On March 15, 2019, Americans for Financial Reform Education Fund sent a letter to the Commodity Futures Trading Commission expressing several concerns regarding the agency’s “Swap Execution Facilities and Trade Execution Requirement” proposed rules. Read or download a PDF version of the letter.
We strongly disapprove of the new proposal to change rules for derivatives trading announced in today’s meeting of the Commodity Futures Trading Commission (CFTC). The requirement that complex derivatives be traded whenever possible in open, competitive markets was a crucial element of Dodd-Frank derivatives market reforms.
The de minimis exemption is a critical element of the swap dealer rule, as it determines which swap dealers will actually be designated as regulated swap dealers and subject to formal dealer oversight. This CFTC proposal addresses a wide range of issues surrounding this exemption.
“The Omnibus budget package contains several policy riders designed to benefit Wall Street investment funds and big banks at the expense of the public. One provision in the omnibus allows Business Development Companies (BDCs), a type of private equity fund sold directly to retail customers, to double their permitted fund leverage from the current 1-1 level (one dollar of borrowed money for each dollar of investor equity) to 2-1. BDCs are already the beneficiary of regulatory exemptions since conventional closed-end mutual funds can only leverage 1-2, or borrow one dollar per two dollars of investor equity…”
“…We urged the Commission to be more aggressive in laying out structural reforms to the markets and more specific limits on dangerous automated trading practices. The current Supplemental NPRM does not change our basic assessment, as it maintains the basic framework of the 2015 NPRM, with no movement toward additional specificity in risk limits or risk control requirements or reduced discretion for market actors in designing and implementing risk controls…
“AFR is disappointed at the continuing extension of exemptions from swaps reporting for foreign dealers active in the U.S. markets. Some of the transactions to which this relief applies, such as transactions with supposedly non-guaranteed affiliates of U.S. banks, could be highly relevant to derivatives risks within the U.S. economy.”
We are deeply disappointed that CFTC Chair Massad has delayed by one year the lowering of the “de minimis” threshold that requires Swap Dealers to register with the Commission. The decision by the Chair means that many derivatives business will continue to operate for two more years without the new oversight Congress mandated they receive.
“At today’s meeting, the Commodity Futures Trading Commission (CFTC) will rule on whether derivatives margin rules required by Japanese regulators are comparable to U.S. margin requirements… Japanese margin rules are significantly weaker than U.S. rules in several important areas. These include margin protections in case of the bankruptcy or failure of a foreign counterparty, and the types of non-cash margin accepted. Permitting U.S. firms to operate under these weaker rules would constitute an unacceptable back-door weakening of U.S. margin rules. We are concerned that such a comparability determination would set a precedent for permitting similar weakening in other jurisdictions and in other areas of derivatives oversight.”
“[T]he proposed Reg AT is long overdue. At the same time, however, the self-regulatory approach taken here falls far short of a clear set of limits on the most dangerous and predatory practices made possible by automated trading technology.”
“AFR once again calls on regulators to reconsider and end their sweeping regulatory exemptions for international derivatives operations of U.S. banks and to provide greater transparency to the public concerning the size and potential impact of such exemptions.”