Swap Reform's Dancing Shark

Tabb's Fixed Income event, traditionally held towards the end of January, is always a good way to set the table for the year and get into the swing of things after a few quiet weeks in the beginning of the month. It usually produces a couple of interesting debates, and in past years has even featured an unexpected, colorful argument or two on stage.

2015's iteration was probably most notable for a sharp contrast in tone between a panel of senior swaps market participants, and the keynote from J. Christopher Giancarlo—one of the CFTC's new wave of commissioners—that directly followed it.

The best metaphor I can come up with to describe their cognitive dissonance would, quite naturally, be the dancing sharks that stole the show during Katy Perry's kitsch-filled halftime performance last Sunday.

Left Shark and Right Shark—as they're now colloquially known—were meant to be doing the same dance. Like the CFTC and the industry it regulates, they're two characters in a huge production, working in tandem. But one shark clearly studied the moves and put in an almost mechanical level of execution, whereas the other, well, was really into doing his own thing.

The effect was hilarious—I liked the giant bobbing beachballs, personally—and in the days after, it's the laissez faire shark that's getting most of the internet's attention. After all, he stood out. And for a second, we even thought he was Snoop Dogg.

Whoever is willing to rock the boat, and put in the time to produce a document too long for most people to read the entire way through—say, in Giancarlo's case, 88 pages worth—will gain an outsized influence in the process the commission designs to "tweak" the current rules in place for swaps trading.

Reaching for Influence
When new regulators come on board, they often take a similar approach: stand out, make a splash, shake things up a little bit.

With a good deal of turnover at the CFTC in the last year or so, there is even more incentive to do so. Whoever is willing to rock the boat, and put in the time to produce a document too long for most people to read the entire way through—say, in Giancarlo's case, 88 pages worth—will gain an outsized influence in the process the commission designs to "tweak" the current rules in place for swaps trading.

Of course, in the case of Giancarlo and his missive, "tweak" can be read as "rubbish entirely and start over."

Some of his reasoning was well-received. In particular, his point that constraining the request for quotation (RFQ) process and requiring execution be "all-to-all" will hinder future attempts at using new technology to advance the market forward has merit. He also pointed out the conflicted logic inherent in regulators fretting over high-frequency trading on one hand, and then designing an execution environment for swaps that all but invites HFT on the other.

Laundry List
And yet, those items were only two on a laundry list of complaints about the current regime. And given the panel that came directly before Giancarlo's speech, it's hard to imagine what his newly public hand-wringing will come to.

When representatives of Vanguard, Bloomberg, UBS, and SwapClear all put on a brave face and explain how they've collectively figured out a way to cope with Title VII, swap data repositories, portfolio compression and other matters related to the new rules such as they are, it tells you that four years of toiling by the CFTC's old guard wasn't simply for naught.

The industry, in others words, seems to have moved on—accepting the imperfections, fitfully slow pace, and at times questionable Congressional intent inherent in the process, with a preference for making subtle adjustments at this point rather than blowing the whole thing up. 

Giancarlo won't be the last to try this strategic tack, and the effort he's put in could well win him some leverage as the reform process moves on to a new stage. Indeed, his previous work at GFI and elsewhere suggests he knows what he's doing.

But for any newcomer looking to make his or her mark on the regulatory landscape, you have to realize you're part of a much bigger show. And in the swaps world—just as when Missy Elliott made her entrance on Sunday—the past is always there to put you in your place a little bit.

And Finally, Let's Make a Deal
Monday evening this week saw one of the largest deals in buy-side technology in years, with the announcement of SS&C buying up Advent. We'll be producing more coverage of the deal in the coming days and in the March issue of Waters. It certainly has elicited some colorful opinion.

For now though, our magazine's editor-in-chief, Victor Anderson, has a really good comment piece with his thoughts on what this means for the space and the perils of a potential new era of vendor consolidation. Seriously worth a read.