Speaking at the Tabb Forum conference in New York last week, CFTC Commissioner Scott D, O’Malia addressed two topics that have been generating lots of buzz in the industry: the “futurization” of swaps and the long-awaited final rules for SEFs.
As we reported last week, there has been a great deal of speculation in the press about the futurization of the OTC swaps market. The prevailing logic has been that OTC swaps will follow a similar path to energy swaps, eventually migrating to futures contracts to dodge onerous regulations. O’Malia set out to quickly diffuse the idea that a move to futures would skirt regulation, suggesting that, ultimately, the derivatives market will be driven by risk management needs and cost:
“Some have even opined that the shift to futures is a move to a less regulated environment. While I disagree with the characterization that the futures market is less regulated, I couldn't agree more with the argument that the futures market is well understood and that its rules are clear and provide market participants with regulatory certainty. In comparison, the swaps rules are vague, poorly understood, and now riddled with temporary exemptions and no-action relief – in other words, a confounding mess that only an outside counsel could love."
However, the current state of affairs is not necessarily the end of the story. The transition to futures in the energy market has been facilitated by the exchanges establishing extremely low threshold sizes for block trades in the futures contracts. These thresholds are unlikely to stay at these levels. The question is: if they are raised, what impact will this have on traders?
"[…] With the election behind us, we can lower the rhetoric and look objectively at the relationship between the markets and the products. We must look at both U.S. markets and foreign markets to understand the costs and regulatory incentives embedded in their rules. We must always be thinking about risk management. We must also refrain from jumping to conclusions as we haven’t yet completely defined the costs associated with over-the-counter trades."
On the topic of finalizing SEF rules, O’Malia said he expects his agency to take a final vote within two weeks:
“It appears the SEF final rules may be voted on by the Commission as early as mid-February. That’s right in time for Valentine’s Day, and nothing says “Valentine, I care” like a SEF final rulemaking.”
As to the specifics of those rules, O’Malia shared a four-part checklist for the final SEF rule, which he said was developed to address the concerns of asset managers and dealers that the agency’s proposed SEF rules from January 2011 did not provide the necessary flexibility for less liquid swaps to be executed on the SEF platforms. He said the final rules must meet the following four criteria:
- Allow for flexible methods of execution including request for quote systems (RFQs) and limited voice-based systems.
- Do not copy the rules for designated contract markets (DCMs).
- Adhere to and explain the statute, or risk litigation and delay.
- Develop a clear pathway for timely approval of temporary SEF licenses.
To read Commissioner O’Malia’s full key note speech, click here.
Wednesday afternoon next week, TABB Group will host a range of fixed income and derivatives industry experts at its third annual fixed income forum at the TimesCenter in New York. Fixed Income 2013: Liquidity, Products, Platforms expects to draw more than 400 buy- and sell-side market participants together to discuss new products, market liquidity and business models that are emerging to address changes in the fixed income and derivatives universe.
Among the featured guest speakers at the conference are Tabb Group’s Will Rhode and Adam Sussman, Robert Burke, head of global OTC clearing at Bank of America, Jack Hattem, managing director and senior portfolio manger at BlackRock and Tradeweb CEO Lee Olesky. CFTC Commissioner Scott O’Malia will deliver the keynote address.
Topics covered will include the role of technology in attracting liquidity in SEFs and how buy-side firms will source liquidity in secondary markets following Basel III and QE.
DerivAlert will be on hand, reporting live from the event. Follow us on Twitter @DerivAlert for live tweets from the floor, or click here to register.
CFTC Commissioner Scott D. O’Malia laid out his holiday wish list in a speech last week before the AICPA/SIFMA FMS Conference on the Securities Industry. O’Malia is hoping the CFTC can hammer out clear deadlines, transparent guidance on enforcement relief and a flexible SEF rule. He explains:
“The first item on my list is that any relief that the Commission is planning to provide from the December 31 implementation date should be issued by December 14, to give certainty to the market as soon as possible. Next, I want a flexible SEF rule, and transaction rules that set fair rules of the road and step aside to allow the industry to decide which products and on what venues to trade. After that, I want capital and margin rules that are sufficiently mindful of the costs imposed on market participants, particularly commercial end users. And finally, I want Congress to review and provide feedback on a few areas of the Commission’s work that need further clarity and guidance.”
