CFTC Chair J. Christopher Giancarlo introduced a new measure for the size of the rates segment of the swaps markets and called for a new "paradigm" in describing that market.
In remarks delivered at Derivcon 2018 in New York, Mr. Giancarlo characterized notional value as a highly flawed metric for the size and risk of the swap market, and emphasized that reliance on the metric for regulatory purposes leads to poor allocation of public resources. In particular, he noted that the common use of notional amounts in public discourse without normalizing for duration or offsetting positions creates an impression that the market is much larger than it is in actual risk terms, and has led to misguided policy decisions.
Mr. Giancarlo unveiled a new metric for measuring the size of the rate swap markets developed by CFTC Chief Economist Bruce Tuckman. This measure would evaluate market size based on entity-netted notionals ("ENNs"), which are produced by first converting notional amounts for rate swaps of all durations into five-year risk equivalents and second netting long and short exposures in the same currency between pairs of market participants. Mr. Giancarlo explained that ENNs are designed to describe the amount of market risk transfer in the interest rate swaps markets. Using this method of calculating risk, the aggregate risk transfer amount is sized much more consistently with other major markets, such as the debt market, and can be evaluated accordingly.
Mr. Giancarlo encouraged consideration of the ENN including its potential uses for regulation, but noted that his intention was not to come up with a specific alternative to the current swap dealer de minimis calculation methodology. He also emphasized that ENNs are not intended to quantify credit or operational risk.
Commentary / Steven Lofchie
Query whether the new measure will be adopted by those who believe that there is political advantage in exaggerating the size of the swaps market? It sounds a lot more ominous to describe a swap as having a billion dollar notional than it does to describe it as having a four dollars and thirty-seven cents market value.
Commentary /Jeff Robins
While the expert reception of ENNs as measures of market size and risk awaits to be seen, Chairman Giancarlo and Dr. Tuckman should be applauded for taking on a foundational issue. The policy argument for improving the metrics used in public discussion of the swaps market is unassailable.
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