CFTC should allow voice trading for Sefs, says Chilton

Final rules on swap execution facilities (Sefs) should allow voice-brokered execution, according to Bart Chilton, commissioner at the Commodity Futures Trading Commission (CFTC).

The issue has been hotly debated since the agency's proposals in January 2011 suggested the new over-the-counter derivatives trading platforms should be electronic only. Speaking at the Risk USA conference in New York earlier this week, Chilton said he expects final Sef rules to be voted on in the next four to five weeks, and argued voice brokerage should be allowed.

"I look to the law to see what we are supposed to do, and it says in the statute regarding Sefs that you have to ensure trading ‘by any means'. So, however swaps are trading now or have traded in the past, it is a means by which they have been trading. Our proposal on Sefs said no voice brokers would be permitted. I supported the proposal because I wanted to get comments, but voice brokers are a means by which people trade and, as such, they should be included," said Chilton.

Speaking after his keynote address, Chilton also intimated that other controversial parts of the proposals will be amended in the final rule – such as the requirement for all quote requests on a Sef to go to at least five counterparties, and that a 15-second delay must be observed in the execution of a swap trade to allow other market participants to offer a better price.

A revised execution delay could remove the need for quote requests to go to a minimum number of counterparties, he suggested – the multiple-to-multiple competition on which the Dodd-Frank Act insists would happen naturally if other participants on a Sef were given a chance to beat the price.

I look to the law to see what we are supposed to do, and it says in the statute regarding Sefs that you have to ensure trading ‘by any means'

"On the 15-second rule, I can't tell you what is going to be in there, because I can't prejudge the rule, but I prefer something that is flexible. The language in the law says the opportunity to trade has to be ‘multiple-to-multiple'. The 15-second rule – or a more accommodating version of the 15-second rule that I hope we come up with – will take care of that multiple-to-multiple requirement," Chilton said.

"For example, if you and I agree a swap at 100 basis points, but someone is willing to buy from me at 101bp, I should be able to go with that guy. And if there is another entity that will sell you that swap at 99bp, then you should be able to go with them if you wish. That takes care of the multiple-to-multiple requirement and I hope this is what we end up with. I think what we included in the proposal was too rigid and inflexible. I can't tell you what the final draft says, but it is not what was in the proposal," he explained.

Chilton also offered assurances that the broad definition of ‘US person' contained in the CFTC's proposed guidance on the cross-border application of Dodd-Frank will be narrowed. The guidance sparked complaints from market participants that entities with only a tenuous connection to the US would be treated as US persons, therefore obliging non-US counterparties that trade with that entity to comply with transaction-level elements of Dodd-Frank.

"The definition of US person will not be the same in the final rule, I believe. We should put out a cross-border rule towards the end of the year in which we state what our definition of US entity is, which I think will be altered to the liking of many. But it would not go into effect until June 2013 – at least that's my proposal," he said.

Chilton also reiterated statements he has made in recent weeks, vowing to appeal the September 28 US district court ruling that struck down the CFTC's position limits rule for 28 physical commodities contracts and their economically equivalent swaps.

Chilton said he believes an appeal will be filed "before the 27th of this month", while the commission simultaneously begins work on a re-proposed position limits rule that takes into account the court's judgement that the CFTC must illustrate the necessity of limits before imposing them. Chilton said the new rule would also include a firmer cost-benefit analysis.