More flexibility and stricter reporting rules needed for U.S. derivatives market: chairman of CFTC

Strongly in favor of the 2010 Dodd-Frank Act, through this new blueprint Christopher Giancarlo aims to improve optimize it the implementation of the rules in the act.

On Thursday, Christopher Giancarlo, the chairman of the Commodity Futures Trading Commission (CFTC), the U.S. derivatives watchdog, stated he would like to see more flexibility in the way swaps are traded while tightening the requirements for reporting of such trades.

Giancarlo said, while he completely backed the regulation of swaps which was introduced following the 2007-2009 global financial crisis, they have had an unintended consequences.

His proposals were unveiled as part of a 103-page policy blueprint for revising swaps rules brought into law by the 2010 Dodd-Frank Act.

Following the filing of bankruptcy by the Lehman Brothers in 2008 due to their exposure of their huge pile of swaps, Dodd-Frank introduced a range of safeguards in reporting, trading, risk management and capital rules that were aimed at mitigating the risks in the U.S. derivatives market.

Backing that law, Giancarlo said although the law was sound, the CFTC’s implementation, in some cases, were flawed.

Giancarlo, who was appointed chairman last year after having served as a minority commissioner, has for several years argued that the CFTC was wrong to impose an exchange-traded futures model on to the over-the-counter derivatives market.

“Upon becoming chairman, I thought it made sense to do a more comprehensive look at all the reforms, with a clear-eyed view toward what’s worked, and if it’s worked, what issues has it led to, what hasn’t worked as well, and what could we do better,” said Giancarlo.

As per the policy paper, the manner in which CFTC implemented swaps trading rules caused liquidity to fragment globally, which in turn pushed price-discovery away from transparent exchange-type platforms. A possible fix could be to allow for more flexible execution mechanisms.

Giancarlo, whose blueprint drew on new data, industry feedback and academic input from across the political spectrum, said his intention was not to weaken the current rules, but to strike a better balance between security and the vibrancy of the market.

“We’re not undoing it, we’re trying to improve it, we’re trying to optimize it,” said Giancarlo.

Furthermore, the policy papers calls for tightening of the swaps data reporting requirements to provide for more specific information on trades and their potential risks. It also declares the Dodd-Frank’s mandate to push trades through clearing houses a big success, with many more trades now guaranteed in case either counter party defaults.

The bulk of the changes proposed by Giancarlo will now have to be voted on by the commission or, in some cases, taken up by the Federal Reserve or international regulators.

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