Thursday, September 08, 2011

House Legislation Would Foster Natural Evolution of Swap Execution Facilities

Bi-partisan legislation introduced by Rep. Scott Garrett (R-NJ), Chairman of the House Subcommittee on Capital Markets, would require the CFTC and the SEC to finalize swap execution facilities rules allowing the swaps market to naturally evolve towards the best form of execution over time. The Swap Execution Facility Clarification Act, H.R. 2586, would 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.

Specifically, H.R. 2586 prohibits the CFTC and the SEC from interpreting the swap execution facility definition to: 1.) require a minimum number of participants to receive or respond to quote requests, 2.) require a swap execution facility 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 swap execution facility. In Chairman Garrett’s view, these prohibitions are necessary to preserve investor choice of execution, promote transparent price discovery for market participants, and decrease the costs of hedging.

Regulating the execution of swap transactions in the U.S., as mandated by the Dodd-Frank Act, is the most significant market structure undertaking since 1934, emphasized Chairman Garrett, and not getting it right would risk putting the U.S. at a competitive disadvantage with foreign counterparts. While for some the goal is to have them trade with continuous pricing like the equity and futures markets, he noted, because many swaps are illiquid products with sporadic pricing that goal simply isn’t practicable at this time.

H.R. 2586 is specifically designed to promote the transparent evolution of swaps trading on swap execution facilities and ensure that a vibrant swap market develops in the U.S. Importantly, it also protects the confidential trading strategies of asset managers, pension funds, insurance companies, farm credit banks and the ability of commercial end-users to access the swap market to fund the long-term projects necessary to create jobs.

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