Trading, Position Limit Rules Could Be in Jeopardy Under Giancarlo

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By Richard Hill

Elevating J. Christoper Giancarlo to head the CFTC, as expected under the new administration, could threaten rules governing high-speed trading, derivatives trading and commodities speculation.

Giancarlo, a commissioner since June 2014, put out a “white paper” not long after he was sworn in detailing his theories on derivatives regulation. It prominently included a strong critique of swaps trading rules and could serve as a blueprint for actions he could take as chairman.

In an interview with Bloomberg BNA in December 2015, Giancarlo said the Commodity Futures Trading Commission should focus on the health of derivatives markets, rather than implementing years-old reforms called for by the Dodd-Frank Act. “I’d like to see us be far more cognizant and concerned with market health and vibrancy and perhaps a little less focused on Dodd-Frank mandates,” he said.

Position Limits, AT

Proposed rules on position limits and oversight of automated traders also could be in jeopardy with Giancarlo as chairman. Giancarlo was especially critical of the proposal that automated traders—firms that trade only their own money using mega-speed computers—make their proprietary algorithms available to the CFTC.

Giancarlo also has faulted the CFTC’s reproposed rule to impose position limits on 28 physical commodity futures contracts, even though he voted to issue the rule for public input. He said he wanted to see comments on the reproposal before deciding whether to support it.

At the time, he told Bloomberg BNA, that position limits were a “perfect example” of an outdated Dodd-Frank mandate that should be deprioritized. While speculative limits might have been appropriate for an overheated commodities marketplace in 2008, they are “completely ill-purposed” for the reality of today, he said.

SEF Rules

Swaps trading rules, which were instituted under Dodd-Frank, also could be in for a major overhaul if Giancarlo becomes chairman. Although he hasn’t objected to requiring that swaps be traded on an exchange, he has strongly objected to rules that dictate how such exchanges operate. He has argued that swap execution facilities (SEFs) are too limited by only allowing for two forms of execution—an order book system, or a request for quotes.

In his view, the model should accommodate other approaches, such as auction, volume match and voice-broker models. If bilateral trading were still allowed, he told Bloomberg BNA, the requirement that swaps be traded on an exchange would be irrelevant.

Bloomberg BNA is owned by Bloomberg LP, which operates Bloomberg SEF.

Dan Berkovitz, a partner at Wilmer Cutler Pickering Hale and Dorr LLP, Washington, who specializes in swaps and futures law, told Bloomberg BNA that Giancarlo believes the CFTC misinterpreted Dodd-Frank when writing its rules for SEF trading. “I’m pretty sure this will be on the agenda and there’s a substantial possibility it will go in [Giancarlo’s] direction” if he becomes chairman, Berkovitz, who was the CFTC general counsel when the SEF rules were written, said. “I think it’s pretty likely we’re going to see some changes” in SEF rules.

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

To contact the editors responsible for this story: Phyllis Diamond at pdiamond@bna.com; Seth Stern at sstern@bna.com

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