Swaps Regulation Still Makes Sense


A version of this post originally appeared as an op-ed in Politico.

When Congress passed the Dodd-Frank Act in response to the 2008 financial crisis, its primary goals were to (1) reduce systemic risk through centralized clearing and (2) increase transparency through reporting and trading on regulated trading platforms.  Both of those goals are within reach today.  Yet as implementation deadlines near, some are pushing back by claiming the new regulations for the previously unregulated swaps market are creating a regulatory imbalance that favors futures.   They have dubbed the supposed issue “futurization” – which will be discussed at a roundtable at the Commodity Futures Trading Commission today – and are alleging that it weakens Dodd-Frank. That argument turns history, law and reason on their heads.

Some background is helpful.  For more than 90 years, futures markets have been subject to increasingly comprehensive federal regulation.  (Futures markets were regulated even before securities markets.)  Swaps were not regulated at all until the Dodd-Frank Act was enacted in 2010.  Congress decided that swap regulation was needed after some of these contracts contributed to the crash of the economy in 2008.  Now all swaps will be regulated under rules adopted by CFTC and the Securities and Exchange Commission.

Dodd-Frank makes clear that futures and swaps are different product classes and should receive similar, but not identical, regulation.  Congress decided that the longstanding futures regulatory model – clearing and exchange trading – should be applied only to segments of the swap market, primarily trading among financial entities.    Other swaps are to be offered by registered dealers privately to commercial end users under special regulatory provisions.

Seems sensible, so what is the issue?  Some in the swaps world don’t like, in fact they even fear, the CFTC’s new swap rules. They are claiming that any differences in regulations will put them at a disadvantage.   Despite the fact that customers are already asking regulated entities like CME Group to develop new means to accommodate swap transactions in the futures markets, they are crying foul – saying this will weaken regulation by encouraging regulatory arbitrage.

Preposterous.  Futures are thoroughly and well-regulated.  Swaps are not – yet – but will be once the CFTC finishes its work though somewhat differently from futures.  Different regulation does not mean weaker regulation.  CME Group has no interest in having the CFTC impede swap markets; we want to offer our customers swaps services — clearing, reporting and trading — and have invested in new clearing offerings.  We and others have responded to customer demand in recent months to develop new products and trading systems for futures subject to regulation.

The issue being raised today is really a myth.   After all, bringing regulation to a previously opaque, risky market is exactly what Congress sought to do in the wake of the financial crisis.  In fact, we don’t think we need a new moniker like, futurization, to describe the development of products and services that meet regulatory requirements and customer demand.  We already have the word for that – it is innovation.

Terry Duffy is the Executive Chairman and President of CME Group.

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