"To ensure greater transparency in the security-based swaps market and reduce systemic risk, the Dodd-Frank Act sought to move the trading of security-based swaps onto regulated trading markets.
As such, Dodd-Frank requires security-based swap transactions that are required to be cleared through a clearing agency to be executed on an exchange or on a new trading system called a security-based swap execution facility. The Dodd-Frank Act, however, states that the transaction need not be executed on a security-based SEF or exchange if no security-based SEF or exchange makes the security-based swap "available to trade.""
A better way to say this of course would have been: A cleared swap is only required to be traded over an exchange or SEF if such an exchange or SEF makes it available for trading; there is no trading requirement unless the aforementioned occurs." But that would presume the absence of industry-regulator lawyering and its resulting crazy talk. Don't be fooled though; the resulting language was selected very carefully, fought and picked over, and was very purposeful and is aimed at giving political cover to both the industry and its politician overseers, as it relies on the fact that very few citizens, journalists included, read entire passages of voluminous and jargon-thick legislation. Stating first a requirement, and later stating an exception that completely weakens, and in this case, obliterates, the requirement, is a time-honored strategy of regulating industry, as it allows for the appearance of vigorous oversight, while letting the industry involved get its way. It's hoodwinked most of the press, that's for sure.The Times and the Journal showed yesterday they continue to wrongly believe swaps "must" be, or are "required" to be, traded over an exchange or SEF. Bloomberg reporters in their coverage yesterday weirdly focused on what they confusingly described as the "small" number of firms participating in the swaps markets involved, when that amount is likely to be in the hundreds, if not thousands, as it includes banks, hedge funds, insurance companies, pension funds, etc., across the globe. Of course, accurate records are tough to come by in this labyrinthine marketplace. (And note that if none of these platforms make swaps available for trading - and if the several big banks that control these markets don't want them to, they won't - few swaps customer counterparties will show up for obvious reasons.)
Also, what one Reuters reporter just as confusingly referred to yesterday as "a narrow slice" of the derivatives market: the Bank of International Settlements (BIS) reminds us is a $32.7 trillion market, in the form of credit default swaps, and another of those little bits, equity swaps, is a $6.6 trillion sector, in aggregate. We can presume our Reuters reporter meant "narrow slice" in relative terms, but with the gargantuan albeit aggregate (some trades cancel other trades out) numbers involved, this was at the very least a poor choice of words in describing the size of the market, as it could lead one to believe said market is small. Alas, there's no way of telling given the lack of numbers in the story.
Anyway, all the deep and relevant contextual background can be found in our old post here.
