It’s Friday, so for fun let’s play financial reform loophole detective. Here’s the definition of a “swap execution facility” in Senator Lincoln’s original bill (p. 47):
This language was passed out of the Ag Committee. Here is the Ag Committee’s language merged into the Dodd Bill that will be debated next week (p. 773-774). Can you find a difference?
The word “trading” has been removed from the Dodd Bill. Specifically, a swap execution facility no longer means a “trading facility” but just a “facility.” I thought this might not mean much, until I just saw this Bloomberg report from Matthew Leising that this might in fact be a big deal:
April 29 (Bloomberg) — A one-word deletion in the 1,565- page Senate financial reform bill may help banks and inter- dealer brokers maintain how they trade swaps in the unregulated $605 trillion over-the-counter derivatives market…. The latest version deletes the word “trading” from the term “trading facility,” according to a copy of the revised bill obtained by Bloomberg News.
A “trading facility,” as defined under the U.S. Commodity Exchange Act, prohibits phone transactions, which is how swaps have been traded for three decades…Lincoln’s bill does create a framework for swaps to be traded competitively based on price, service and technology options, said Christopher Giancarlo, chairman of the Wholesale Markets Brokers’ Association Americas.
“Allowing such swaps intermediaries to connect with market participants using a full range of communications methods brings more, not less, of the marketplace into the new cleared environment and regulatory framework,” said Giancarlo, who is also the executive vice president of GFI Group Inc., an inter- dealer broker. Lincoln’s legislation enhances “overall safety and soundness” of the derivatives business, he said…
The revision in the bill was made to avoid improper use or conflict with how the term “trading facility” is defined, according to people familiar with the process who asked not to be identified because the negotiations are ongoing.
Retaining the status quo may maintain the profits dealers make by trading interest-rate, credit-derivative and other swaps contracts. Trading venues that increase price transparency shrink bank profit on the trades and threaten the control that banks have maintained over the cost to buy and sell swaps.
(Nice job Leising – I’m kicking myself for not getting on this sooner.)
So “trading facility” has a more specific definition under the CEA than just facility. Remember lobbying efforts on derivatives is going to take a two-part approach: expanding end-users so that people who aren’t really end users can qualify for not needing to use the facilities the law will require, and attacking the very definition of those facilities themselves. I noticed a similar attack in the House Bill for derivatives reform.
Now maybe there isn’t much here. And maybe this is temporary language. But given that Obama has promised to veto a bill without strong derivatives language, we as citizens have an obligation that the language of the bill meets his expectations. And if those expectations allow for the opaque derivatives market of the 00s to continue, same as it ever was, he should make that clear.
I’ll have more Monday, but this is something to keep an eye on…
Rortybomb 
What about the addition of the qualifying term “security-based” to “swaps”?
I don’t know enough about the financial side to say how much impact that will have (i.e., are there non-security-based swaps?), but I know enough about the statuory interpretation side to say it results in a narrower coverage. And somebody put it in there for a reason.
Maybe citation from p.557 in Dodd Bill was more appropriate. I think that’s where swap execution facility for swap in general, not just for security-based swap, was defined.
A little off-topic, but what did you think of the wrangling described in this article:
Looks somewhat disturbing, though I can be talked off the ledge.
Great job Mike. It doesn’t matter who spots it first, just as long as all the guys in the white hats are trying to get it out for the voting public to see. 2 points for Matthew Leising and Konczal.
By the way Mike, you’ll save yourself a lot of hunting if you look first at ANYTHING related to derivatives coming out of the Agriculture Committee. Those slimeballs are getting a lot of dirty money to sneak shit into the legislation.
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