At the ISDA 32nd Annual General Meeting, CFTC Acting Chair J. Christopher Giancarlo examined the changing nature of the global swaps market. Mr. Giancarlo described the current landscape concerning trading liquidity:

  • since Dodd-Frank's implementation, market liquidity has been reduced significantly, with bank-dealers stepping away from providing liquidity;
  • new regulations have made markets far more vulnerable to stress conditions, including the miscalibration of bank capital requirements and the misapplication of the supplementary leverage ratio ("SLR") to swaps activity;
  • uncertainty surrounds the issue of whether regulatory capital requirements can be reconciled with the amount of capital needed to maintain liquidity in the global markets; and
  • restrictive applications of the Volcker Rule, swaps trading regulations, and the "CFTC's flawed U.S. swaps trading rules" also have impacted liquidity negatively.

On the application of the supplementary leverage ratio, Mr. Giancarlo commented that:

"[The] SLR is a perfect example where regulators, who focused narrowly on the goal of increasing bank capital, failed to appreciate the impact on another important risk buffer, central clearing. This has undermined the resiliency and efficiency of the financial markets."

Mr. Giancarlo emphasized that:

  • U.S. swaps trading rules have affected U.S. and European market interactions detrimentally, disadvantaging the U.S. with provisions that impede technological innovation;
  • CFTC rules must be tailored to allow and encourage more global participation in the U.S. trading markets; and
  • the CFTC must cooperate with overseas regulators, since it is important to avoid conflicts that contribute to market fragmentation even though strict regulatory uniformity is unnecessary.

Mr. Giancarlo stressed the CFTC's commitment to "foster[ing] safe, sound, and vibrant global markets for investment and risk management to stimulate greater job creation and broad-based prosperity."

Commentary / Bob Zwirb

In his remarks, Mr. Giancarlo rightly praises his predecessor, Chair Timothy Massad, for being "both consistent and correct," as well as "prescient" in "explaining how [application of] the SLR has impaired the ability of derivative end-users to hedge risk and reduce volatility." Mr. Giancarlo, in turn, is prescient in warning of the difficulties that may occur in the financial markets from the ongoing decline in futures commission merchants, a trend that is related, in part, to the impact of new regulatory requirements arising from Dodd-Frank.

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