Forum for Innovation

Due to Hurrican Sandy, we were unable to hold our third quarter Quarterly Economic Roundtable. Below are the Prepared Remarks of J. Christopher Giancarlo, Executive Vice President, GFI Group Inc. as he would have delivered to National Chamber Foundation on October 31, 2012.

GFI Group is delighted to continue its support of The National Chamber Foundation’s quarterly economic briefings.  The goal is to assess the impact of public policy on US business and the global economy.

GFI Group is an American company, headquartered in New York City with its shares traded on the NY Stock Exchange.  GFI employs close to 2000 people in over a dozen offices in most of the world’s major financial centers. 

Today and every business day, GFI employees are hard at work around the globe executing billions of dollars in transactions across the range of foreign exchange, credit, equity, commodity and energy instruments.  GFI is a wholesale broker, sometimes called an “inter‑dealer” broker.  The roots of the industry go back over a century in the world’s major financial centers.  GFI assists institutional clients in transacting exchange-listed products and also operates exchanges for things that don’t trade on traditional exchanges – instruments that are, instead, traded “over the counter” such as swaps and other derivatives.

Twenty-seven months ago, Congress passed the Dodd Frank Act, including Title VII that requires, to the extent possible, that swaps transactions be cleared, reported and executed on exchanges or on “swap execution facilities” or “SEFs”. The SEC and CFTC are still at work on detailed SEF regulations that will impact the entire process of trading swaps and futures in the United States. Getting those rules right will impact not just the large banks and swap dealers that make markets in derivatives, but also the American businesses and end users that use the products to lessen their balance sheet risk, manage capital for growth and investment in US jobs. Those rules will affect not just the insular world of Wall Street, but economic conditions on Main Street.

GFI Group stands for a swaps regulatory regime that improves regulatory transparency, promotes competition and increases market participant access.  The industry has been vocal in support of the clearing, execution and reporting mandates of Dodd Frank through dozens of public writings and formal Congressional and regulatory testimony.

Yet, decades of experience in global financial markets leads to concern that certain currently-proposed SEC and CFTC rules are overly proscriptive, may harm market liquidity, increase trading costs and, worse, may drive trading in some swaps products offshore. This result would negatively impact US capital formation.

It is estimated that in the past four years trading in both exchange-traded and over-the-counter equity and fixed income derivatives has declined approximately by between thirty to forty-five (-30 to -45%) percent.  With futures and swaps markets trading at a cyclical low, opportunities are reduced for hedging risk.  It is not surprising, then, that US lending and investment are similarly reduced, as seen in the pared extension of credit by the largest American banks and sharply lower trading volumes on US stock exchanges. With derivatives trading curtailed, is it any wonder that US economic activity remains weak and jobs are still being lost four years after the financial crisis?

Despite the popular revulsion at Wall Street, America needs healthy financial markets, including sound, transparent and, indeed, liquid swaps markets.  Yet, instead of furthering the recovery of US swaps markets, US regulators are hindering it.  The delay is causing market participants to move to futures and other financial products and markets to avoid swaps regulatory uncertainty.  While the SEC has been slower to act under Dodd Frank, the CFTC is attempting to restructure much of the swaps and futures markets and the roles, risks and rewards of their participants.  The CFTC has imposed margin calculation rules that favor futures over swaps without regard to inherent economic characteristics or drawn from thorough cost benefit analysis. The CFTC has issued a stream of highly prescriptive, overly complex and critically flawed rule proposals under the truncheon of “pre-trade” price transparency, a standard that is a mere rule of construction under Dodd Frank. Several of these proposals impose practices that are incompatible with the efficient trading of swaps in global markets.  They were put forth without full consideration of the harm they will cause – and have caused - to market liquidity, trading and clearing.  The result is that full implementation of Dodd Frank will take many more months, if not years, while US capital markets remain in confusion holding back US economic recovery. 

Nowhere is the impact of CFTC’s over-reaching rule proposals more troubling than globally, where US trading firms are being shunned by foreign counterparties that seek to avoid having to register with the CFTC as swaps dealers.  Last week, Singapore's DBS Group and Sweden's Nordea Bank were the first major institutions to declare publicly that they will not register with US regulators to trade swaps.  Many more trading firms have said so privately and have stopped trading with US persons. The CFTC should revoke its previously issued "interpretative guidance" and, instead, work in cooperation with overseas regulators on a less overarching framework that does not balkanize global trading markets.

Instead, US financial market regulators should properly implement the key reforms of the Dodd-Frank Act - central clearing, regulated execution and enhanced transparency - without overreach and complication.  They must turn away from attempts to reengineer swaps markets with a series of one-size-fits-all rules and, instead, turn to a flexible, principles-based approach that respects the importance of these markets for US economic recovery.  Regulators must not pick winners and losers or favor certain financial products over others, but should instead work to enhance the depth and vibrancy of US capital markets and foster competition and innovation. Thus will the US derivatives markets stand on a sounder footing with greater transparency enabling investors to better manage risk and lead America back to prosperity.

GFI is pleased to support the National Chamber Foundation in ensuring that all public policy - whether related to the US swaps markets or in any other way related to US business activity - is well examined for its impact on US economic growth, market vibrancy and, most critically, job creation.