At a conference hosted by the Wholesale Markets Brokers’ Association yesterday, CFTC Chairman Gary Gensler spoke about the future of Swap Execution Facility (“SEF”) regulation, and answered questions about the position limits rule still under debate at the Commission.
Gensler told the audience that the CFTC hoped to finalize SEF rules “in the first quarter of 2012.” This estimate matches the timeline proposed earlier last month. The Commission plans to approve final product and entity definitions by the end of this year, before moving on to SEF regulation and other issues. Gensler also hinted that the CFTC and SEC would be revisiting their respective SEF rules in order to cut down on the differences between future swap and security-based swap execution facilities.
Two SEF regulatory proposals in particular have distressed market participants. One, the request-for-quote (“RFQ”) minimum, requires that swap traders send quote requests to at least five counterparties before entering into a transaction. This provision has been the subject of many comment letters, as Gensler acknowledged in his speech. Furthermore, it puts the CFTC into conflict with the SEC, which has suggested a one quote minimum. Though he did not say that a reduction in the minimum was out of the question, he did dwell on the benefits of pre-trade price transparency: “When markets are open and transparent, price competition is facilitated and costs are lowered for companies and the people who buy their products…[The Dodd-Frank Act] brings transparency to the time immediately before the transaction is completed–or so called pre-trade transparency. This is done by requiring standardized swaps–those that are cleared, made available for trading and not blocks–between or amongst financial entities to be traded on exchanges or SEFs.”
The other SEF requirement still generating ill-will at the conference is the 15-second delay. Section 37.9(b)(3) i requires SEFs to have a delay between two swap orders when one party is a customer and the other a trader or in the case of two customers. Participants have complained that forcing counterparties to display their trades 15 seconds before the swap is processed will allow other traders to “pick off” the order and trade ahead. According to the International Financing Review, “in an active interest rate swaps market, for example, most participants believe the 15 second time delay is too long, and in other swaps markets, such as within renewable energy, the delay could actually disrupt the market entirely since there are so few players.” ISDA has argued that the 15-second delay should only apply to orders being entered into the same order book.
After his remarks, Gensler faced reporters curious about the delay in position limits finalization. “We’re not trying to to this against the clock,” he said, “We’re trying to this in a way that gets it right. So a few more weeks is a small thing for us to be concerned with if we’re going to get it thought through in a better way.”