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CFTC’s Giancarlo issues manifesto for Agency Civil War

J. Christopher Giancarlo has made his views of the Agency’s previous work very clear- he hates it in detail, spitting his dummy so far out that it may well be irretrievable. The Republican CFTC Commissioner, speaking from his ex-practitioner’s podium, has issued a nine page broadside against the regulator’s implementation of Dodd-Frank’s essentially benign intentions.  Prefaced by an explanation of his being barred from speaking at today’s SEFCON V conference, his statement is a cogent criticism of Title VII’s critical flaw- the imposition of an inappropriate futures model on a market more than uncomfortable with commoditisation. Worth reading in full, but for those of a nervous disposition, sanitised highlights follow:


  • Mr Giancarlo’s views are his own and do not reflect on the diligent CFTC staff who “are engaged in a Sisyphean task”
  • The US IPO market is a model of success, as witnessed by the recent Alibaba IPO, in marked contrast to the swaps market which is suffering liquidity fragmentation, Balkanisation and capital flight
  • CFTC Swaps rules are mismatched to global markets. Eschewing novelty, Giancarlo compare the swaps market to a “square peg being forced into a round hole”. The fundamental misalignment between CFTC regulation and market reality acts as a global capital repellent and results in stalled growth and lost jobs
  • Adverse Consequences of Flawed Swaps Trading Rules. The inculcation of monopoly. Market disintegration. European rules are less-prescriptive- lost business will not return
  • Unwavering Support for Swaps Reform. Due to his personal experience in the crisis, Mr Giancarlo supports central clearing, trade reporting and “sensible regulation”, and is a committed supporter of the “core tenants” (sic) of D-F Title VII. He will soon issue a “White Paper” detailing a comprehensive alternative to the CFTC’s deeply flawed D-F implementation
  • Understanding Swaps Liquidity. The essentially bespoke swaps markets are characterised by episodic liquidity- futures markets are not.

The Dodd-Frank Swaps Trading Regulatory Framework

Mr Giancarlo lays out his own opinion of the central features of Title VII- all of which are lacking in or actively oppressed by CTC implementation:

  • Congress got it “mostly right”, articulating “goals not requirements”
  • Flexible Execution Methods for SEFs.
  •  Goal to Balance Price Transparency with Promotion of Regulated Trading.
  • No Artificial Distinctions for Swaps Trading
  • No Regulatory Mandate for Made Available to Trade
  • Core Principles-Based Framework



The Current CFTC Swaps Trading Regulatory Framework

  • Limits on Methods of Execution. The CFTC prohibition on various execution methods by limiting SEFs to Order Books creates needless complexity and confusion, militating against both competition and transparency.
  • Artificial Distinction between Required and Permitted Transactions.  Puts the execution cart before the liquidity horse
  • Block Transactions “Off-SEF” or “On-SEF”?Pointless, arbitrary and confusing
  • Unworkable Made Available to Trade Process. Inflexible execution creates tension between trading and clearing
  • Inconsistent Transparency Objectives. Embargo rule reduces liquidity and prioritises public transparency over market transparency. Its purpose in serving the public good is unclear
  • Prescriptive Rules Disguised as Core Principles. Swaps rules are unworkable and have to be reformulated as principles

Conclusion: Re-Balance by Returning to Congressional Intent. Read the forthcoming White Paper. Redesign and simplify the rules along the principles-based approach. Let customers and the market determine trading methodologies, technology, market structure and trading relationships. Let the resulting joy be unconfined.

Mr Giancarlo has placed an ocean’s worth of clear blue (though not Democrat-blue) water between himself and his possibly more temperate fellow Commissioners. His broad critique, that the specificity of the CFTC’s implementation renders it unfit for purpose, is a question that deserves an answer. The answer is that principles are largely rules without details, and rules without details are useless.  He is broadly correct in characterising Dodd-Frank as a set of principles; however, they are principles formed with the express purpose of being transformed into rules. If he is intent in his implied belief that American innovation and excellence should be unshackled from inconveniently detailed regulation, he should devote his time to altering its existing implementation. Even with the following wind of a Republican majority in both Houses, the chance of a complete redesign of the current framework is very close to zero. However, we may at least be confident that today’s rhetorical fireworks are a portent of more interesting times ahead at the US’s leading derivatives regulator.

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