CFTC's O'Malia To Oppose Proposal To Regulate Swap Trading Venues

A top U.S. regulator raised concerns Thursday about a proposal to regulate how swaps are traded, saying it could place burdens on the industry.

Scott O'Malia, a Republican commissioner at the Commodity Futures Trading Commission, spoke about the issue at a public hearing Thursday where the CFTC will vote to propose the new rules for swap trading platforms.

The CFTC's proposal would implement a key provision in the Dodd-Frank financial law that seeks to promote pre-trade price transparency for swaps, derivatives often used by companies to mitigate risks such as interest-rate changes. If the agency votes to propose it, it will be issued for public comment. A second vote is needed to implement the rule.

The law requires that standard swap contracts traded between major players such as banks to be executed on trading platforms. The swaps can be traded on a traditional futures exchange like those run by CME Group Inc. (CME). But the law also provides for an alternative kind of platform known as a swap execution facility, or SEF. These platforms are meant to be used by institutional investors to help match buyers and sellers.

Numerous companies that offer swap trading today, from Tradeweb to the interdealer brokerage firm ICAP, are all planning to apply for "SEF" status. Some of these firms offer a "request for quote" trading model that lets a customer request a price with the click of a mouse to get quotes from several dealers. Others use a mix of the computer and the telephone to help broker deals.

Many of the companies have urged the CFTC not to define a SEF too much like a traditional exchange, which has an "open order book" model that publicly lists bids and offers.

O'Malia said he feared the proposal is far too narrow and would force swap execution facilities to operate too much like exchanges. He added that he plans to oppose the draft measure.

"Staff has interpreted the minimal statutory requirements in a manner that entirely strips away the unique characteristics of swaps that have been bandied about the commission for at least 20 years, and requires swaps to trade like futures," he said. "To limit swap trading to a traditional central limit order book-type exchange may be unnecessary to mitigate systemic risk, protect the public interest, and may, in fact, inappropriately burden commerce."

-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; sarah.lynch@dowjones.com

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