In a June 2nd speech to the National Association of Corporate Treasurers, CFTC Chairman Gary Gensler summarized how transparency fits into the "life of a trade" (And for those of you who have sat through one of our Dodd-Frank training sessions, this will really resonate!)
Here is our summary of his summary:
|PHASE OF TRADE||HOW DFA ATTEMPTS TO BRING TRANSPARENCY TO THAT PHASE|
A counterparty will be able to use a swap execution facility to find the best possible pricing on cleared, standardized swaps.
A counterparty will be able to compare the price that it paid for a standardized swap with what others paid for the same swap. Then, on a going forward basis, it can analyze the effectiveness of its trading program (e.g., hedging program) and adjust that program as necessary.
Over the life of a swap, a counterparty will know the actual price of a cleared swap and the mid-market price of a non-cleared swap. As a result, counterparties will have access to relative price information regarding their positions throughout the life of a swap (i.e., from clearing through termination of the swap).
Furthermore, regulators will be able to more effectively monitor the swaps markets for manipulative behavior, since ALL trades (both cleared and non-cleared) will be reported to swap data repositories.
And, just in case you doubt us, here are the actual comments from Chairman Gensler:
The Dodd-Frank Act brings transparency in each of the three phases of a transaction.
First, it brings transparency to the time immediately before the transaction is completed, which is called pre-trade transparency. This is done by requiring standardized swaps – those that are cleared, made available for trading and not blocks – between or amongst financial entities to be traded on exchanges or swap execution facilities (SEFs), which are a new type of swaps trading platform created by the Dodd-Frank Act.
Exchanges and SEFs will allow investors, hedgers and speculators to meet in a transparent, open and competitive central market. Even if you, as corporate treasurers of nonfinancial entities, decide not to use exchanges or SEFs for your swaps transactions – because the Dodd-Frank Act says that you are not required to do so – you still will benefit from the transparent pricing and liquidity that such trading venues provide.
The Dodd-Frank Act mandates that all market participants have the ability to utilize SEFs and derivatives exchanges if they choose to do so. The statute requires these trading facilities “to provide market participants with impartial access to the market.” The CFTC’s proposed rules require SEFs to allow market participants to leave executable bids or offers that can be seen by the entire marketplace. That means that any market participant – a bank or a nonbank – a corporation or a financial institution – can choose if they want to hedge a risk and enter into a swap. This brings competition to the marketplace that improves pricing and lowers risk.
Corporate treasurers will benefit from markets that have competition. When you use the swaps markets, you are paying for a service to reduce your risk. You want a lot of people competing for that business. You want them to compete in a transparent marketplace where you will benefit from better pricing.
Second, the Dodd-Frank Act brings real-time transparency to the pricing immediately after a swaps transaction takes place. This post-trade transparency provides all end-users and market participants with important pricing information as they consider their investments and whether to lower their risk through similar transactions.
The CFTC’s proposed real-time reporting rules include provisions to protect the confidentiality of market participants. The rules also provide for a time delay for large swap transactions – or block trades.
Third, the Dodd-Frank Act brings transparency to swaps over the lifetime of the contracts. If the contract is cleared, the clearinghouse will be required to publicly disclose the pricing of the swap. If the contract is bilateral, swap dealers will be required to share mid-market pricing with their counterparties. Thus, you as corporate treasurers and the broader public will benefit from knowing the valuations of outstanding swaps on a daily basis.
Additionally, the Dodd-Frank Act brings transparency of the swaps markets to regulators through swap data repositories. The Act includes robust recordkeeping and reporting requirements for all swaps transactions so that regulators can have a window into the risks posed in the system and can police the markets for fraud, manipulation and other abuses.
Good day. Good reading. TSR.
Phase of Trade How DFA Promotes Transparency