The CFTC isn’t giving over-the-counter derivatives reform a Valentine’s Day kiss as expected. The regulator has put off a key vote on swap execution facilities (SEFs) until maybe March 1 as, reportedly, it is still working out how SEFs will function. I hope the delay will refocus attention on firms that operationally are not ready for an OTC overhaul.My suspicions about firms’ readiness were partially confirmed by an exclusive story via Energy Risk in which the soon-to-be-former CFTC commissioner Jill Sommers says the CFTC has moved too quickly on OTC reform and caused a great deal of anxiety for all market participants, particularly financial services firms.
Sommers argues that firms need more time to come up to speed on the Dodd-Frank-inspired reforms and rules that are coming at them too quickly. This has left many firms “scared to death” and seeking no-action letters at a high rate. Sommers also says that all the new rules should be finalized long before firms are required to comply with them. As we are seeing, this isn’t the case.
In the meantime, the Wall Street Journal is reporting that CFTC members are haggling over the fine print of how SEFs will operate and are even reviewing the role of phone-based transactions in cleared and executed OTC derivatives trading. On one level, this is good news for trading turret and telecom/networking service providers that cater to trading firms. But it’s a little disturbing that three years into the era of Dodd-Frank there is still resistance to electronic trading, which also signals that many firms are nowhere near ready for 21st Century trading.
Given the scale of what is a sweeping overhaul, it would make a lot of sense to step back, take a breather and assess where end-users firms are. I think the regulators—particularly the CFTC and SEC—would be shocked at how far behind firms really are. Of course, in theory, that isn’t their concern. The regulators also seem to be unconcerned about how out-of-sync their rules-making engines are, which is another headache for end-user firms.
Yet the reality is that we will get to OTC reform in frustrating fits and starts—it will not be a well-orchestrated transformation. (As I’ve said in my piece for the digital magazine version of FTF News—which you must download if you haven’t—the industry will be on a rocky road to the OTC reform throughout 2013.)
One bright spot for firms is that the technology, the solutions and services are moving ahead despite the dithering of regulators. Just this week the CFTC approved Cantor’s request to designate the Cantor Clearinghouse, L.P. as a derivatives clearing organization (DCO). In addition, IPC Systems, well known for its voice and electronic trading communications solutions, announced that it has added Javelin Capital Markets, an upstart OTC derivatives execution platform provider, to IPC’s Connexus Financial Extranet service.
So, the IT and service solutions are coming online, many players either have SEFs ready or will have them ready soon, swaps data repositories (SDRs) are sprouting daily, and clearinghouses are sharpening their swords for battle. They are all waiting at the starting gate for the regulators to agree on the fine print.
Pardon my idiomatic language, but as the regulators stumble forward, they are going to have cut end-user firms—especially the beleaguered buy side—some slack and let them catch up. In addition, it’s time for the SEC and CFTC to truly get their acts together and provide seamless coordination on their rules and regulations.
Maybe I am being too optimistic but I think there is still time to fix this situation and alleviate some of the misery that has come to define OTC reform.
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