May 16, 2013
I respectfully dissent from the Commission’s approval today of the rule establishing Process for a Designated Contract Market or Swap Execution Facility to Make a Swap Available to Trade under Section 2(h)(8) of the Commodity Exchange Act (CEA).
I supported the proposed rule because I wanted to solicit public comment and engage market participants in an open discussion on how the Commission should implement the available-to-trade provision in section 2(h)(8) of the CEA.
During the comment period, the Commission received 33 comment letters and held a roundtable1 to solicit public views on this matter. The commenters provided various recommendations but in general virtually all of them rejected the proposal; the Commission would be hard pressed to point to one comment letter that supported the Commission’s approach. Unfortunately, despite this strong feedback from the public, the Commission has chosen to follow its original proposal.
I recognize the challenge that the Commission is facing in interpreting the “make available to trade” provision. Unfortunately, Congress did not provide the Commission with any guidance as to how and under what conditions the trade execution mandate must be triggered. Nevertheless, a lack of direction from Congress should not be an excuse for the Commission to come up with an unworkable rule.
As I explain below, the rule provides illusory comfort that the Commission will have a legal authority to review and, if necessary, challenge a mandatory trading determination made by a Swap Execution Facility (SEF) or Designated Contract Market (DCM). In fact, the only authority that the Commission has is to “rubber stamp” a SEF or DCM’s initial determination.
Sections 40.5 and 40.6 of the Commission’s Regulations Do Not Provide an Appropriate Avenue for a Made Available-to-Trade Determination
I have deep reservations about the process that the Commission is proposing for “making a swap available to trade.”
First, the Commission’s determination under the rule approval process (§ 40.5) or the rule certification process (§ 40.6) is intended to apply to only one particular DCM or SEF that requested such rule approval or submitted such rule certification. However, under this rule, an available-to-trade determination has a far reaching effect. It binds not only the requesting SEF or DCM but the entire market, thus forcing all SEFs and all DCMs to trade a particular swap by using more restrictive methods of execution.
Second, the Part 40 process does not give the Commission any legal authority to object to a SEF or DCM’s made available-to-trade determination. Under the rule approval procedures, the Commission must approve a rule unless such rule is inconsistent with the CEA or the Commission’s regulations.2 Similarly, a new rule subject to stay will become effective, pursuant to its certification, unless the rule is inconsistent with the CEA or the Commission’s regulations.3
How will the Commission be able to point to a provision in the CEA or in the regulations that is inconsistent with one or all subjective factors?
The Commission’s Determinations Must Be Based on Objective Criteria.
In essence, the rule allows a SEF or a DCM to make a made available-to-trade determination based solely on factors it deems relevant, while ignoring other considerations that may be of vital importance to the trading liquidity of a particular contract. The Commission needs to require more than a simple “consideration” of these factors.4
The lack of specific objective criteria for determining trading liquidity introduces uncertainty into the market and makes it unfeasible for the Commission to have any meaningful regulatory oversight over the made available-to-trade determination process.
The Commission’s Factors Are Not Supported by Data
I agree with the commenters who requested that the Commission implement a pilot program or perform an in-depth study of various classes of swaps to determine the appropriate criteria for a made available-to-trade determination.5 A better approach would be for the Commission to review trading data currently submitted to the Commission pursuant to the Swap Data Repository (SDR) rules and after thorough analysis, come up with objective criteria that would define trading liquidity. Instead, the Commission chose to implement a flawed process that does not lead to any substantive analysis of trading liquidity.
The Commission Failed to Establish a Process for Removing Made Available-to-Trade Determinations
Without providing any reasoning, the Commission has decided that only after all SEFs and all DCMs have de-listed a particular swap, will such swap be deemed by the Commission to be no longer available-to-trade.6 This process lacks any logical or legal basis and is the exact opposite of what is required to make the initial available-to-trade determination. The initial made available-to-trade determination provides that, if one SEF or DCM determines a swap to be made available to trade, then such swap is deemed to be made available-to-trade on all SEFs or DCMs.
Again, the Commission neglects to analyze swap transaction data that it receives from SDRs. In my view, if a swap does not have sufficient trading liquidity to be traded in a more restrictive manner on a SEF or DCM, as determined by the Commission’s broader view of market trading data, then such product must be determined by the Commission to be no longer available-to-trade.
Due to the above concerns, I respectfully dissent from the decision of the Commission to approve this final rule for publication in the Federal Register.
1 January 30, 2012.
2 Commission Regulation § 40.5 (b)
3 Commission Regulation § 40.6(c)(3).
4 Commission Regulations §§ 37.10(b), 38.12(b).
5 Tradeweb Markets Comment Letter at 3-5 (Feb. 13, 2012); ISDA/SIFMA Comment Letter at 8-9 (March 8, 2011)
6 Commission Regulations §§ 37.10 (c), 37.10 (d), 38.12(c), 38.12 (d).
Last Updated: May 17, 2013