Statement of Commissioner J. Christopher Giancarlo on the DMO Made Available to Trade Process Roundtable (Washington, DC)
July 14, 2015
The Division of Market Oversight will hold a roundtable tomorrow to discuss the CFTC’s “made available to trade” (MAT) process. I hope this will provide an opportunity to thoroughly reconsider this ruleset that is not supported by the Dodd-Frank Act and runs counter to long-settled constitutional precedent surrounding the Commerce Clause.1
The analysis of the MAT rulemaking should not be focused on who makes the MAT determination, swap execution facilities (SEFs) or the CFTC. That would be a false choice. The analysis should be focused instead on why SEFs should have to restrict their client service offerings in the first place in light of the broad liberties granted to them in the Dodd-Frank Act to serve their clients through “any means of interstate commerce.”2
As I noted in my White Paper, the CFTC’s MAT process is problematic for a number of reasons.3 Market participants have rightly expressed concerns. Some, however, are urging the CFTC to move to a Commission-driven MAT process. They argue, among other reasons, that the current platform-controlled process allows a nascent SEF attempting to gain a first-mover advantage in trading liquidity to force certain swaps to trade exclusively through the SEF’s restrictive methods of execution.4 They argue that the Commission should decide which swaps are required to trade on SEFs to prevent early stage products from being strangled by inadequate trading liquidity. I am sympathetic to these concerns.
Yet, I believe the choice between a platform-controlled or a Commission-controlled MAT process is a false choice. There would be no need for the flawed platform-controlled MAT process, if the CFTC did not limit the SEF execution methods for swaps subject to the trade execution requirement.5 The Dodd-Frank Act never intended to limit swaps execution methods to Order Book or RFQ Systems.6 Congress could have required SEFs to offer certain limited execution methods, but chose not to do so. Congress could have limited swap execution to the trading facility execution method that futures exchanges are required to use. Congress did not do so. Instead, Congress allowed SEFs to provide such means of swaps execution that best suits their clients’ trading needs.
Electronic order books have become the standard method of trade execution in the futures markets for appropriate reasons. But, that is not the case with swaps. Congress understood that, given swaps’ generally episodic liquidity, a broad variety of execution methods are necessary. Congress did not seek to alter swaps’ natural trading and execution dynamics. Since Congress has spoken in the Dodd-Frank Act, we at the CFTC do not have the authority to do otherwise.
In view of the rapid advance of exponential digital technologies that are transforming financial markets in the early 21st century, it is hard to understand how the CFTC settled on only two rigid methods of swaps execution developed in the last century. Surely, the CFTC can find its way to better accommodate the market transformations taking place all around us. Flexible methods of execution would open U.S. swaps markets to promising technological advances and further Congress’s goals of promoting the trading of swaps on SEFs and pre-trade price transparency.7
It is imperative that we take this opportunity to correct the inflexibility of the CFTC’s swap trading rules. Failing to do so will not make the harm go away. It is increasingly clear that Organized Trading Facilities under European swaps trading rules will not be similarly hidebound in methods of trade execution, nor will swaps platforms in Singapore or Hong Kong. This mismatch between CFTC and European rules may well be the basis down the road for another “equivalency” standoff similar to the currently prolonged dispute over central counterparty recognition. Such a wrangle would not be in the spirt of global regulatory reform or in the interests of healthy and efficient markets. I note that the first panel of the roundtable is focused on trading requirements in various jurisdictions. I trust it will highlight the singularity of the CFTC’s inflexible approach to swaps execution.
It is my hope that roundtable participants and the CFTC staff focus on the need to return to the statutory language of Dodd-Frank with respect to flexible execution methods and the trade execution requirement rather than who should control the faulty MAT process. Otherwise, the CFTC will continue to ignore congressional intent and move further away from the SEF goals of promoting pre-trade price transparency and trading on SEFs.
1 See J. Christopher Giancarlo, Pro-Reform Reconsideration of the CFTC Swaps Trading Rules: Return to Dodd-Frank, at 23, 30-32 (Jan. 29, 2015) (White Paper).
2 CEA section 1a(50); 7 U.S.C. 1a(50).
3 See White Paper at 29-31.
4 Richard Henderson, Numerous SEF challenges predicted in 2014, THE TRADE, Jan. 8, 2014, available at http://www.thetradenews.com/news/Asset_Classes/Derivatives/Numerous_SEF_challenges_predicted_in_2014.aspx.
5 CEA section 2(h)(8); 7 U.S.C. 2(h)(8); White Paper at 31-32 (discussing the reasons the MAT process fails to follow the statutory language).
6 CEA section 1a(50); 7 U.S.C. 1a(50).
7 CEA section 5h(e); 7 U.S.C. 7b-3(e).
Last Updated: July 15, 2015