reforms, far faster than any other regulator in the United States or abroad. In particular, its implementation of the swaps clearing mandate was highly effective, significantly increasing the volume of transactions cleared through clearinghouses.14 Chairman Gensler and his fellow CFTC commissioners and staff deserve enormous credit for this remarkable achievement.
The CFTC also moved quickly to cause swaps transactions to be reported to swaps data repositories, referred to as SDRs.15 Yet despite these sound steps, the establishment of global standards for categorizing swaps trades was assigned to intergovernmental bureaucracies, rather than to bodies made up of swaps counterparties themselves. That was a misstep. The process of developing standards took on a life of its own. While important work was done, a decade after the financial crisis SDRs still could not provide regulators with a complete and accurate picture of the true risk of failure of a large swaps dealer in global markets.
The CFTC's least successful implementation of swaps reform, in my view, related to the trading and execution of swaps. In Dodd–Frank, Congress laid out a fairly simple and flexible framework for trading swaps. It required certain swaps to trade on regulated platforms called “swaps execution facilities” (SEFs). Congress defined these SEFs as trading systems or platforms “in which multiple participants (can) execute or trade swaps by accepting bids and offers made by other participants that are open to multiple participants in the facility or system, through any means of interstate commerce.” The key phrase is “any means of interstate commerce,” a phrase with a rich constitutional history, which US federal courts have interpreted to cover almost an unlimited range of commercial and technological enterprise, including those conducted over the telephone.16
As I would explain at length in my upcoming white paper, Congress had expressly permitted SEFs to offer various flexible execution methods for swaps execution. Unfortunately, in carrying out this mandate, the CFTC—improperly in my view—attempted to re-engineer swaps market structure by limiting methods of transacting. It grafted onto its SEF rules a number of market practices borrowed from exchange-traded futures markets. That was the wrong model and resulted in an overly complex and highly prescriptive contraption that was not only bad policy but inconsistent with the language of the law.
In my speech, I intended to say that Congress got much of Title VII of Dodd–Frank right. It had laid out a straightforward and flexible swaps trading regulatory framework well suited to the episodic nature of swaps liquidity and swaps market dynamics. I would also say that, in my view, the CFTC's implementation of the swaps trading rules missed the congressional mark. I planned to explain that over the past two decades the swaps market had grown organically into a global market serving important commercial needs and it needed a set of rules that worked for its unique niche. The speech would announce that I would be issuing a white paper analyzing the mismatch between the CFTC's swaps regulatory framework and the inherent dynamics of global swaps markets. I'd also be describing the adverse consequences that had already resulted.17 The paper would propose a comprehensive, better-suited approach to regulating swaps trading.18
Now, as I turned back south onto Connecticut Avenue and headed for Dupont Circle, I wondered: Was I being denied a waiver to speak at SEFCON V because of my likely criticism of the CFTC and, by implication, the Obama White House? Was I being denied the right to speak, not because of where I was speaking, but because of what I might say?
If so, the denial was wrong. I had a right to speak that the White House should not have denied. I had every right to call it as I saw it. And, after 14 years in the swaps industry and 16 years practicing business and finance law in New York and London, I knew what I was talking about.
Lemons into Lemonade
Cutting across Dupont Circle past its grand marble fountain, I reached a decision. Okay, I could not give a speech at SEFCON. That did not mean I could not give a speech. The First Amendment was still intact. I would give the speech, just not at SEFCON.
I ducked into a deli and grabbed a sandwich and a lemonade. I then turned south onto New Hampshire Avenue and walked 300 more yards to 21st Street and the CFTC offices. I greeted the security detail, tapped my electronic card to open the double turnstiles, and then rode the elevator back to the ninth-floor office suite.
Back at my desk, I called the staff together, unwrapped my sandwich, and laid out my plan.
“I'm going to give the speech … just not at SEFCON.
“We'll explain right up front that I intended to give it at the conference, but that the White House denied a waiver to speak. We'll release the speech to the press and post it on the CFTC website on the morning of the conference.
And so we got to work. We revised the speech to address a lay audience and set it to be released the evening before the conference. We also provided an advance copy to a business reporter, Katy Burne of the Journal, whom I knew from my years in the industry. I knew that she would cover the substance of my remarks from a business perspective, not from the usual political winners-and-losers viewpoint of the inside-the-beltway media. In the middle of these preparations, the Financial Times informed us that they were about to publish an op-ed that I had submitted several weeks before touching on some of the same issues.
With our plan in place, I headed up to Philadelphia for college parents' weekend with our elder son and then to our home in New Jersey. On Monday, I crossed the Hudson River by ferry to the CFTC's office on Broadway in downtown Manhattan. I rode the elevator to the 19th floor and greeted the helpful receptionist. Fishing out my keys, I unlocked the door to a simple but comfortable office, set down my briefcase, sipped a coffee and logged onto a computer. Scrolling through the morning's emails, briefings, and press clippings I was delighted to see that the FT had published my piece. Here are a few key passages:
“In 2009, world leaders in Pittsburgh pledged to better regulate emergent global swaps markets through the co-ordinated efforts of national and supranational regulators.
“Five years later, global co-ordination is not going well. Instead of collaborating with foreign regulators, the US Commodity Futures Trading Commission (CFTC) developed swaps ‘transaction level’ rules based on the wrong template of the structure of the US futures markets…
“To maintain healthy global markets, we must regulate swaps execution and clearing in a well-crafted and harmonious manner across jurisdictions.”19
Later that afternoon, I got on the telephone with Katy Burne of the The Wall Street Journal and answered several questions she had about my speech. She also asked me about the White House's refusal of the waiver. I told her that I declined to question the White House's decision, but that she was free to make her own inquiries.
The following evening as the organizers of SEFCON V were setting up their podium and exhibition hall at the Grand Hyatt Hotel on 42nd Street and Lexington Avenue, Katy's story ran. She nailed it.
“A top U.S. regulator said new rules governing the multitrillion-dollar derivatives markets are sending swaps trading overseas, threatening Wall Street jobs and potentially destabilizing financial markets.
“In remarks he intended to deliver at an industry conference this week, J. Christopher Giancarlo, the lone Republican among four commissioners at
