Tuesday, December 13, 2011

House Financial Services Committee Approves Legislation Clarifying Dodd-Frank Swap Execution Facility Provisions

The House Financial Services Committee approved by voice vote bipartisan legislation providing certainty and direction with regard to the Dodd-Frank definition of swap execution facility. Sponsored by Chairman Scott Garrett (R-NJ), the Swap Execution Facility Clarification Act, HR 2586, is designed to implement congressional intent reflected in the heavily negotiated language of the swap execution facility definition in Dodd-Frank. H.R. 2586 directs regulators to provide market participants with the flexibility they need to obtain price discovery in the market and in the method of execution they use.

In addition to allowing voice execution on a swap execution facility for any trade, HR 2586 prohibits ‘the 15 second rule,’ restrictions on the request for quote (RFQ) model and a sweep the book requirement. Chairman Garrett believes that the specific nature of this direction is necessary to promote the conditions for a competitive regulated swaps market to thrive in the U.S.

A technical amendment offered by Chairman Garrett, and suggested by the SEC, would strike ``trading system or platform’’ from the bill and insert ``method of trading system functionality.’’ According to Chairman Garrett, this is term of art that keeps the congressional intent of allowing different methods of trading while obviating the need for new definitions in the legislation. The amendment was withdrawn for further discussion before full Financial Services Committee mark-up of HR 2586.

In earlier testimony, ISDA expressed support for HR 2586, which it said would refine the Dodd-Frank definition of swap execution facility by requiring flexibility and correcting a number of flaws in the current proposed regulatory interpretation. According to ISDA, these flaws have the potential to significantly and adversely affect the dynamics of the swaps market by reducing liquidity and choice and by increasing costs and ultimately risks for OTC derivatives markets participants.