CFTC White Paper Highlights Opportunities to Improve Swaps Regulation

Commodity Futures Trading Commission Chairman Christopher Giancarlo today released a white paper highlighting plans for improving the regulation of the swaps and derivatives markets. The paper provided an overview of five key areas of swaps reform — including central counterparties, reporting rules, execution rules, dealer capital and the end user exception — and recommends further changes. In particular, it noted that the current risk-based capital framework — and the inability of banks to use regulator-approved internal models — has contributed to an unintentional bias against swaps.

“The particular problems of standardized, regulatory capital models arise from inappropriately relying on swap notional amount to measure risk; from not sufficiently recognizing offsetting swap positions between pairs of counterparties; and from not sufficiently acknowledging the risk-mitigation of posted margin,” the report said. To remedy this, Giancarlo recommended that banks be permitted to use internal models, which would correct the unintended consequences of relying on derivatives notional amounts in the setting of regulatory capital requirements.

Of the approximately 100 swap dealers registered with the CFTC, roughly 50 percent are banks and an additional 30 percent are subsidiaries of bank holding companies. ABA — which has long advocated for risk-based bank regulatory capital requirements — offered support for the CFTC’s recommendations. For more information, contact ABA’s Ananda Radhakrishnan.