CFTC Faces Challenges to Implement SEF Rule Changes

The Commodity Futures Trading Commission (CFTC) might struggle to implement recently proposed changes to the Swap Execution Facility (SEF) rules in their current format, said Justin Slaughter, a partner at Mercury Strategies, and counsel to the Foreign Exchange Professionals Association (FXPA) on a webinar hosted by the FX trade association.

On November 5, 2018, CFTC Commissioners voted in favor of proposed amendments to the rules governing SEFs and the trade execution requirement, with Chairman Christopher Giancarlo signaling his intention to finalize revised rules next year. In a detailed release issued by the CFTC, a number of significant changes to the SEF rules were proposed.

The Commission aims to increase the number of swaps being traded on these platforms by expanding the number of swap execution platforms that must register as SEFs, allowing a SEF to offer any means of execution for swaps and by requiring all swaps that must be cleared under the CFTC’s clearing mandate to be executed on a SEF. In addition, the Commission is proposing to allow SEFs more flexibility to choose which types of market participants may access each SEF.

The CFTC is seeking to increase the number of SEF registrants by proposing that swaps broking entities that facilitate multiple-to-multiple swaps trading that does not occur on SEFs and trading systems or single-dealer platforms that aggregate one-to-many systems have to register as SEFs.

The Commission is also proposing that a swap can be executed on a SEF via any means of interstate commerce. This is a significant change from the current requirement that swaps subject to the trade execution mandate be traded through a central limit order book (CLOB) or by sending a request for quote (RFQ) to at least three unaffiliated market participants. This change could pave the way for more voice broking in the swaps market.

Another proposed change is to the trade execution mandate. The CFTC wants to remove the current Made Available to Trade (MAT) determination for swaps to become subject to the trade execution mandate, a process that requires CFTC review. Instead, it is proposing that any swap that is subject to the clearing mandate would automatically be required to be traded on a SEF or designated contract market (DCM) if the swap is listed for trading on at least one CFTC-registered SEF or DCM. The impact of this is likely to be that many more swaps products will be forced onto these platforms.

The Commission is advocating for changes to the requirement of SEFs to offer impartial access to market participants, instead stating that they must offer “fair and non-discriminatory” access to “all or similarly situated market participants”. What this means in practice is that SEFs will be able to deny access to specific classes of market participants, so they could, for example, decide to only allow bank dealers onto their platform.

Elsewhere, the CFTC proposes to facilitate a broader range of swaps trading activity on SEFs and promote pre-trade price transparency by limiting pre-arranged trading and pre-execution communications that occur outside of SEFs and has requested comments regarding the use of the “post-trade name give-up” practice on SEFs for swaps that are intended to be cleared.

During the FXPA webinar, Slaughter claimed that the reaction to these proposed rules from the financial services industry has this far been “fairly tepid” because, as he put it, everyone “has something to love about this rule, something to hate about this rule, something to fear about this rule”.

Interestingly, he highlighted that since the proposed rule changes were released, there have been some conversations amongst the banks about possibly creating SEFs themselves in the form of single-dealer aggregation platforms in a bid to disintermediate the existing SEFs.

“That’s going to be a continued point of conflict going forward,” said Slaughter.

However, love it or loathe it, Slaughter also suggested that will be challenging for the Commission to implement these rules in their current form. Part of this comes down to timing, he explained.

There’s a 75-day comment period for the rule changes proposed, and Slaughter said that while Giancarlo’s office is strenuously opposed to any extension of this comment period, there are already rumblings from market participants that they need more time to digest what is a long and complex piece of text. 

“[Giancarlo’s office] are on a very tight schedule. They want to get this done as early as late spring, which strikes me is unrealistic, but at the very latest by early fall of next year,” said Slaughter.

He continued: “Once the comment period ends, the CFTC’s process for actually dealing with the comments and moving forward is, in a word, Byzantine. Unlike popular belief, there is no automated process for reviewing comments, it’s all done manually often by only one or two people inside the building. They have to read every comment together and summarize them internally and then they have to respond to the comments one-by-one or be at risk of violating the Administrative Procedure Act.”

