CFTC Open Meeting, May 16, 2013

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Dodd-Frank Timeline, Core Principles for SEFs, CFTC
Final Rule Issue Effective Date Compliance Date
June 4, 2013 August 5, 2013 October 2, 2013 (one-year phase-in of RFQ minimum); Also see No-action relief note
Timeline, Made Available to Trade Provisions
Final Rule Issue First MAT Determination First Compliance Date
June 4, 2013 January 16, 2014 February 15, 2014
Dodd-Frank Timeline, Block Trade Minimum Size, Protection of Identities, CFTC
Proposal Date Final Rule Issue Effective Date
February 23, 2012 May 31, 2013 July 20, 2013
Swap Transaction Compliance and Implementation Schedule: Clearing and Trade Execution Requirements
Proposal Date Final Rule Issue - Clearing Final Rule Issue - Execution Effective Date - Execution
September 20, 2011 July 30, 2012 June 4, 2013 September 28, 2012
Timeline, Interpretive Guidance on Disruptive Practices
Proposal Date Comment Deadline Effective Date
March 18, 2011 May 17, 2011 May 28, 2013

The Commodity Futures Trading Commission held a public meeting on Thursday, May 16, 2013, to consider swap execution rules, as well as interpretive guidance on anti-disruptive trading practices. The following rulemakings were approved by the commission:

Link to Agenda and to View Webcast

Meeting Summary and Links to Related Documents

  • Block Size Final Rule: Passed by a vote of 3-2, with Commissioners Sommers and O'Malia voting against. Prior to the vote, Commissioner O'Malia proposed two additional amendments. The amendments were designed to add flexibility to the 67 percent notional threshold and, when additional data has been received by the commission, the public would be given an additional comment period. Both amendments were defeated by a vote of 3-2, as other commissioners believed that the final rules do consider data, do offer sufficient flexibility, and that the block rules should not be subject to additional delays.
  • Made Available to Trade (MAT) provision passed by a vote of 3-2, with Commissioners Sommers and O'Malia voting against. Subsequent to the meeting, O'Malia issued a statement of dissent regarding the MATT rule, stating his belief that the commission did not privide an appropriate avenue for making an clear determination, and that the rule is not supported by data.
  • SEF Core Principles rule passed by a vote of 4-1, with Commissioner Sommers voting against. Prior to the vote, Commissioner O'Malia proposed an amendment that would require a CFTC data study and public comment period on request-for-quote systems, and not allow an automatic step-up until such study has been completed. (See final rule for more details).
  • Interpretive Guidance and Policy Statement on Disruptive Practices passed unanimously.

Speakers

Chairman Gary Gensler; whose statements include:
"I support the final block rule for swaps, which is critical to promoting transparency in this once opaque market. 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."

View Gensler's statement supporting the final rules HERE.

View Gensler's opening statement HERE.

Commissioner Jill Sommers, whose statements include:
"With respect to setting block sizes, I have acknowledged in the past the difficulty of establishing appropriate minimum thresholds. The goal is to promote transparency as much as possible without reducing liquidity in the various markets. The goal is to promote transparency as much as possible without reducing liquidity in the various markets. The Commission cannot achieve this goal without appropriate data...Regrettably, we are relying on the same stale data to support the final rule. We are also finalizing the 67% notional amount formula, which, as I observed at the proposal stage would allow for only the largest 6% of all interest rate and credit default swaps to be executed as blocks, and we are applying the 67% formula across all asset classes. This approach, in my view, ignores Congress’ mandate that we take into account the impact of public disclosure on liquidity when setting block sizes. These are not one-size-fits-all markets, and we should not be adopting a one-size-fits-all approach."

"My objections to the made available for trading rules also remain the same. A few minor revisions have been incorporated into the final rules, but, as proposed, the final rules provide that Designated Contract Markets (DCMs) and SEFs, rather than the Commission, will make the determination of when a swap has been made available to trade (MAT determination) by considering a list of factors that fail to contain any objective standards."

"My comments on the disruptive trading practices guidance relate to my hope that the guidance has clarified how we intend to apply this authority in our enforcement actions. Guidance should be helpful and not create more questions than it answers. While we have made some improvements in the final guidance, I think we could have been more helpful in some areas."

