CFTC drags its feet over OTC derivatives transparency.. again

6 years ago, the CFTC began talking generically about reforming the FX market. Now, they are still talking about it….

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The low pitched drone of a stuck vinyl record appears to resemble the soundbites that have emanated from the US Commodity Futures Trading Commission (CFTC) for an astonishing 6 years on the issue of its intention to ‘reform the OTC derivatives market.’

Whilst the authorities in the United States are world renowned for their tenacity and Senator-level understanding of the four decade old electronic trading industry that is equally sophisticated in North America, 6 years in the lifetime of retail brokerage business is an epoch.

Today, the CFTC’s regulatory juggernaut has begun publicly discussing what it continues to term ‘reformation of the OTC derivatives market’ this time in the form of an opening speec at the first Global Markets Advisory Committee meeting of 2019.

CFTC Commissioner Dawn D Stump, who was appointed by President Donald Trump to serve as a Commissioner of the CFTC on June 12, 2017 and was sworn into office on September 5, 2018 for the remainder of a five-year term expiring in April 2022.

Prior to her appointment, Mrs. Stump was President of Stump Strategic, a consulting firm she founded in 2016. Before starting her firm, Mrs. Stump was Executive Director and Senior Vice President of U.S. Policy for the Futures Industry Association (FIA) and Vice President at the New York Stock Exchange.

Commissioner Stump may well have the qualifications and business experience, but the CFTC’s intentions to address what it appears not to be sure about and take over 6 years to continue to speak about it very generically precedes her tenure.

“Turning to today’s agenda, we have a full day ahead. We are focusing this meeting of the GMAC on an examination of the status of the key pillars of the Group of 20 (G-20) directive regarding the OTC derivatives market” she explained to the panel.

“Specifically, today’s agenda revolves around the sometimes-overlooked component of the G-20’s agreement in 2009 in Pittsburgh, which stipulated that regulators should “assess regularly implementation and whether it is sufficient to improve transparency in the derivatives markets, mitigate systemic risk, and protect against market abuse.”

” It is noteworthy that in 2009, in the midst of responding to the crisis, the G-20 leadership admitted that as individual jurisdictions implemented the G-20’s principles, a look-back was needed to ensure the G-20’s objectives were being met” explained Commissioner Stump.

“In that spirit, this morning, we will start with a presentation by Shunsuke Shirakawa, Vice Commissioner for International Affairs at the Financial Services Agency in Japan, on Japan’s priorities for its G-20 presidency in 2019. The Vice Commissioner will focus on the three goals of Japan’s G-20 presidency: first, addressing market fragmentation; second, addressing the challenges that come with regulating in this era of technological innovation; and third, addressing the issue of financial inclusion in an aging society. We are pleased to have the Vice Commissioner here with us today, and we look forward to his presentation” said Commissioner Stump.

“Second, Steve Kennedy from ISDA will pick up on one of the themes in Vice Commissioner Shirakawa’s presentation, and present on ISDA’s work on regulatory-driven market fragmentation. Steve’s presentation will include a discussion of the sources of market fragmentation, some real-life examples of fragmentation, and potential solutions” she continued.

“In the afternoon, we will turn to an examination of the status of the key pillars of the G-20 directive regarding the reforms of the OTC derivatives markets” said Commissioner Stump.

“The third panel will explore cross-border issues with respect to trading venues and central counterparties. Nicolette Cone of ISDA will walk us through some of the cross-border issues that arisen with new trade execution requirements and the effect of the October 2017 announcement of a common approach between the CFTC and the European Union regarding certain derivatives trading venues.”

“Then, Colin Lloyd of Cleary Gottlieb Steen & Hamilton will present on the current framework for U.S. access to non-U.S. swaps central counterparties, some of the issues created by the current framework, and a proposal for a new framework for allowing U.S. customer and proprietary access to non-U.S. CCPs for swaps. Both presentations raise a number of interesting points for discussion, and I have no doubt that the GMAC members will have plenty of thoughtful comments following these presentations” she said.

There is a 6 year delayed echo here.

Back in 2013, I became aware of a letter, signed by chiefs of regulatory authorities across the world, had been circulated by the US Secretary of Treasury stating that such officials were already starting to see evidence of fragmentation in this vitally important financial market, as a result of lack of regulatory coordination.

The letter expressed concern that without clear direction from global policymakers and regulators, derivatives markets will recede into localized and less efficient structures, impairing the ability of business across the globe to manage risk.

A the time, my opinion was that this in turn could dampen liquidity, and impede investment and growth. The countries involved showed a common commitment with respect to OTC derivatives reform, and are implementing rules across very different markets with different characteristics and different risk profiles, to support this global initiative.

The CFTC at the time held the view that cross border rules should be adopted that, if they were replicated by all other jurisdictions, would not result in duplicative or conflicting requirements, or regulatory gaps.

Back then, it was considered that this should be achieved through substituted compliance or equivalence arrangements which would provide regulatory recognition of the CFTC’s mutual efforts to put in place measures to deliver the 2009 Pittsburgh commitments on OTC derivatives.

The arrangements were intended to be without prejudice to the right to withhold equivalence or substituted compliance arrangements where regulatory reforms are materially different in outcome.

So here we are, 6 years on, in a very mature post-Dodd Frank Act environment, and not only that but a very post MiFID II environment across the pond, and senior Commissioners are still emitting very general soundbites about the same subject that was vaguely on the radar all that time ago.

Meanwhile, retail brokerages such as XM and IG Group have begun the very valuable and worthwhile re-entry into the US market, and the listed derivatives giants of Chicago have set their sight on accruing a high quality and astute retail client base, therefore it is perhaps fair to assume that the industry itself is in a better position to determine the direction of North America’s markets than the CFTC itself!

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