A version of this blog post originally appeared in FOW.
As additional final rules are promulgated throughout the globe, an emerging trend for financial market regulators is to transfer, allocate and defer significant implementation discretion to financial market utilities and other relevant transaction infrastructures.
For instance, on May 16, 2013, in a landmark ruling decided in a public forum, the U.S. Commodities Futures Trading Commission (CFTC) voted, by a margin of 3-2, to implement, among other rules, the final “made available to trade” (MAT) rule.
The MAT rule fundamentally changes the swaps market by instituting the method and manner by which specific products required to be executed and cleared are identified.
This changes the swaps market because the CFTC, in its final rule, has effectively transferred, allocated and deferred significant power to swap execution facilities (SEFs) and designated contract markets (DCMs), (collectively, “facilities”) to unilaterally bind the entire swaps market to mandatory participation.
This binding effect is accomplished through a self-certification and designation process, which is based exclusively on independent factors deemed relevant by the facilities. Once the determination is made that a swap qualifies as MAT, all swap transactions must be executed on a facility, unless a narrowly construed exemption applies.
Concurrent with the final rule, the CFTC has effectively relinquished most, and arguably all, of its authority to oversee the facilities’ independent determinations. This is because the facilities’ self-certification to inform market participants of MAT swaps is deemed enforceable in all instances, unless inconsistent with the Commodity Exchange Act (CEA) or a preexisting regulation.
This strict standard essentially eliminates the CFTC’s ability to filter, restrict, or otherwise prevent abuses by facilities that attempt to impose marginally liquid swaps onto the market, or alternatively, pursue a strategy of over-inclusivity.
Beyond an express requirement that each facility must have order book capability, facilities have broad discretion to dictate the execution format of MAT swaps. This point is significant in that it dispels any expectation that facilities must necessarily have an advanced electronic processing capability. Also, voice brokerage remains a viable execution method.
Critics of the final MAT rule might contend that the CFTC has an obligation to maintain oversight authority over any facility-imposed mandatory trading determination. However it cannot because the final rule has effectively relinquished any meaningful discretionary oversight beyond a facility determination that is inconsistent with the CEA, or in contravention to a relevant CFTC regulation.
This simply means that, at least from a MAT determination perspective, independent innovation by facilities will actually and substantively influence the course of performance for the global swaps marketplace. This is the case because it is yet to be determined whether swap transactions will migrate to other jurisdictions with favorable treatment.
During the open forum, there was significant debate concerning ancillary issues such as the thresholds that would determine large notional value swap transactions, also commonly known as although marginally distinct from block trades. Although contentious, the block trade final rule at least provides for a well-articulated reservation of authority.
This all simply means that unlike the MAT rule, where any authority is illusory, the CFTC may revisit, reanalyze and/or modify the final “block” rule to align any abuses and to ensure a proper market synthesis.