BST North America Panel: Derivatives Regulation Creates Tech Limbo, Opportunities

With several new rules coming online in the past year, a discussion was held at this year's event in New York to discuss what effect these regulations will have.

Houman Shadab, a professor of law at New York Law School, moderated the three-person panel that included Michael Loesch, a partner at Norton Rose Fulbright, James Wallin, a senior vice president at Alliance Bernstein, and Uche Abalogu, the CTO for the University of Texas Investment Management Co.

While the rulemaking and implementation process for the swaps regulation scheme is coming to an end, Loesch noted the Commodity Futures Trading Commission (CFTC) is at the early stages of a large transition.

Gary Gensler, formerly the chairman of the CFTC, two commissioners and the leaders of the division of markets and enforcement have all moved on, causing quite a shakeup in the regulatory body. These moves will likely have an impact on the refinement of the rules, according to Loesch, and new chairman Timothy Massad has already made statements recognizing that the rules still need to be adjusted, albeit slightly.

"Those statements are, I think, in some ways encouraging for market participants who are suffering with burdens and costs of some of these rules that may not be tailored well to your particular operations or business," Loesch said. "The new chairman has said, ‘I think we've got a very pragmatic and practical CFTC.'"

Focus on NDFs, Tech Limbo
These sentiments, though, were more towards commercial end users, and Loesch wondered if the same will prove true for non-swap dealer financial entities.

One particular area of interest is the status of non-deliverable forwards (NDFs) clearing. On Thursday, the CFTC is having a hearing regarding potential clearing mandates on NDFs. It's a concept that's been rumored for a while, but hasn't had any real traction until recently, according to AllianceBernstein's Wallin.

"If you had asked me back in April or May when NDF clearing was going to take place, based on several of the announcements that came out of the CFTCC, we were expecting an imminent timeline," he said. "We were planning for the end of the year until the middle of the year came, and we realized the end of the year was too soon. To me, it's unusual that they would announce that the implementation timeline was going to be imminently promulgated."

The delay has put CTOs in an awkward spot, as their infrastructure sits in limbo waiting for the regulation to be passed so they can remain compliant.

"From a technology standpoint, we're playing the wait and see game," Utimco's Abalogu said. "We have our data warehousing in place, and we're waiting for instruction from our attorneys and our opps team are on standby as well."

Global Opportunities
The panel also discussed global regulation of swaps, something that potentially will provide a big opportunity for vendors.

With so many current fissures among individual regions' rules, a unified set of regulations is not likely to happen in the near future. That market fragmentation provides an opening for technology providers to handle the compliance for firms.

"It's going to be very difficult to go to market quick," Abalogu said. "Everyone knows what happened with Form PF. It was very vague at the beginning. A lot of firms could not make changes in-house, so the vendors fielded it. The vendors were quickest to market, and now everybody is pretty much all set. I think this is roughly the same opportunity for the service providers and vendors out there. This is your chance."

Bottom Line

•OTC-trading regulations are no longer considered to be in the implementation period, but there is still a bit of fine tuning that will occur to the rules.

•Complicating things is the amount of shake up that is happening at the CFTC. There is a new chairman, two commissioners and two leaders of major divisions at the regulatory body.

•The multiple compliance requirements for firms that swap globally give technology providers a new business opportunity.