This past Sunday, I flew to New York for Monday’s SEFCON IV, the fourth annual get-together of swap execution facility (SEF) participants and the regulators who oversee this market. It was a whirlwind trip, literally and figuratively. I fought through pounding storms and tornadoes in order to get to the conference and, once I settled into the venue, I was reminded that the SEF regulatory environment is still, three years after the passage of Dodd-Frank, subject to a few weather disruptions of its own.
In between panels on technology, regulation and market structure, John Lothian News interviewed about a dozen SEF operators, service providers and regulators, and what we found was that, while much progress has been made in the three years since SEFs were created by the Dodd-Frank Act, and while SEFs are officially “open for business” (the theme of this year’s conference), the atmosphere is still a bit unsettled – stormy, if you will.
I use the term “stormy” because that word really set the tone and shaped my perspective going into the conference, for, just as I was leaving for the airport, a violent storm ripped through the Midwest. Though I grumbled and cursed when I heard my plane would be delayed by a couple hours, a phone conversation with my mother quieted my complaints and turned them into a counting of my blessings. She told me that a massive tornado that had just ripped through the area where I grew up, and where most of my family still lives, just across the river from Peoria, IL.
Within an hour, the pictures and stories of the devastation began hitting the airwaves. Luckily for our family, of the dozens of family members living in the area, including several in Washington, the town hardest hit of all, the only casualty affecting our family is a section of roof on the home of one of my cousins. Everyone, however, knows at least one person who suffered total loss. My sister works with the wife of the lone fatality in Washington. Two of my mother’s friends lost their homes. My cousin who lost the shingles was three houses away from one that got ripped apart. The area has a long, tough road ahead but, in terms of human life, the damage could have been much, much worse.
Back to SEFCON, and the storms brewing in New York Monday. The winds kicked up early, as the opening remarks from event chairman Chris Ferreri seemed to clash with those of CFTC Chairman Gary Gensler. Ferreri reminded us just how far these rules had come since the first SEFCON in 2010. Dodd-Frank defined a SEF in about 50 words; the final set of rules published this year totaled 511 pages, with about 1250 footnotes. The concern in the industry is that these pages contain numerous sources of varying interpretation, in other words, potential loopholes. Each time the commission staff issues guidance and other advisory letters, the result has been either more confusion, or an interpretation that amounts to an eleventh-hour material change to the structure of SEFs.
Finally, Ferreri reminded the audience that certain elements, such as the famous “Footnote 88,” which expanded the scope of the registration requirement, has had the perverse effect of steering traffic away from the transparency of SEFs.
In Mr. Gensler’s opening remarks, he painted a different picture, suggesting that the rules are clear in their intent, are working as planned, and that recent advisories and guidance are simply a means of “reminding SEFs of their responsibilities” and that “not all SEFs are currently playing by the rules.”
This is what we call an “outtrade.” This is not a group of firms trying to circumvent clear-cut laws; this is a group that is trying to compete in an arena where the goal posts are in constant flux. These are firms that have spent oodles of their own money to hold together a structure that has had tornadoes swirling around it for three years.
I understand Gensler’s eagerness in getting these rules done. He is on his way out, and he wishes to secure his legacy – the man who led the charge of swaps transparency. The problem is, when you stitch something together with duct tape and baling wire, there is a limit to how long it will hold.
Speaking of duct tape and baling wire, if you have any extra lying around, please send them to my family in downstate Illinois. I know of at least one roof that needs fixing. Others may need it to hold their lives together.