US regulator hits out at derivatives reform deadline

An upcoming deadline for a major derivatives market reform is “unrealistic” and authorities should consider whether the asset managers and banks most affected are ready, a top US regulator has warned.

Christopher Giancarlo, the sole Republican of the three commissioners at the Commodity Futures Trading Commission, on Friday called on counterparts to prevent new rules due on March 1 from disrupting the global swaps market.

His remarks, in a speech in London, came as markets seek more indications of the direction of regulation policy under president-elect Donald Trump.

Mr Giancarlo’s comments were in a personal capacity but he is expected to, at least temporarily, become head of the CFTC, the US derivatives markets regulator, next year. He has also been tipped to hold the role full-time.

Speaking at a conference held by industry association ISDA, Mr Giancarlo said he was concerned about the impact of reforms damaging market liquidity.

They include tougher rules on swaps that are not processed through clearing houses, part of a package of reforms aimed at bolstering global markets after the financial crisis.

From the start of March users such as financial services companies and asset managers will have to supply more money up front or margin to support their uncleared trades.

Mr Giancarlo criticised regulators for introducing the margin changes “regardless of the effect on the health of the market and market participants”. Industry concerns such as updating legal contracts would “pose a massive challenge”, Mr Giancarlo added.

Ciaran O’Flynn, Emea head of bank resource management at Morgan Stanley, agreed, telling attendees “it is hard to see past the next four or five months“ because banks needed to exchange “tens of thousands of documents” with clients.

Mr Giancarlo also hit out at broader swaps trading regulations, blaming US rules in the 2010 Dodd-Frank legislation for causing “fragmentation” in the global market.

Mr Trump has called for a repeal of Dodd-Frank, without providing specific details.

“The time has come for the CFTC to revisit its flawed swaps trading rules to better align them to market dynamics, allow US swap intermediaries to fairly compete in world markets,” said Mr Giancarlo.

He added that it was “disconcerting” that bank regulators were pressing ahead with tougher capital rules. “The Financial Stability Oversight Council has been particularly delinquent in its duty to measure the cumulative effect of dozens of new federal and overseas regulations on trading liquidity in US financial markets,” he said.

FSOC is a group of US regulators brought into being by the Dodd-Frank regulation. Mr Giancarlo also called on US regulators to follow UK counterparts in encouraging the development of new technology for financial markets, such as blockchain.