US banks, institutional investors, European regulators and Democratic and Republican commissioners of the Commodity Futures Trading Commission had already pleaded for moderation and delay to the huge shake-up in derivatives markets.
Gary Gensler, chairman of the CFTC, has pressed ahead with the launch of the new system, designed to shift more trading from opaque bilateral deals to new platforms – or “swap execution facilities”. These SEFs are designed to increase price transparency and competition to a clique of large banks that have dominated the arena.
However, SEC officials contacted participants and warned them that SEFs should not be used to trade certain products because they might fall in to the SEC’s jurisdiction and should only be traded on traditional exchanges, according to three people familiar with the situation.
The CFTC and SEC have been engaged in a turf war over derivatives regulation, but it was not clear if the CFTC approved of the SEC’s intervention. That is because the CFTC immediately sent most of its staff home in the US government shutdown this week, while the SEC has enough funds to keep operating for several weeks.
The move by the SEC over the quoting of certain derivatives contracts which they deem to be security-based swaps was seen by brokers as adding to the general sense of confusion around the official start of SEF trading.
The bulk of the swaps market is interest rate contracts, which fall under the remit of the CFTC, the regulator that has written the rules for SEFs, trade reporting and clearing. Derivative contracts that reference asset-backed securities are viewed as occupying a grey area in terms of regulatory oversight, said brokers.
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