New bill may restore sanity to SEF regulations


Just noticed this announcement:

Chairman of Financial Services Subcommittee on Capital Markets Scott Garrett, is introducing a bill (H.R. 2586) “the Swap Execution Facility Clarification Act”, which will require the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) to finalize swap execution facilities (SEFs) rules that allow the swaps market to naturally evolve towards the best form of execution over time.

Note that in this context, ‘Best form of execution’ is NOT the same as the MiFID requirement for ‘Best Execution’.

The  Senator goes on make a damning indictment of the currently drafted rules from the CFTC, and the ‘unintended consequences’ of poorly drafted over prescribed legislation….

“During consideration of Dodd-Frank, we were told that if the U.S. led the way on derivatives reform the rest of the world would follow,” said Garrett upon introduction.

“Unfortunately, in the area SEF rule making, that hasn’t been the case.  In fact, there is such a material disagreement between U.S. regulators and those in Europe and Asia that we now risk driving the swaps market to our foreign competitors simply because regulators have resisted providing the methods of swap execution that market participants require.  This legislation will provide clarification to the marketplace that U.S. regulators will ultimately design a sustainable swap execution environment that aligns with the underlying legislative intent of Dodd-Frank.”

“The entire market from buy-side asset managers, pension funds, commercial end-users, farm credit banks and rural power cooperatives to sell-side dealers and even prospective swap execution facilities seeks flexibility in obtaining price discovery and in the choice of execution,”

The bill would seek to prohibit the CFTC and SEC from interpreting the SEF definitions to:

1) require a minimum number of participants to receive or respond to quote requests

2) require a SEF to display or delay quotes for any specific period of time,

3) limit the means of interstate commerce that market participants can use to execute swap transactions, or

4) require one trading system (i.e. RFQ) to interact with another trading system (i.e. Limit Order Book) on the same SEF.

These prohibitions are necessary to preserve investor choice of execution, promote transparent price discovery for market participants, and decrease the costs of hedging for American businesses, farmers, and retirement plans, all of which contribute to economic growth and job creation.

So, perhaps sanity will prevail, as the key elements of this new bill seem to remove a number of major objections from market participants.

Bill details here

3 Responses

  1. “perhaps sanity will prevail” – heres hoping!

  2. […] therefore reassuring, to see the Professor agrees with my post yesterday, in that sanity may at last prevail, in the area of SEFs, with the introduction of Senator Scott […]

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