Reformer Supports CFTC SWAPs Negotiation With Caveats

Reformer Supports CFTC SWAPs Negotiation With Caveats

When the U.S. Commodity Futures Trading Commission announced an agreement with European participants to allow over the counter (OTC) SWAPs trading on foreign exchanges, as reported yesterday in ValueWalk, those knowledgeable of the vast power behind the largest Wall Street bank’s lobbying machine were skeptical.  After all, the recently reform-minded and now former CFTC Chairman Gary Gensler, who was said to have fallen out of favor with the Washington power elite due to his new-found gusto for financial reform of toxic derivatives, had just fought an aggressive if losing battle to keep U.S. banks trading on U.S. regulated Self Execution Facilities (SEFs).

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But is this negotiated exemption bad for market protection?

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“The CFTC exemption does include important positive elements,” noted Marcus Stanley, in a statement from Americans for Financial Reform. “The exemption requires that European trading platforms follow the most important rules binding U.S. SEFs in order to quality for relief. These requirements are specific, not just statements of broad principle, and have to be enforced through rules of the home country regulator, not through informal agreements with the exchange.”

While they found positives they, like many reformers, did so with a skeptical eye.

“We generally don’t favor letting foreign exchanges without registering as U.S. SEFs, but given that the CFTC permitted this it is important that they did include some real protections for the U.S. financial system in their requirements for foreign regulation,” said Stanley in an interview with ValueWalk. “That is a positive step. They need to enforce those requirements, and going forward if there are any future cases where they permit foreign regulatory oversight of derivatives impacting the U.S. economy, they need to continue include strong and specific protections to ensure that the foreign entities truly match or exceed U.S. standards.”

OTC derivatives key causation of 2008 crash

Among the key causations of the 2008 market crash was the fact that the derivatives positions were non-transparent: those purchasing the investments based their decisions on trust and faith in those who packaged and rated the opaque derivatives.  What buyers didn’t know was that the derivatives held toxic assets that ultimately brought the world economy to its knees.  Dodd-Frank was design to address the root causes of the 2008 crash.  “Transparent, open, and competitive derivatives trading is a key element of the derivatives reforms included in the Dodd-Frank Act,” the statement read. “To implement this reform, Congress mandated that most derivatives be traded on exchanges known as Swaps Execution Facilities (SEFs), which must provide open access and competitive pricing.”

Gensler’s fight to protect American public from OTC SWAPs centers on overseas trading, meets organized resistance

While transparency and competitive pricing are important components of reform, sources note that former CFTC Chairman Gensler, acutely aware of how the products were created and why they still pose a threat to the world economy, was hot on the trail of protecting the American public from when he found himself in a meeting on July 3, 2013 with the Obama Administration’s financial power elite.

Some found it odd that Gensler had taken the reform mantle, as he, along with Clinton economic appointee Larry Summers, were intimately involved in derivatives deregulation in the late 1990’s and early 2000’s that led up to the stock market crash of 2008.  But after the MF Global debacle – true details of which have yet to emerge – Gensler found his new religion: proper regulation of OTC SWAPs so they would not destroy the economy again as they did in the past. 

Fast forward to the July 3 meeting when U.S. Treasury Secretary Jack Lew, with newly minted SEC Chairwoman Mary Jo White in tow, provided Gensler marching orders that were essentially the same as pleas made by the Wall Street financial lobby.  Those orders, placed in a polite package, were to back off his opposition to overseas SWAPs trading by U.S. firms that still will receive a bailout if their risky bets fail.  It only seemed logical that if the U.S. government was going to backstop the risk they trade in its jurisdiction, under its regulation.  Such logic, however, was abandoned in the recently announced agreement overseas SWAPs trading agreement – achieving a goal of the Obama administration and the largest Wall Street banks.

“The derivatives market is a global market, but risks incurred by U.S. firms can impact the U.S. economy regardless of where a derivatives transaction takes place,” the statement from Americans for Financial Reform concludes. “As the process of cross-border regulation moves forward we urge the CFTC to ensure that all derivatives transactions posing a risk to the U.S. economy fall either under U.S. rules or under a regime that is fully equivalent to U.S. rules and is properly enforced. This requires both careful specification of the standards for equivalence and continued monitoring of the enforcement of these standards.”

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Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)
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