CFTC and SEC could diverge on rules, says Schapiro

Securities and Exchange Commission (SEC) chair Mary Schapiro says Dodd-Frank Act should be adapted to fit markets. She advocates working closely with the CFTC.

US regulators will have to be flexible in implementing the Dodd-Frank Act, said Securities and Exchange Commission (SEC) chair Mary Schapiro, speaking exclusively to

Under Dodd-Frank the job of regulating the swap market falls to the Commodity Futures Trading Commission (CFTC) while the SEC will take responsibility for the smaller market in security-based swaps. Security-based swaps include swaps linked to a single security or loan, such as single-name credit default swaps, as well as swaps referencing a narrow basket of securities.

While the SEC intends to work closely with the CFTC, there are some areas where the two parts of the market should be regulated differently, noted Schapiro.

“Going into this the desire of both agencies was to minimise the differences between our approaches. While we have proposed some things that are different, some of that is driven by the fact they’re different products and trade differently,” she said.

In both segments of the market, Dodd-Frank requires market participants to use central counterparties (CCPs) for all standardised derivatives, executing those trades on exchanges or swap execution facilities (Sefs). But the CFTC and the SEC disagree on the minimum number of market participants who should receive quote requests.

The CFTC has proposed quote requests be sent out to a minimum of five market participants, while the SEC believes they could continue to be sent out to as few as one market participant. In either case single-dealer platforms would not be permissible as the SEC insists Sefs must offer the capability for multiple participants to interact with each other.

“Our view was that if the quote-requesting party believes it only wants to seek a quote from one party, for example, because it is worried about somebody front-running the hedge of the transaction, then it should have that option to be able to do that,” said Schapiro.

Another area of divergence between the two regulators could be rules on block trades, she suggests. Dealers have criticised the CFTC for proposing thresholds on block trades that are too high – something that could subject large trades to onerous transparency requirements. Meanwhile, a 15-minute reporting delay for block trades would not give dealers enough time to lay off the risk of large trades, they argue.

“The CFTC has proposed specific levels and specific time frames for post-trade reporting. We’re less sure about what the right answer is, so we’re still in the information-gathering stage,” said Schapiro.

Nevertheless, this is one area where differences could be justified, she says. “Block trades could be defined somewhat differently in the two markets, because the products are quite different. I’m not saying for sure that is going to be one of the differences. But you can see that’s an area where the rule set will be highly dependent on the underlying product, as opposed to issues of market structure.”


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