Swaps-Market Reporting Overstates Risks, CFTC’s Giancarlo Says

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By Richard Hill

The CFTC needs to come up with a new way to talk about the size of the swaps market that doesn’t overstate its risks, Chairman J. Christopher Giancarlo said Oct. 25.

“There’s a lot of concern expressed around clearinghouses,” Giancarlo said at an Exchequer Club luncheon in Washington. Central counterparties, which are often said to be housing hundreds of trillions of dollars worth of risk, “suffer from a worry of big numbers,” he said.

The dollar figures aren’t inaccurate, but they don’t accurately describe the risk at stake, which can be exponentially less, Giancarlo said.

“One of the big problems we have as a marketplace is these big numbers are associated with risk, and that the size of the numbers is somehow supposed to set off alarm bells,” he said. “These numbers get to be ridiculous and are nothing related to what the real risk is.”

As an example, he cited Lehman Brothers, which was said to have $400 billion in swaps exposure during the 2008 financial crisis. Subsequent research, however, found that only about $6 billion was actually at risk.

“If that was known in 2008, we may have gone down a whole other path with what happened with Lehman Brothers,” which went bankrupt and was sold off, the chairman said.

Giancarlo said he’s directed his chief economist, Bruce Tuckman, who did the research on Lehman, to develop “a new, numeric nomenclature” to describe the size of swaps markets on a risk basis.

Bloomberg News reported earlier this month that White House chief economic adviser Gary Cohn sees a major risk developing in clearinghouses because of their lack of transparency and liquid assets.

“It does start to resonate to me to be a new systemic problem in the system,” Cohn, director of the White House’s National Economic Council, reportedly said.

Risks Overblown

Giancarlo said he thinks concerns about the size of clearinghouses and the risk they carry may be overblown.

“I don’t think the clearinghouses are some sort of new global risk-housers,” Giancarlo said. He said the Commodity Futures Trading Commission has good rules in place to oversee them, but that the agency needs to be fully funded at $281.5 million to ensure its rules are followed.

Giancarlo, who was sworn in as permanent chairman in August, said he plans to preside over a transition phase at the CFTC—looking both backwards at improving rules implemented under Dodd Frank, and forward to address topics such as cyberdefense and virtual currency that the law didn’t contemplate. “By focusing so much on Dodd-Frank, we’re looking backwards all the the time,” he said.

To contact the reporter on this story: Richard Hill in Washington at rhill@bna.com

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com

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