BST North America 2015: Regulators Seeking Deeper Markets Transparency as Non-Banks Rise

The Commodity Futures Trading Commission (CFTC), represented in the discussion by Commission Sharon Bowen's chief counsel, Petal Walker, has focused recently on four different areas.

"On the execution side, we've had a lot of participants asking about making swap execution facilities (SEFs) more workable, with greater anonymity and ensuring they're operationally ready when new products are made available to trade. In the clearing space, we're hearing a lot about clearinghouses, increasing transparency and making sure they're properly risk-managed. The unclear margin space for over-the-counter (OTC) instruments, requiring variation and initial margin, is a third and very messy area. And the buy side, specifically, has focused on CPO/CTA issues, changes in exemptions for certain investors, cross-border definitions and registration."

Bradley Ziff, formerly of Misys and ISDA, and now a consultant, noted that many of these current concerns are "about yesterday and tomorrow, low-hanging compliance fruit," and instead suggested that longer-term issues—systemic importance, market and credit risk, and non-banks breaking into market-making as well as investing in alternatives like real estate, trade finance and peer-to-peer (P2P) lending—should be getting more attention.

"The baseline for measuring opacity versus transparency in markets has always had a very sell-side bias," he said. "Structurally, the market has always looked at what are the top banks; those could easily be measured with a look at high concentration among a small number of players. The issues now fail that test for a couple reasons: There is no central data that will provide the level of transparency into the markets that are involved; it's an extensive list now. I think most people out there, whether dipping their toe in or becoming drenched, don't look at it as exotic or hype so much as 'here is where our investors are looking for return in a low-interest environment.' That trend started three years ago and has found itself in the wide growth of private equity, increased fees there, and the enormous assets moving around from mutual funds or long-only investments and into alternatives."

Defining Consistency
The panel, which was moderated by Guggenheim Securities CCO Joseph Lodato, also took on issues of regulatory arbitrage and jurisdictional consistency as the buy side's activities evolve.

"I'm not sure a lot of people believe that the shift of risk and new risk takers is a problem," Ziff continued. "I do believe that the diversification of risk is something regulators want, pushing capital requirements on the banks and effectively saying you're taking less risk, dumping proprietary trading desks and certain illiquid products, adding balance sheet constraints and levying substantial fines. Clearly some of that risk was going to dissipate, but a lot of it would disperse somewhere else, and it has."

Walker noted, in addition, that some arbitrage is inevitable, and perhaps even preferrable, as regulators take a careful approach.

"At the CFTC we're constantly asked to make a decision about consistency with other global regulators and US agencies, and the question is always, 'At what standard?' We stepped out in front to respond to the Group of 20 nations' (G20's) post-crisis requirements more than most regulators, and now we have to ask what are we giving up to achieve consistency? As a regulator you have to be measured about making sure you don't cede good regulation for consistency's sake."

Diversification is a logical outgrowth of the current scheme with banks pulling back and have others entering, she added.

"When buy-side firms start to be more like market-makers, things change. More tiny players is better, but if we find it's changed in other ways, we need more data than we had before. It's not a problem of a shift, but it's still a question mark. We shouldn't always regulate first—facing the agency as a lawyer for several years, sometimes the regulator's contribution isn't value added—but right now we need the lay of the land."

More from Buy-Side Technology North America in the coming days.