Saturday, January 28, 2012

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

The House Agriculture Committee approved by a voice vote bi-partisan legislation providing certainty and direction with regard to the Dodd-Frank definition of swap execution facility. Sponsored by Rep. Scott Garrett (R-NJ), Chair of the Capital Markets Subcommittee, 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.

The Act would clarify that a swap execution facility cannot be required to have a minimum number of participants, receive or respond to quote requests, or display quotes for a certain period of time. Further, the SEC and CFTC would not be permitted to limit the means of contract execution or require trading systems to interact with each other.

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.

An amendment to HR 2586 offered by Ag Committee Ranking Member Collin Peterson (D-MN) was approved by voice vote. The Peterson Amendment is designed to send a signal to not gut CFTC powers on swap market transparency. In this spirit, the amendment preserves CFTC authority to promote greater transparency. Rep. Peterson noted that swap execution facilities must be open transparent marker places where competition governs. The Peterson Amendment was strongly support by Ag Committee Chair Frank Lucas (R-OK), who described it as a targeted amendment that will give swap execution facilities the flexibility to evolve naturally without hindering liquidity or choice for market participants. ‘

Chairman Garrett praised the Ag Committee’s approval of HR 2586, noting that regulating the execution of swap transactions as mandated by the Dodd-Frank Act is the most significant market structure undertaking since 1934. If Congress and the regulators don’t get it right, he warned, there is a risk of putting the U.S. at a competitive disadvantage with foreign counterparts. While for some the goal is to have swaps trade with continuous pricing like the equity and futures markets, he said, 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 help to 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 long-term projects necessary to create jobs.

During the markup of HR 2586 in the Financial Services 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.

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