In a recent client memorandum, Dechert LLP examines the recent SEC/CFTC roundtables on regulation of swaps, parsing the statements and comments to give us an idea of what is ahead in the regulation of swaps trading and clearing. For the most part, Dechert's reading is that, "whatever observers previously thought, we are a long way from a robust, liquid market for exchange-traded derivatives." They base their conclusion on the general lack of swap trading volume, the difficulty in identifying unique swaps, and the problems associated with requiring swap participants and exchanges to provide trade and position data to regulators.
The memo also identifies some problems associated with what the regulators could or would actually be able to do with the huge volume of swap trading data they might collect:
The agencies did not show their hand as to what they will actually do with all of this swap data. Dodd-Frank allows the agencies to "limit the activities" of swap dealers and major swap participants based on this information. It is possible that the agencies could impose risk criteria on derivatives portfolios that they consider to be overly long or short volatility or overly concentrated in certain asset classes (e.g., MBS), products and counterparties. Whatever the agencies do, we expect and hope that involvement from the SEC and CFTC in specific derivatives portfolios would be limited.
Dechert's looks at the state of play in the new regulation of swaps demonstrates how complex and daunting the task will be. It also provides some insights on the nature and scope of the regulations and trading structures being considered.
The full text of Dechert's client memo may be found at: http://www.dechert.com/emailings/newsflash/fs-nf-09-28-10.html