Impact of CFTC swaps reporting delay overstated

US regulator the Commodity Futures Trading Commission (CFTC) has decided on a 30-minute price disclosure delay for swaps trades, although some market participants have questioned whether the increased delay is necessary.

Concerns over the CFTC’s original plan to immediately introduce a 15-minute reporting delay had prompted opposition from buy- and sell-side firms, with critics arguing that more immediate disclosure of trading information would increase market impact, potentially damaging liquidity and making it more difficult to trade in blocks.

However, other observers have questioned whether fears over the trade reporting delay were exaggerated.

Sean Owens, director, fixed income and derivatives at US financial consultancy Woodbine Associates, pointed out that the information disclosed to market participants is only of limited use, since a notional cap limit of US$100 million means that traders can see only that a trade was above the notional limit – but have no idea how little or how much above that limit the trade was.

“The information being disclosed is not going to move the market that much,” he said. “It is hard to read, in the sense that there is no distinction between trades above the notional cap – limiting its usefulness and therefore potential market impact.”

Moreover, as part of the Dodd-Frank Act, the trade reporting rule will be reduced to 15 minutes, as originally planned, after the first year. The CFTC has also stated that rules defining the size of block trades will be redrafted in 2012. Yet Owens considers it unlikely that the CFTC will make a major change to the level of information being disclosed. “Unless they make a dramatic, unexpected raise to the notional market cap for trade information disclosure, then I don’t see much cause for concern,” he said.

Meanwhile, according to the International Swaps and Derivatives Association (ISDA), the notional amount of OTC derivatives outstanding increased 18% from US$416.7 trillion at the end of 2010 to US$491.3 trillion at 30 June 2011 – an increase that reverses the cumulative 12% decline seen from 2007-10.

The figures are part of an ISDA analysis of the OTC derivatives market, in which it noted that a large rise in interest rate swaps (IRS) notional outstanding during the first half of 2011 led to growth in the level of uncleared IRS by US$28.2 trillion to US$143.9 trillion, the first increase in this figure since before 2007. Cleared IRS increased to US$297.8 trillion, representing 50.8% of all IRS.

The Dodd-Frank Act aims to move as large a proportion of OTC derivatives as possible onto new, centrally cleared swap execution facilities, in an effort to reduce systemic risk in the OTC markets. The Act also contains other measures, such as a ban on prop-trading, directed at shoring up market integrity and stability.