To view a copy of the full speech, please click here.
The third annual WMBAA conference on Swap Execution Facilities (SEF), SEFCON III, will be held this upcoming Tuesday, November 13, 2012 at the Grand Hyatt Hotel in New York. The conference is expected to bring together over 300 swaps markets participants, including interdealer brokers, regulators, buy-side traders and corporate end-users to discuss critical issues facing the markets.
Among the featured guest speakers at the conference are CFTC Commissioner Bart Chilton, U.S. Congressman Jim Himes, Congressman Scott Garrett and CFTC Commissioner Scott O’Malia.
The agenda features a panel discussion regarding ‘Swap Execution Under New Regulation’ moderated by Tabb Group’s Will Rhode and including notable panelists such as Tradeweb CEO Lee Olesky.
To view the full program for SEFCON III, please click here.
The CFTC announced that it will hold a public meeting of its Technology Advisory Committee (TAC) next week. The meeting will be held at CFTC headquarters in D.C. from 10:00 AM – 4:00PM on Thursday, July 26th.
Chaired by CFTC Commissioner Scott O’Malia, the TAC meeting will focus on “identifying and exploring technological issues and possible solutions relating to the ability of the CFTC, self-regulatory organizations and futures commission merchant (FCM) customers to verify the location and status of funds held in customer segregated accounts.”
A complete agenda for the meeting will be available prior to the July 26th meeting.
Audio of the meeting will be available via a listen-only conference call.
Domestic Toll Free: 1-866-844-9416
International Toll: Listed Under Related Documents
Pass Code/Pin Code: CFTC
DerivAlert will be watching and will provide a reaction following the discussion.
The second annual conference on Swap Execution Facilities, SEFCON II, will be held this upcoming Monday, October 3, 2011 at the Grand Hyatt Hotel in New York. The conference aims to bring together wholesale financial executives to discuss a wide range of issues around SEFs from operations to regulatory reforms, specifically the impact of Dodd-Frank regulations.
Program highlights include demonstrations of trading platforms for interest rate and credit derivatives, fixed income, money market products, foreign exchange, energy and equity derivatives.
Among the featured guest speakers at the conference are U.S. Congresswoman Caroline Maloney, Congressman Scott Garrett, CFTC Chairman Gary Gensler, and CFTC Commissioner Scott O’Malia. The agenda features a panel discussion regarding ‘What is a SEF and What is it Good For,’ moderated by FT US Editor Gillian Tett and including notable panelists such as Tradeweb CEO and Co-Founder Lee Olesky.
To view the full details for SEFCON II on October 3rd 2011, please visit here.
To view New York Times Business press coverage for SEFCON II, please visit here.
To view Bloomberg News press coverage for SEFCON II, please visit here.
CFTC Commissioner Scott O’Malia and ISDA Chief Executive Conrad Voldstad addressed the ongoing regulatory overhaul of the OTC derivatives industry at the International Swaps and Derivatives Association Annual North America Conference this past Tuesday, September 13th.
In the opening remarks, Voldstad argued for the industry to consider alternatives to the proposed reforms and weigh the potential cost and risk. Voldstad also pointed to an upcoming report that would analyze the costs and benefits of SEF’s.
During the keynote, O’Malia emphasized cost-benefit analysis as a major factor in delaying the finalization of proposed rules. In an effort to shed light on the timeline for Dodd-Frank implementation, O’Malia projected timelines for entities in Category 1, 2, and 3. He also highlighted next steps including the provision of definite dates for entity-specific obligations and more transparent criteria of phasing of the clearing and trading mandates. O’Malia also acknowledged the commission’s need for technological upgrades.
Commissioner O’Malia does not expect to see final rules to be implemented until Q3 of 2012.
Opening Statement of Commissioner Scott O’Malia:
I would like to thank Stephen O’Connor and the International Swap and Derivatives Association (ISDA) for inviting me to speak with you today. As I was thinking about my remarks for this conference I was struck by its title, “Shaping the Future of Derivatives.” Even before the passage of the Dodd-Frank Act, the Commission has worked to shape the future of derivatives. To date, the Commission has issued 57 advance notices of proposed rulemaking or notices of proposed rulemaking, two interim final rules, 13 final rules, and one proposed interpretative order. Only last Thursday, though, did the Commission finally turn its attention in its last open meeting to addressing how industry will be required to comply with the various implementation requirements for the numerous, intertwined rulemaking initiatives…
To read the full text of Commissioner Scott O’Malia’s Keynote Speech, please visit here.
