CFTC’s Giancarlo Unveils Alternative Measure of Swaps Market

The prevailing “notional amounts” method of estimating the size of the global swaps market is distorting the market and public policy, Commodity Futures Trading Commission Chairman Christopher Giancarlo said today. “Sizing the global swaps markets in hundreds of trillions of dollars has done nothing to bring clarity to newspaper accounts, policy discussions in Congress, or regulatory policy setting in the decade since the financial crisis,” he said at an industry event in New York. “Rather, it more often confuses the issue and hinders dispassionate consideration and sound policy setting.”

Giancarlo unveiled a new approach developed by the CFTC’s chief economist and members of his team. This approach, called “entity-netted notional amounts,” or ENNs, nets longs and shorts between swap counterparties, thus “captur[ing] the market risk transfer in [interest rate swap] markets much more accurately than notional amounts,” Giancarlo said. Whereas the notional amount of swaps among U.S. reporting entities in December 2017 was an eye-popping $127 trillion, under the ENN approach, the amount of swaps nets to just $15 trillion — a size comparable to the treasury, corporate bond and mortgage markets and “more normalized and intelligible as part of the U.S. economy,” Giancarlo explained.

A more rational measurement of the swaps market is part of a broader regulatory reform of the swaps market that the CFTC envisions, he added. Four years after the implementation of Dodd-Frank Act-mandated swaps reforms, the CFTC plans to address outstanding implementation challenges. “The goal will be enhancement of derivatives markets — their resilience, transparency, soundness, diversity and vibrancy,” Giancarlo said. “And, of course, a first step in swaps Reg Reform 2.0 is to introduce a more accurate measure of swaps market size.”

Since banks are both end users of swaps to hedge their own risks and providers to assist their customers with risk management, the American Bankers Association is following the matter closely. For more information, contact ABA’s Ananda Radhakrishnan.