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CFTC Revising Swaps Rules to Fix 'Flawed' Regulatory Reform, Giancarlo Says

The U.S. Commodity Futures Trading Commission (CFTC) will pursue a reform of swaps trading rules "to fix flawed implementation of regulatory reform," Chairman J. Christopher Giancarlo told a global forum for derivatives markets in Switzerland last week.

Rules covering the vast swap transaction market -- "Swaps Reform Version 1.0" -- adopted by CFTC in an effort to implement reforms forged by G-20 nations in Pittsburgh eight years ago, have shown "varied strengths and shortcomings," Giancarlo said.

"CFTC Version 1.0 contains the basic functionality of the Pittsburgh G-20 swaps reforms, but it has some serious bugs and flaws, most critically its inhibition of robust trading liquidity, participant diversity and market vibrancy," he said at the annual Burgenstock Conference in Lucerne. "I intend to advance the cause of swaps market reform. We will pursue improvements to the CFTC version 1.0 swaps regulations.

“These changes will stay true to the Pittsburgh G-20 reforms and be in full accordance with the letter and spirit” of the Dodd-Frank Financial Reform Act. “Yet, they will incorporate lessons from our initial reform efforts into a new and better framework.

"The new framework, CFTC Swaps Reform Version 2.0, will be engineered to better enhance market durability, increase trading liquidity and stimulate broad-based economic growth and revival.

“At the same time that we update and refresh our regulatory response to the last crisis, we must also keep abreast of the challenges of ever-changing markets and technologies.”

The swaps rules, voted out by CFTC in 2013, set out corporate rules and operational requirements for swap execution facilities (SEF), which were at the center of the 2008 financial meltdown that spurred Congress to enact Dodd Frank.

The trade execution facility of Dodd-Frank required that swaps be traded on SEFs or designated contract markets (DCM) that are subject to mandatory clearing and are made available to trade. Completion of the final rules facilitated the congressionally mandated and critical reform for promoting pre-trade transparency in the swaps market. SEF and DCM platforms would allow participants to trade swaps by accepting bids and offers made by multiple participants with all market participants given impartial access.

The sweeping Dodd-Frank legislation was signed into law by President Obama in July 2010. Of particular interest to the energy industry, the legislation marked the first time that the over-the-counter derivatives market would be regulated by the federal government.

Total repeal or partial dismantling of Dodd-Frank has been a prominent goal of the Trump administration. In February, Trump signed a pair of executive orders designed to roll back two provisions of the Act, calling for revisions to major provisions and overhauling a rule requiring brokers to act in their client's best interest, rather than seeking their own highest profits.

In June the House approved a bill to eliminate or revamp much of the Dodd-Frank. The Senate Committee on Banking, Housing and Urban Affairs held hearings in July, but no vote on the bill has been scheduled.

In a second speech last week, this time in Estonia, Giancarlo said CFTC "needs to go even further in applying deference to how we regulate cross-border entities and transactions," an assertion he made even before he took the lead at CFTC.

"Now that I am chairman, it is my intention to have the CFTC make more explicit in our cross-border rules that the CFTC will defer to the rules of comparable foreign jurisdictions. Such an approach will bring the CFTC back to its traditional approach to cross-border regulation and accord with the spirit of the Dodd-Frank Act."

Giancarlo outlined his vision of CFTC more than two months after the Senate confirmed his nomination as chairman and both Brian Quintenz and Rostin Behnam as CFTC commissioners. Giancarlo has served as acting CFTC chairman since January.

A fourth commissioner, Sharon Bowen, announced in June that she would resign her position "within the next few months, or perhaps sooner if another nominee is confirmed," but she remains at CFTC.

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