CFTC Division of Swap Dealer and Intermediary Oversight Director Joshua B. Sterling described the CFTC's role in overseeing CPOs and CTAs in light of the size and agility of the firms in the asset management industry. He argued that there may be fewer asset management firms than before, but those that remain are "bigger, faster, stronger" and more interconnected.

In remarks before the Chicago Investment Management Conference, Mr. Sterling stipulated that he does not necessarily consider the expanse of the asset management industry to be "inherently good or bad." However, he stated, it is the duty of the CFTC to address "significant changes" in the advisory industry that will affect other derivatives market participants as well.

Specifically, Mr. Sterling found that:

  • investors are increasingly moving their assets into a limited number of very large firms;
  • technological developments (e.g., trading algorithms, quantitative tools and quantum computing) are increasing the speed and volume of investment decisions; and
  • firms are pressured to consolidate, thus causing large managers to become even larger still.

These factors could cause those connected to asset managers - futures commission merchants ("FCMs"), swap dealers, contract markets, swap execution facilities and clearinghouses - to experience outsize effects, according to Mr. Sterling. In particular, he said it was time to consider the impact of the asset management industry on:

  • the liquidity and risk continuum for cleared and uncleared trades; and
  • the liquidity and risk transmitted from CPOs and CTAs into the decreasing number of FCMs and swap dealers.


Bob Zwirb

Title VII of Dodd-Frank was adopted in large part to address the problem of "interconnectedness," i.e., the problem caused when large intermediaries become too intertwined with each other to safely maneuver sudden market shocks and, thus, prevent financial contagion during market downturns. As former Chair Gary Gensler explained: "Swaps market reform is a key component in ensuring that firms are not too interconnected . . . to fail."

A decade later, however, notwithstanding the intent of those reforms, the market is more concentrated and more interconnected than ever, as Mr. Sterling explains:

Interconnectedness. Liquidity and risk are transmitted from the many CPOs and CTAs into the many fewer FCMs and swap dealers that take their trades. The number of FCMs has shrunk dramatically over the past 15 years. Among the remaining 55 registered FCMs with customer business, our data indicate that just 10 firms hold about 75 percent and 93 percent of customer funds for futures and foreign futures, respectively, 17 FCMs alone are responsible for all customer cleared swaps activity. As for swap dealers, while there are 107 registered firms, our data show that, as of the end of the second quarter of 2019, just 10 swap dealers accounted for well over 50 percent of total dealer swap positions.

Could it be that rather than making the market less interconnected, the Dodd-Frank regulatory framework instead made it more concentrated and more interconnected?

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