CFTC calls for international help on derivatives oversight
Philip Stafford | Financial Times
A top US markets regulator has called for his own agency to defer more oversight to overseas jurisdictions to prevent the vast global off-exchange derivatives market from fragmenting.
Mark Wetjen, a Democratic Commissioner at the Commodity Futures Trading Commission, on Friday joined the growing calls for his own agency to tweak its new swaps trading rules as traders shy away from US venues.
Among the changes he suggested included easing requirements of overseas traders to comply with US law, a foreign regime for the new electronic marketplaces for swaps and a faster recognition of overseas jurisdictions.
His comments were made during a visit to London and come as regulators and market participants struggle to adjust to trading on the new electronic marketplaces, known as swap execution facilities (Sefs). The first mandated products came on to the market in March.
They are intended to meet a G20 mandate to provide more transparency in the $700tn global swaps market but the wide-ranging definitions in US law encompass investors and trades that have minimal US involvement. Some have argued the rules amounted to an extraterritorial land grab by the CFTC.
Eight months’ worth of data have indicated Sefs have become US-centric venues. That has led to concern that the market is fragmenting, damaging both economic growth and contributing to potential systemic market risk.
Commissioner Wetjen acknowledged that “that policy making around trading of swaps has been controversial, perhaps the most controversial of the CFTC’s reforms”.
He said the US regulator should accept more oversight by overseas jurisdictions and defer to them when foreign trading venues choose to facilitate trades solely between foreign persons.
“This cannot mean blanket recognition of policy determinations elsewhere in the world. But a properly conceived, global framework based on substituted compliance can best ensure that jurisdictions compete on an equal playing field, and do not have holdout incentives that could impede progress on the G20 commitments,” he told reporters.
He also called for a foreign Sef regime to help prevent the unnecessary fragmentation of liquidity. Some rules created in the spring to ease the rules for overseas traders were “too vague”, he acknowledged.
He advocated the changes be made “as soon as practically possible” and to be brought into line with other jurisdictions around the world, most notably the European Union, which is still finalising its rules.
His comments follow only days after Timothy Massad, the new CFTC chairman, said one of his priorities was “to fine tune the Dodd-Frank rules”. Chris Giancarlo, a fellow commissioner, has also called for changes.
Mr Wetjen also said the regulator should take on the responsibility of deciding which instruments be required to trade on a Sef. At present the responsibility lies with the venue operator and was modelled on the futures market.
Lee Olesky, chief executive of Tradeweb Markets, earlier this month called for the CFTC to take the responsibility away from market operators.
“The authority should lie with the regulators after they gain appropriate input from Sefs and the marketplace,” he wrote.
That call was echoed by Mr Wetjen. “Independent regulatory agencies should not leave policy making of this sort to the very commercial entities that stand to benefit most from the trading policies in question,” he said.
Read the full article in the Financial Times here.