As such, Slaughter predicted that it will take months for the CFTC to provide a comment summary, even if they allocate a substantial amount of what he described as already overtaxed staff to the task. Once this is done, then there are internal negotiations that take place between the Commissioners, with Slaughter estimating that there will be at least one month of negotiations and edits to the proposed rule changes at this point in the process.

The reason why this timeline is particularly significant is because Giancarlo, who has been the driving force behind these possible swaps market reforms, is due to end his term as Chairman and as a Commissioner in next year with Heath Tarbert, who currently serves as assistant secretary for international markets at Treasury, set to be nominated as his replacement.

“The timeline we’re operating under to get this rule done, with a Chairman who wants to leave as soon as it’s done and maybe an administration that wants to replace him is very, very fraught,” said Slaughter. “[Giancarlo’s] going to move as fast as he can, but it’s not clear you can get this entire thing done. That leads to my belief that what’s going to end up happening is that this rule is going to get cut into pieces and a large chunk of it is going to get finished, but not all of it, and what gets included is going to be key.”

Even beyond this, Slaughter highlighted other possible challenges to the implementation of the rule changes.

For example, he said that they could be vulnerable to legal challenges because the proposal is required to go through a cost-benefit analysis before it can be introduced, and the CFTC says that it actually can’t estimate the cost of this proposal because it doesn’t have enough data. This, according to Slaughter, is “a big red flag” that will see the proposal potentially attacked by a variety of opponents to it.

In addition, he pointed to broader political trends in the US that might make it more difficult to implement the rule changes at speed.

“Mercury Strategies is anticipating there will be several funding lapses potentially in the next 12 months. Under the current Federal rules and laws, the CFTC does not get to continue to have much of its staff working in the event of a funding lapse. In 2013, 97% of the staff had to go home during the government shutdown,” said Slaughter. 

He added: “Every time there’s a shutdown it basically it makes it harder to finish this rule.” 

The FXPA presentation can be found here.

FXPA Welcomes Capitolis as Member

The Foreign Exchange Professionals Association (FXPA) is pleased to announce the addition of Capitolis as the newest Associate level member of the FX trade group. 

“The changing market landscape and regulations are forcing all of us to think differently around the future structure of the market. Capitolis is responding to those changes by finding new ways of connecting capital with the best collaborative solutions to clients all over the world. We are pleased to support the FXPA in their efforts to benefit the industry and the wider public by promoting better standards and practices in accordance with their mission to foster a healthy global FX market,” said Gil Mandelzis, CEO and founder of Capitolis.

“We are thrilled to welcome Capitolis to our ranks at FXPA, as Gil and team represent another vibrant, innovative and potentially disruptive solution to the global FX space that our membership community is well positioned to embrace,” says John Shay, President of FXPA.Launched in September 2014, FXPA is uniquely comprised of a cross-section of the institutional FX industry. Diversity of membership is embedded in FXPA’s organizational construct to ensure wide representation of the professional FX market. Founding members epitomize this diversity – including the buy side, exchanges, clearing houses, trading platforms, technology companies, banks and non-bank market participants.

The CFTC’s SEF Reform Rule: Its Key Aspects and Prognosis – Dec 11, 9-10am (ET)

Tuesday, December 11th – 9-10am (ET): Justin Slaughter, former counsel to a CFTC Commissioner and current counsel to the Foreign Exchange Professionals Association (FXPA), will provide a detailed breakdown of the CFTC’s new regulatory proposal to fully overhaul SEFs. Justin will provide a summary of the major changes contemplated, including changes to the made-available-to-trade process, SEF accessibility, and pre-execution communication requirements. Justin will also discuss the timeline for the rule, the motivations underlying it within the CFTC, and its prospects for finalization in its current form. Register by clicking here

FXPA Files Comments with CFTC on De Minimis Threshold, NDFs, Swaps

Yesterday, the Foreign Exchange Professionals Association (FXPA) filed a comment letter with the CFTC in connection with its recent proposal to maintain the current $8 billion de minimis threshold for swap dealer registration.

