CFTC Commissioner Dan Berkovitz proposed a number of measures that might increase competition in the swaps markets.

In remarks at the Commodity Markets Council State of the Industry, Mr. Berkovitz stated that he voted against the CFTC's proposal to change the swap trading rules because it conflicted with the free and open competition principles that are within the Commodity Exchange Act and the Dodd-Frank Act. He complained that the current swaps market is dominated by a "few large bank dealers," with the five largest dealers party to 80% of the notional amount traded. He stated that "[t]hese high levels of concentration show that the largest dealers possess considerable market power . . . [and] also present potential systemic risks, since the failure of one of these firms in a highly interconnected market could have significant impacts on the other firms in the market." Mr. Berkovitz noted that economic evidence exists demonstrating that the CFTC's current swap execution facility ("SEF") rules have "led to more competition, greater liquidity, more electronic trading, better price transparency, and lower prices for swaps that are traded on regulated platforms."

Mr. Berkovitz offered several examples of improvements to the swaps market, including:

  • expanding floor trader registration (allowing non-dealer traders to register as floor traders instead of swap dealers);
  • altering bank capital requirements that affect futures commissions merchants;
  • scraping name give-up, on the grounds that name give-up is a "major deterrent to non-dealers seeking to participate on dealer-only platforms as it provides the dealers with valuable information about a counterparty's positions"; and
  • permitting "average pricing" for buy-side swap trades.

Commentary / Bob Zwirb

Commissioner Berkowitz's views regarding the need for the CFTC to 1) promote competition in the swap dealer market and 2) prescribe the modes for trading swaps rest on notions that from an antitrust perspective are subject to debate. For example, his thesis that "high levels of concentration [in such markets] show that the largest dealers possess considerable market power" is based on the so-called "market concentration doctrine," whose basic tenet correlates concentration with higher profits and market power. But the literature in industrial organization long ago questioned whether such a correlation exists or whether market power was responsible. A report issued in 1969 by the Task Force on Productivity and Competition headed by Nobel laureate George Stigler, for example, noted that "the correlation between concentration and profitability is weak, and many factors besides the number of firms in a market appear to be relevant to the competitiveness of their behavior." See also Harold Demsetz, "The Market Concentration Doctrine," AEI-Hoover Policy Study 7, August 1973; Demsetz, "Industry Structure, Market Rivalry, and Public Policy," 16 J.L. & Econ. 1 (1973).

What Stigler and Demsetz demonstrated nearly half a century ago is that other factors such as efficiency or consumer preferences rather than market power may give rise to concentration in an industry. And in the swaps markets, those "other factors" include the preferences of market participants, who appear to favor more trading venues and more means of trading (including trading with certain dealers) than those favored by Mr. Berkovitz. It is this very preference for what economist Craig Pirrong characterizes as "a diversity of trading mechanisms" that appears to be driving the reforms proposed by Chair Giancarlo and for the disappointment (even within the CFTC) with the failure of the SEF trading model to gain traction. See Pirrong, SEFs: The Damn Dogs Won't Eat It! (noting that the buy side was very resistant to the SEF mandate despite the fact that they were the supposed beneficiaries of a more transparent and more competitive trading mechanism intended to "break a cabal of dealers").

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