The final block rule for swaps is critical to promoting transparency in this once opaque market, says US Commodity and Futures Commission Chairman, Gary Gensler…
With this rule, the public will benefit from seeing the price and volume of the majority of swaps transactions in real time – as soon as technologically practicable – after a trade is executed. Further, with this rule the public will benefit from the competition that will arise as buyers and sellers must transact on transparent trading platforms.
The methodology for determining block sizes is appropriately tailored to vary by asset class and by underlying referenced product or rate.
The Commission also has established a phased-in approach for setting and implementing appropriate minimum block sizes. During an initial one-year period, block sizes in the interest rate and credit asset classes will be set such that 50 percent of the notional amount of a particular swap category will benefit from pre-trade and post-trade transparency. Also during this initial period, the block sizes for foreign exchange and other commodity asset classes will be based upon the block sizes that designated contract markets have set for economically related futures contracts.
After the initial period, the Commission will determine block sizes using a methodology that relies on the data collected by swap data repositories. Block sizes will be set such that 67 percent of the notional amount of a particular swap category will benefit from pre-trade transparency and enhanced post-trade transparency.
The rule also includes measures to protect the identities, market positions and business transactions of swap counterparties when their swap transactions and pricing are reported to the public.
Process for Making a Swap Available to Trade
I support the final rulemaking to implement a process for swap execution facilities (SEFs) and designated contract markets (DCMs) to “make a swap available to trade” (MAT). Today’s rule also finalizes the Commission’s separate rule proposal to phase in compliance for the trade execution requirement.
Completion of these two rules facilitates the congressionally mandated critical reform promoting pre-trade transparency in the swaps market.
The trade execution provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires that swaps be traded on SEFs or DCMs if they are 1) subject to mandatory clearing, and 2) made available to trade. Such platforms allow multiple participants the ability to trade swaps by accepting bids and offers made by multiple participants with all participants given impartial access to the market.
The MAT rule establishes a flexible process for a SEF or DCM to make a swap available to trade. The SEFs and DCMs first will determine which swaps they wish to make available to be traded on their platforms. Then these determinations will be submitted to the Commission either as self-certified by the trading platform or for approval under the Commission’s Part 40 rules.
The phase-in rule would provide market participants with 30 days after the SEF’s or DCM’s self-certification or submission is deemed approved prior to such swaps being subject to the trade execution mandate.
Those swaps that are made available to trade and thus subject to the trade execution requirement will be publicly posted on the Commission’s website.
Core Principles for Swap Execution Facilities
I support the final rulemaking on swap execution facilities (SEFs). This rule is key to fulfilling transparency reforms that Congress mandated in the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Congress included a trade execution requirement in the law. This means that swaps subject to mandatory clearing and made available to trade would move to transparent trading platforms. Market participants would benefit from the price competition that comes from trading platforms where multiple participants have the ability to trade swaps by accepting bids and offers made by multiple participants. Congress also said that the market participants must have impartial access to these platforms.
Farmers, ranchers, producers and commercial companies that want to hedge a risk by locking in a future price or rate would get the benefit of the competition and transparency that trading platforms, both SEFs and designated contract markets (DCMs), will provide.
These transparent platforms will give everyone looking to compete in the marketplace the ability to see the prices of available bids and offers prior to making a decision on a transaction. By the end of this year, a significant portion of interest rate and credit derivative index swaps would be in full view to the marketplace before transactions occur. This is a significant shift toward market transparency from the status quo.
Such common-sense transparency has existed in the securities and futures markets since the historic reforms of the 1930s. Transparency lowers costs for investors, businesses and consumers, as it shifts information from dealers to the broader public. It promotes competition and increases liquidity.
As Congress made clear in the law, trading on SEFs and DCMs would be required only when financial institutions transact with financial institutions. End-users would benefit from access to the information on these platforms, but would not be required to use them.
Further, companies would be able to continue relying on customized transactions – those not required to be cleared – to meet their particular needs, as well as to enter into large block trades.
Consistent with Congress’ directive that multiple parties have the ability to trade with multiple parties on these transparent platforms, these reforms require that market participants trade through an order book, and provide the flexibility as well to seek requests for quotes.
To be a registered SEF, the trading platform will be required to provide an order book to all its market participants. This is significant, as for the first time, the broad public will be able to gain access and compete in this market with the assurance that their bids or offers will be communicated to the rest of the market. This provision alone will significantly enhance transparency and competition in the market.
SEFs also will have the flexibility to offer trading through requests for quotes. The rule provides that such requests would have to go out to a minimum of three unaffiliated market participants before a swap that is cleared, made available to trade and less than a block could be executed. There will be an initial phase-in period with a minimum of two participants to smooth the transition.
As long as the minimum functionality is met, as detailed in the rule, and the SEF complies with these rules and the core principles, the SEF can conduct business through any means of interstate commerce, such as the Internet, telephone or even the mail. Thus, today’s rule is technology neutral.
Under these transparency reforms coupled with the Commission’s rule on making swaps available for trading, the trade execution requirement will be phased in for market participants, giving them time to comply.
These reforms benefited from extensive public comments. Moving forward, the CFTC will work with SEF applicants on implementation.
Disruptive Trading Practices Interpretive Guidance and Policy Statement
I support the Interpretive Guidance and Policy Statement regarding disruptive practices on swap execution facilities and designated contract markets. As part of market reform, Congress expressly prohibited certain trading practices that were deemed disruptive of fair and equitable trading on CFTC-registered entities, such as swap execution facilities and designated contract markets.
These provisions are important because it is a core mission of the CFTC to protect the markets against abusive and disruptive practices, particularly those that impede critical price discovery functions.
The Interpretive Guidance and Policy Statement provides additional guidance to market participants regarding the scope of conduct and trading practices that would violate the law. For instance, the Commission interprets this provision, section 747 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, to apply to any trading, practices or conduct on registered SEFs or DCMs.
The guidance addresses the comments the Commission received in response to the proposal, including a roundtable.