In its comment letter, which is available here: in addition to supporting the CFTC’s proposal to keep the de minimis threshold in swap dealing activity for swap dealer registration at $8 billion; the FXPA also confirmed its support for excepting non-deliverable forwards (NDFs), as well as exchange-traded swaps, whether on SEFs or DCMs, and cleared swaps, from calculations of firms’ swap dealing activity for purposes of the de minimis threshold.

“The FXPA appreciates the opportunity to comment on the CFTC’s recent proposal to maintain the de minimis threshold for swap dealer registration at $8 billion,” says FXPA President, John Shay. “We are also grateful to be able to draw upon the collective views of our broad membership of participants in the foreign exchange market to support regulatory changes that will further the goal of ensuring that our financial markets are fairly and properly regulated.”

FXPA Welcomes New Board Members, Announces Working Groups

The Foreign Exchange Professionals Association (FXPA) voted in a slate of new Board members at its annual meeting on March 6, and re-elected Chip Lowry, Senior Managing Director at State Street Global Markets, as Chairman, and Sean Tully, Senior Managing Director at CME Group, as Treasurer.

Members new to the Board include Lisa Shemie, Chief Legal Officer, Cboe FX and Cboe SEF; Jill Sigelbaum, head of FXall, Thomson Reuters; and Christopher Matsko, Head of FX Trading Services, Portware. Members re-elected to the Board include: Jason Vitale, COO FX & Head of Client Execution, BNY Mellon Global Markets; Jonathon O’Donnell, Investment Manager, CalPERS; Tahreem Kampton, Senior Director, Microsoft; Tod Van Name, Global Head of FX Electronic Trading, Bloomberg; Stephen Komon, Senior Portfolio Manager, Colorado PERA; KC Lam, Head of FX and Rates, Singapore Exchange (SGX); and Chip Lowry, Senior Managing Director, State Street Global Markets.

The new appointments join existing Board members Jessica Sohl, President, HC Technologies; David Goone, Chief Strategy Officer, Intercontinental Exchange (ICE); Edgar Ramon, Global Head of FX, INTL FCStone; and Joseph Molluso, CFO, Virtu Financial.

During the annual meeting, FXPA’s new Chair of the Policy Committee, Cboe’s Shemie, outlined five working groups that FXPA is forming focused around: the FX Global Code; Cryptocurrencies; MiFID II and Cross-Border Regulation; SEF Trading; and Clearing and Margin.

“We will be focusing our collective energy on solving issues that are critical for our members, and on the smooth functioning of the FX market more broadly,” says Shemie. “The role of the Policy Committee is to create an effective forum for discussion, education and advocacy and to have a meaningful role in the continued development of global currency trading market structure. We are very excited to get to work.”

Launched in September 2014, FXPA is a Washington, DC-based organization that represents the collective interests of a full array of professional foreign exchange industry participants. The group was developed to engage key regulators, policymakers, the news media and general public through education, research and advocacy, with the goal of advancing a sound, liquid, transparent, and competitive global currency market.

FXPA Appoints John Shay as President

The Foreign Exchange Professionals Association (FXPA) is pleased to announce the hire of John Shay as President of the organisation, a newly created role. Additionally, FXPA has hired Mercury Strategies, represented by Justin Slaughter, as its new legal counsel.

“We are excited to welcome John and Justin to FXPA. They will be involved on a day-to-day basis, leading the group’s efforts to focus on the issues that matter most to the FX industry and help fulfil our mission statement, which is to advance a sound, liquid, transparent and competitive global currency market through education, research and advocacy,” says FXPA Chairman Chip Lowry.

“Through a dedicated President, FXPA will focus on market structure issues that directly impact the FX industry within each of the industry sectors and geographic regions that our diverse membership represents,” adds Lowry.

