swaps trading and liquidity.
For example, the CFTC now requires swap execution facilities (SEFs) to provide counterparties to swap transactions with confirmations of all contractual terms between the parties, “including terms and freestanding master agreements.” In a white paper Mr. Giancarlo issued six months earlier, he proposed that the CFTC narrow the scope of required confirmations for uncleared swaps to include only primary and other material economic terms that are “appropriate and customary in the swaps market,” adding that swaps do not need all the additional terms and corresponding documentation.
In April, the regulator provided no-action relief that delayed compliance with the requirements until March 31, 2016, but otherwise there’s been little progress.
“The [Division of Market Oversight] staff’s no-action relief is a half-measure that does not fix the underlying issue,” Mr. Giancarlo said.
Another issue Mr. Giancarlo highlights in his white paper as making little to no progress toward resolution is the execution-method requirements in the US for different types of transactions varying from those in other jurisdictions, potentially leading to friction between regulators. He also notes the “artificial segmentation between block transactions “off-SEF” and non-block transactions “on-SEF.
“There is no statutory support for this division and it is at odds with accepted global practices of swaps trading,” Mr. Giancarlo notes in his white paper.