Leveling the Playing Field
Today the US Commodity Futures Trading Commission (CFTC) held an industry roundtable to discuss the “futurization of swaps,” a term referring to the recent trend of the migration of swaps to futures contracts taking place in the financial services industry today.
Following the financial crisis and collapse of major financial institutions, in 2010 Congress passed Dodd-Frank legislation to oversee the unregulated over-the-counter (OTC) derivatives market. The goals of Dodd-Frank are clear: to increase market transparency and reduce systemic risk inherent in trading OTC derivatives.
Toward that end, Congress mandated creation of a swap execution facility (SEF) regime — a trading platform of greater transparency and investor protection than existing futures exchanges. Unfortunately, implementing regulations impose five times the minimum margin on cleared swaps as on cleared futures with equivalent risk.
This disparate treatment drives trading to a less transparent and potentially more risky environment.
Today at the CFTC roundtable, George Harrington, Bloomberg’s Global Head of Fixed Income Trading, asked regulators and government officials to revise these margin requirements to level the playing field between swaps and futures:
“The establishment of a margin regime that favors futures over swaps runs the risk of increasing systemic risk,” Harrington said. “Another major concern is that forcing futurization – which the Commission has done with the margin rule – risks undermining the central goals of Dodd-Frank.”
Other concerns raised by Harrington include the risks associated with creating an economic incentive for firms to trade these instruments overseas.
Sabrina Briefel, Bloomberg Communications