“I’m excited to be back involved with FXPA and look forward to rolling my sleeves up and getting to work. FXPA’s membership is unique in that it comprises a diverse set of FX industry leaders who together represent the breadth of the FX marketplace. In harnessing this knowledge base, FXPA is operating from a position of strength and can concentrate its collective efforts on areas that will benefit from better standards and practices in accordance with our mission to promote a healthy global FX market,” says Shay.

“When I was at the CFTC, I always enjoyed engaging with FXPA and their members about matters of policy and law. The Association and its members have a wealth of knowledge about the FX industry and market that is unmatched. It’s a privilege to be able to represent them as legal counsel and to be able to work closely with John Shay. I’m looking forward to working with John, the Board, and all the members to continue to advance the Association,” says Slaughter.

Shay was an active Board member when he worked at FXPA founding member firm, Virtu Financial. His role at FXPA will be to help lead the group forward through membership outreach, working group coordination, and a focus on expanding FXPA’s relationships with complementary trade groups, among other areas of expansion.

Shay was mostly recently at Nasdaq, where he served as Senior Vice President and Global Head of Fixed Income and Commodities. He currently serves as a board member of both LCH Group Limited and LCH Groups, and has served as an advisor to the US Treasury, CFTC, SEC, New York Fed and Bank of England. He has also testified before the US Congress on market structure reforms, most recently in July 2017.

From 2012 to 2016, Shay served as Senior Vice President for Global Markets at Virtu Financial, where he was responsible for managing outside venue, vendor and trading relationships, focused on fixed income, commodities and currencies.

In 2007, Shay founded and served as Chief Marketing Officer of IDCG. He oversaw all sales efforts, including managing all buy side, sell side and clearing member relationships. IDCG was sold to LCH in August of 2012.

Shay also founded and served as Managing Partner at Capital Market Services Inc, a wholly owned clearing and execution services business designed to improve market access for algorithmic strategy hedge funds in the over-the-counter and exchange traded space.

Shay began a 25-year career at ICAP (now NEX) in 1982, where he served as Executive Vice President and Global Head of Sales for ICAP Electronic Broking (IEB) for Fixed Income and Foreign Exchange from 2003 to 2007. Prior to 2003, he helped develop strategic partnerships in China, Hong Kong, Japan, South America and the European Union, and was instrumental in growing the company’s market share in US Treasuries, Mortgage Backed Products and Repo.

Meanwhile, Slaughter has served in just about every area of government and politics, from Capitol Hill to the Executive Branch, and from the judiciary to political campaigns. As Chief Policy Advisor and Special Counsel to Commodity Futures Trading Commissioner Sharon Bowen, Slaughter advised the Commissioner on all matters of policy, politics, press and law regarding the futures and swaps markets.

Prior to CFTC, Slaughter served as General Counsel to Senator Edward Markey of Massachusetts and advised the Senator on matters of law, finance, taxation and foreign policy, including implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, policies to spur domestic economic growth, government funding and the raising of the debt ceiling, campaign finance reform, judicial and executive branch nominations.

Slaughter has also practiced law at the Washington office of McDermott Will and Emery LLP, where he focused his practice on securities and congressional investigations. Slaughter served as a law clerk to the Honorable Jerome Farris on the United States Court of Appeals for the Ninth Circuit.

Launched in September 2014, FXPA is a Washington, DC-based organization that represents the collective interests of a full array of professional foreign exchange industry participants. The group was developed to engage key regulators, policymakers, the news media and general public through education, research and advocacy, with the goal of advancing a sound, liquid, transparent, and competitive global currency market.

How Does the Global Code Apply to Me? Webinar Audio – May 31, 2017

Click on the links below for the full audio recording and accompanying presentation from FXPA’s May 31, 2017 webinar, “How Does the Global Code Apply to Me?” featuring Chip Lowry, Senior Managing Director at State Street Global Markets and Chair of FXPA; Lisa Shemie, Associate General Counsel at Bats Global Markets, a CBOE Company and Member of the FXPA Policy Committee; Tahreem Kampton, Senior Director, Microsoft and Board Member of FXPA; and David Puth, CEO of CLS, and Chair of the Market Participants Group for the Global Code: