Shakespeare, Space Watches & A Sneak Preview of Rules at The GMAC CFTC Meeting

In what would normally be a fairly dry and serious four hour public hearing, the Global Markets Advisory Committee meeting held yesterday at the CFTC  was full of laughs, multiple Shakespearean quotes and a general feeling of “we are the world” in its approach towards the OTC derivative reform.  Chaired by Commissioner Sommers, the GMAC is the Who’s Who of executives from major Swap Dealers, exchanges, clearing firms and, of course, Reval, representing the end-users.

Chairman Gensler was present and reiterated the importance of global coordination, welcoming Patrick Pearson from the European Commission and Chikahisa Sumi from the Japanese Financial Supervisory Agency.  The laughs started with Commissioner Chilton showing off his Omega watch, the same model used by Neil Armstrong on the moon. He made the point that the world is small when viewed from that perspective—a metaphor for how small the electronic trading world is.  Mr. Pearson then quipped that he didn’t have an expensive watch analogy but felt he needed to educate the Americans on the English language and Shakespeare in a very clever and interesting presentation on how the Dodd-Frank bill and the recently issued draft on OTC reform by the EC are, at the end of the day, very similar despite their different approaches.  After those two speeches, I was not expecting much fun from Sumi-san, but he jumped right in with a quip on how he didn’t read Dodd-Frank on the plane as Mr. Pearson had but watched Die Hard 4.  Maybe you had to be there, but go to  to view the Webcast.

Perhaps it was gallows humor as the room realized the dramatic impacts and the hard road ahead to prepare and implement the reform.  Going into the session, I did see clear differences between the EC proposal and Dodd-Frank, but after listening to Mr. Pearson, it dawned on me that the product has to be the same for this to work, and the EC proposal has many “rules” outlined in it that have yet to be defined by the regulators in the U.S.  I asked how the CFTC will take into consideration these draft rules, and the response was that the Chairman has publicly stated the goal to make them converge where possible.

For the end-user community, I read this to mean that the information thresholds and clearing thresholds prescribed by the EC would be used to capture Major Swap Participants.  This was a key difference between the two approaches, and the commissions can easily write this rule in to mirror the EC’s approach.  As much as I dislike the approach, as the thresholds are not known and it is a bright-line rule vs. a principle-based approach that could catch and keep a company in the MSP category, should the end-user one year tip the threshold scale.  It’s also a proactive burden on end-users to manage the reporting of this as no end-user wants to even breach the information threshold and make its activities that public.

The EC and Japan essentially have until the end of 2012 to come up with their final rules, a full year after watching the U.S. go through its exercise, which is mandated by law to be mostly completed by July 2011.  The meeting yesterday was a very clear sign that, despite their different timelines for going “live,” the major members of the G20 are working more closely together than assumed.