CFTC Chairman: prepare for mandatory SEF

Author: Zoe Thomas | Published: 12 Dec 2013
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  • Gary Gensler gave his last public speech as Commodity Futures Trading Commission (CFTC) chairman;
  • He suggested growing pains from the transition to mandatory use of swap execution facilities could be dealt with through targeted relief and guidance;
  • Gensler praised swap regulation for creating a more transparent market, with fewer loopholes;
  • He also said Libor should be replaced possibly requiring legislation from congress.

A day after the Volcker rule was finalised, Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler praised regulation in the derivatives market for creating greater transparency.

In his last public speech before the end of his five-year tenure, given to the Washington D.C. bar association, Gensler addressed the role of swap execution facilities (SEFs) focusing on their growing use and the transparency created in the market through increased clearing.

Addressing the transition to the mandatory use of SEFs, expected in February 2014, Gensler said the market should be preparing for an even greater amount of clearing.

He suggested that going forward the CFTC, should not look to delay or change the rule, but rather offer guidance or targeted relief as it has under his leadership.

"Clearing houses are not without risk, but better risk then leaving it with the dealer community," said Gensler. "This is all they do, this is where diversification isn’t always a good thing."

Gensler’s legacy

Gensler has been a hard-line regulator, pushing for strict reform particularly in the swaps market. The formation of SEFs and increased regulation on cleared swaps will undoubtedly be a part of his legacy.

Gensler told the audience the "bright lights of transparency" were now shining on the swaps market.

The reaction of market participants has not been as positive. A lawsuit filed last week, by industry groups is seeking to overturn rules that were issued as guidance rather than formal CFTC rules.

Gensler has been repeatedly criticised for sticking with the registration date for SEFs and for international compliance standards seen as creating a double standard and fragmentation in the market.

Gensler defended this point: "If regulations don’t take consideration of global entities it isn’t worth anything - just creating gapping loopholes," he said.

See also

Bumps on the EU/US Path Forward

The Futurisation of Swaps: what’s expected

CFTC’s new chairman: the market responds

Greater reporting

The increased reporting, stemming from new regulations, has improved the market for everyone but dealers, according to Gensler. He likened the real-time public information now available in the swaps market to a modern ticker tape.

"Pre-trade transparency helps the community, the 94% of businesses not in finance, but it does shift the advantage from the dealers," said Gensler.

Change Libor

While he will not see it in his own term as chairman, Gensler did insist there was a need to address the London inter-bank offered rate (Libor).

"There is a real challenge replacing benchmarks," Gensler explained. "We have to put Libor to bed. We need to work with congress in that transition," he added

The CFTC has penalised several banks for their role in an alleged interest rate manipulation scheme.

"Regulations need to evolve and be open to change. The journey isn’t over for the replacement for Libor," said Gensler.

Though Gensler did not offer an alternative for Libor, he suggested that legislators would need to play a role in any transition away from the benchmark rate, given the public’s reliance on it, through student, home and business loans. The change could be similar to that transitions in Europe following the switch to the euro, where legislation dictated how and when rates transferred.

Going forward
Gensler’s departure might mean a less rigid CFTC; it is by no means the end to regulatory changes.

Mandatory use of SEFs is expected for the middle of February 2014. Implantation of further international regulation is expected over the next several years.

Gensler would not say what he will be doing come January, but the regulator he leaves behind and the industry it oversees will certainly still be busy.

Further reading

Bumps on the EU/US Path Forward

The Futurisation of Swaps: what’s expected

CFTC’s new chairman: the market responds