Swaps regulation faces “futurization” argument

Terry Duffy

Terry Duffy

The Dodd-Frank Act was passed in response to the financial crisis with primary goals to reduce systemic risk in swaps through the use of central clearinghouses and enhance transparency, both of which remain feasible.

Some industry participants, however, have opposed the new rules, saying that the legislation creates “futurization,” a regulatory imbalance that favors the futures markets and weakens Dodd-Frank, Politico reports.

Futures markets have been subject to increased federal regulation for close to a century, though swaps were largely unregulated until Dodd-Frank was passed. Regulators concluded that oversight and regulation of the swaps industry was necessary because of the role swaps markets played in the 2008 financial crisis. The CFTC and SEC are responsible for regulation of the swaps markets.

Dodd-Frank distinguishes the two product classes and indicated that they should receive similar regulation. Congress applied the long-standing futures regulatory model to only certain segments of the swap market, predominantly trading between financial entities. Other swaps will be offered by registered dealers, according to Politico.

Terry Duffy, the executive chairman and president of CME Group, said that some swap participants indicated that differences in rules issued by the CFTC or SEC could put the industry 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,” Duffy said, Politico reports. “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.”

Duffy said that CME Group wants to offer customers swap services and has responded to recent customer demand to develop new systems and products for the regulated futures market.

“The issue being raised today is really a myth,” Duffy said, according to Politico. “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.”

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