U.S. Commodity Futures Trading Commission (CFTC) member Bart Chilton has expressed worry over the “swapification” of the futures market, perhaps giving a hint of the CFTC’s broader position.
Chilton spoke via speakerphone at a public roundtable last Friday. The event, held by the CFTC, was meant to bring the public into the brewing conversation about the futurization of the swaps market. Chilton spoke against the grain of that trend, suggesting instead that regulators should worry about “swapification.”
“Here’s the comment: I think there is a false argument out there, and perhaps a mistaken impression given, about some of this futurization–that is, swaps morphing into futures.”
Chilton maintains that futurization is a reasonable extension of much-needed regulation.
I don’t buy that. Here’s why some futurization is not necessarily a bad thing, nor quite frankly, is it unexpected. Some market migration is, and has been, expected– particularly when it comes to very standardized swaps that probably should have always been futures contracts in the first place. And remember, it was the lack of regulation in swaps—not futures—that fueled the market messes in 2008. So, I’m pleased that certain swaps are being given the light of day.
Chilton also suggested that fears over futurization are related to new rules that have yet to be finalized.
In that regard, the best thing the Commission can do right now to avoid further futurization is to finalize the rule on Swap Execution Facilities (SEF’s). Uncertainty about that rule is fueling much of the futurization anxiety and if we finalize it, the uncertainty–and a lot of anxiety–will be alleviated. You SEF folks are ready-go, and we just need to give you the rules of the road.
Chilton sidestepped lingering fears about futurization. Instead, he noted that he’s far more worried that the futures market will take on attributes of the swaps market:
Finally, while I’m interested in hearing the concerns about futurization, I am more concerned about, a silent creeper. That is, the “swapification” of the futures markets. Specifically, I’m concerned that the conversion of certain standardized cleared swaps will be under-regulated–under-regulated–in the futures markets. It may be block rules or something else, but we need to be cautious about converting certain swaps to futures in an attempt to export the deregulated, opaque swaps trading model to these new futures markets. Let’s be cautious about allowing lax oversight of these futures contracts, regardless of how they were treated before they were futurized.