"I have a number of other concerns with the SEF final rules. As with many of our rules, we have gone beyond Congressional intent by imposing requirements not called for by the statute—the order book and RFQ requirements, to name just a few. Nothing in the statute mandates these minimum trade functionalities. We made them up. This puts us out of sync with the SEC and, I suspect, with foreign regulators when they finalize their rules."

Viiew Sommers' entire statement HERE.

Commissioner Bart Chilton, whose statements include:
'This set of three trading rules—SEF, MAT, and Block—have, to put it mildly, been a long time coming. What is in front of us today has parts I like, parts I don’t like—that’s what compromise means. As Churchill said, “The English never draw a line without blurring it.”'

"I think we could have achieved even greater transparency, and as my colleagues know, I put forth proposals in this regard. However, by failing to act, we leave in place unregulated dark markets. These are the very dark markets that got us into the economic mess in 2008. Secondly, by not acting, we are making a decision by default. We have allowed the futurization of swaps to take place. That is, we have seen some standardized swaps move to futures exchanges. If the market works out that way, fine. But we shouldn't push such futurization by regulatory dereliction of duty."

Commissioner Scott O'Malia, whose statements include:
"I am very excited about the opportunity SEFs will provide in bringing transparency to the swaps market. I support a flexible framework to ensure that all participants have the opportunity to – or frankly don’t have an excuse not to – trade on a SEF."

"...the Commission should have done a better job at implementing the Dodd-Frank directives to create flexible trading platforms for sophisticated traders, such as Eligible Contract Participants. Instead, the Commission has come up with a number of prescriptive rules, especially in the rule enforcement area, that are almost identical to the Designated Contract Markets rules. Also, in the spirit of promoting trading on SEFs, the Commission should have expressly permitted other methods of execution, including voice. At a minimum, the rule text should have included voice as the third method of execution."

"More importantly, I am concerned with the process the Commission is using to shift the minimum number of traders on an RFQ from two to three participants. It is incredible to me that the Commission rushed to implement the data rules to ensure that it can make informed decisions, and yet has chosen to pick an unsubstantiated number without relying on any transaction data."

"My frustration with the swap block final rule lies in the process. The goals of promoting pre-trade price transparency and trading on a SEF require the Commission to encourage on-screen trading, while the block rule should be reserved for those trades that are sufficiently large to be disruptive in the market."

"The [MAT] rule provides illusory comfort that the Commission will have a legal authority to review and, if necessary, challenge a mandatory trading determination made by a SEF or DCM. In fact, the only authority that the Commission has is to “rubber stamp” a SEF or DCM’s initial determination."

View O'Malia's entire statement HERE.

Commissioner Mark Wetjen, whose statements include:
"I believe that taken as a whole, the Commission has struck an acceptable balance in these final rules. I am certainly confident that the new execution framework...represents a fundamental shift away from the OTC model as it existed only a few years ago."

"Like all of the Commission’s rules, today’s releases require the Commission to make a number of policy judgments that necessarily involve trade-offs. And in making those judgments, the Commission faces the challenge of creating a new market structure on paper while being informed only by what we know, or think we know, about the swap markets today."

"The Commission therefore must remain open to reassessing the policy judgments in these final rules as the markets evolve, as the Commission is provided new information, and as the Commission benefits from its experience overseeing the new SEF market structure. In short, the Commission must remain open to course correction, where necessary, and ensure that the swap regulatory regime keeps pace with the markets that it governs."

'“Flexible trading protocols” is not code for “status quo” as some might suggest. It is not code for “pro-dealer” trading protocols. Nor is it code for “pro-buy side,” or “pro-retirees, -pensioners, -endowment-beneficiaries and -end-user” trading protocols, although I believe it is these constituencies who stand to benefit the most from this flexibility.'

Instead, what “flexible trading protocols” really means is: consistency with congressional intent as it relates to swap-trade execution under Dodd-Frank, which on its own was destined to bring dramatic change to the OTC swap markets."

"In my view, the long-awaited block rule is consistent with Congress’ intent to drive a significant portion of OTC swap activity into a multilateral trading environment. And, as a complement to the SEF regime, the block rule will for the first time usher in real-time, post-trade transparency throughout the swap markets."

"The final rule’s approach is admittedly blunt. But the Commission has attempted to balance as best it could potentially conflicting objectives."

View Wetjen's entire statement HERE.

References