A group of associations said the Commodity Futures Trading Commission (CFTC) not industry participants should determine whether a swap is available to trade for the purposes of Dodd-Frank's clearing requirements.
Section 723(a)(8) of the Dodd-Frank Act amended the Commodity Exchange Act (CEA) by adding Section 2(h)(8). The CEA, as amended, generally requires that the execution of all swap transactions subject to certain clearing requirements occur on a designated contract market (DCM) or swap execution facility (SEF), except where no DCM or SEF makes the swap available to trade. Therefore, a swap designated as available to trade would no longer be permitted to trade on a bilateral basis.
Under rules proposed by the CFTC on Dec. 5, 2011, DCMs and SEFs would submit any determination that a swap is available to trade to the commission. DCMs and SEFs would make a swap available to trade while the commission has a role in reviewing such determinations. If a DCM or SEF makes a swap available to trade, all other DCMs and SEFs listing or offering for trading such a swap or any economically equivalent swap would also be required make those swaps available to trade.
In a Feb. 13 comment letter, three associations argued that “the goals of the commission and the Dodd-Frank Act would be best served” if available to trade determinations were made by the commission, not SEFs and DCMs.
“The commission has an overall view of the market and an ability to assess how the available to trade determination will affect market participants and financial markets generally,” the groups wrote. “In contrast, SEFs and DCMs have an economic incentive to designate as many swaps as “available to trade” as possible. Accordingly, there is an inherent conflict of interest between the profit incentive of SEFs/DCMs to have as many swaps as possible required to be traded on their platforms and whether there is actual benefit to the market of requiring a swap to be traded on a SEF/DCM.”
The groups said that if the commission decides that SEFs and DCMs must make the initial determination, the process should include a six month period for CFTC review and public comment before a submitted swap is made “available to trade.”
Under the proposed rule, an SEF or DCM has the option to submit a determination under Sections 40.5 or 40.6 of the commission's regulations. Section 40.6's self-certification procedures provide for a 10-day review period while the approval procedures of Section 40.5 establish a 45-day review period.
“Even if an SEF/DCM opts for the approval procedure under Section 40.5, proper review by the commission and potential public comment within even a 45-day period will be very difficult, especially when the rules are first being implemented,” the groups wrote.
The letter stated that SEFs and DCMs should be required to list and support trading in a swap before they submit the swap as available to trade. Liquidity should be a prerequisite for such a determination and a submitting entity should provide “detailed reasoning for its determination and specific supporting evidence of any valid factors considered.”
The proposed regulations would require DCMs and SEFs to conduct an annual review and assessment of each swap they have made available to trade to determine whether or not each swap should continue to be available. The organizations called for more frequent reviews and suggestion that SEF and DCM members and participants should be able to submit swaps for review that are no longer available to trade.
The letter was signed by the International Swaps and Derivatives Association, the Securities Industry and Financial Markets Association and the Futures Industry Association.
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