To read the full text of ISDA CEO Conrad Voldstad’s Introductory Remarks, please visit here.
At the Federal Reserve Board of Chicago’s 47 Annual Conference on Bank Structure and Competition, on May 5, CFTC Commissioner Scott D. O’Malia spoke on a panel titled “Implementing Dodd-Frank: Progress to Date and Recommendations for the Future.” In his remarks, which are included below, he discussed some of the issues the CFTC has had during the rulemaking process so far and some of the challenges and open questions that still lie ahead.
Remarks of Commissioner Scott D. O’Malia
May 5, 2011
“However beautiful the strategy, you should occasionally look at the results.”
First, I’d like to thank the Federal Reserve Board of Chicago for hosting this conference and for inviting me to speak with you. Having been born in Indiana and raised in a small town in Michigan, I always enjoy opportunities like this to come back home to the mid-west. In fact, when I first arrived at the Commission I received advice from one of our senior staff members to get out from behind my desk and go speak to people. Actually, he said go listen to people outside of Washington. Hopefully, we will have some time to hear from the audience about your priorities and concerns.
I know that I don’t have to tell you that the Commission has been extraordinarily busy. I’m proud of the great effort that the staff is making to fulfill the regulatory mandates of the Dodd-Frank Act. To date, the Commission has put forward 66 proposed and final rules under Dodd-Frank. Not even counting the last four rule proposals the Commission voted on, we’re at over 1,046 dense, Federal Register pages filled with legal jargon and regulatory requirements. If you were to run the comment periods on all of those proposals consecutively, it would take 2,964 days, or a little over 8 years. I doubt I have to give those numbers much context; they speak for themselves. But just for fun, if you were to lie each of those Federal Register pages end to end, they’d stretch two-thirds of the way up the newly renamed Willis Tower. And we’re not done yet, so I am sure we’ll reach the top of tower before this is all over.
Sequencing and Implementation
When you’re putting out that much paper, I think you should have a plan for how to get through it. We are nearly halfway through the rulemaking process and we are just about to start consideration of the final rules. As Winston Churchill once advised, “If you are going through hell, keep going.” I’m going to accept that advice, but I have made two recommendations for the Chairman to make our trip a little better.
Continue reading here…
CFTC Commissioner Scott D. O’Malia will host an open meeting at 9:30 am on Thursday, March 31, 2011, to talk about how current technologies will be used in the execution of interest rate swaps on Swap Execution Facilities (SEFs). Market participants representing buy- and sell-side interests, including pension funds, asset management funds, end-users and dealers, will discuss the attributes of a successful SEF. This will be followed by demonstrations of current functionality offered by 16 electronic execution facilities representing designated contract markets (DCMs), exempt commercial markets (ECMs), exempt boards of trade (EBOTs) and other types of trade and execution facilities.
While this meeting is not part of the Technology Advisory Committee and will not be webcast, market participants can listen in through a dial-in number, and a portion of the meeting will be podcasted.
The CFTC will host the meeting in its Headquarters Conference Room. Members of the public interested in participating can visit the CFTC website for more information: www.cftc.gov.
At the recent Tabb FORUM event, “Derivatives Reform: Preparing for Change”, industry leaders gathered to discuss key issues around OTC derivatives trading under the Dodd-Frank Act. Some of the topics covered included:
Below are videos of the four panels that were held at the event.
Panel One: The SEF Definition is Finally Set - Now What?
Interview With Peter Fisher, BlackRock
Commissioner O'Malia Keynote Video
Panel Two: Central Clearing: The Best Model for Reducing Risk
Panel Three: RFQs and CLOBs: What's the Future for Swaps Trading
Panel Four: Client Clearing Differentiation: How to Choose?
Below are two additional videos from the event that aired on CNBC: An interview with Peter Fisher, Vice Chairman of BlackRock, and another with Scott O’Malia, Commissioner at CFTC.
CNBC - "BlackRock's Fisher on Inflation, Economy & More"
CNBC - "Derivatives: Rules of engagement" with CFTC Commissioner Scott O'Malia