Sunil Hirani's Remarks at the CFTC Round Table, The Futurization of Swaps
New York, January 31, 2013 - trueEX

Good afternoon, I'm Sunil Hirani, CEO of trueEX. Thank you for inviting me participate in this Round Table about what needs to be done to guarantee fairness, transparency and protection to the public in the swaps and futures markets.

trueEX is the first regulated exchange approved as a Designated Contract Market for interest rate swaps by the CFTC.

trueEX's goal is to provide a safer, more efficient and open exchange as outlined by Dodd-Frank mandates for creation of transparent, competitive, regulated marketplaces for standardized swaps and central clearing of these transactions.

One of the reasons trueEX created a DCM regulated by the CFTC is to allow the listing of both swaps and futures. Our initial focus will be on the interest rate market. This allows the benefits that have long been enjoyed by the futures market to be utilized by the $600 trillion swap market.

We need a CFTC regulated exchange, like trueEX, that provides all the benefits of futures to standardized swaps, including:

I'd like to make two points. My first point relates to those class of swaps that are liquid, trading on an exchange, transparent and cleared, which are basically futures-like. The CFTC must craft a regulatory framework that treats a standardized swap or a futures contract equally, assuming the futures contract is equivalent to the swap in terms of risk, time for liquidation, volatility, and pre-trade transparency.

As things stand today, even if a swap is traded on an exchange with the full benefits of transparency, equivalent time horizon for liquidation and clearing, it is not equal to a futures contract.

For an equivalent amount of product standardization, risk, liquidity, transparency and hopefully, regulatory oversight, a swap should be treated in a similar manner to a future.

My second point relates to the class of swaps which are not liquid nor standardized. It is necessary for market participants to trade "off the run" or block transactions - i.e., life cycle events that cannot be captured easily in a central limit order book. Swaps traders need to be able to terminate pre-existing swaps, as well as to novate and compact swaps.

Recent DTCC SDR data and anecdotal market information demonstrate that a majority of reported transactions (which were eligible for clearing) were done in "off the run" instruments or were terminations, novations, unwinds or compactions.

For those on-standardized swaps, we must allow swap market participants to execute "off the run" transactions, as well novations, terminations and compactions on a regulated Designated Contract Market (DCM). The CFTC should ensure that these transactions can be executed on regulated DCMs in a manner similar to transactions currently permitted for futures, such as block trades, exchanges for physical and exchange for risk order types.

In the futures market, numerous order types are permitted to execute less liquid or block transactions "off facility". Once again, we would request similar and consistent treatment for allowing less liquid and blocks to be executed in a similar fashion to futures on a DCM.

As long as standardized swaps are traded on a DCM on a transparent, cleared and anonymous basis with equivalent regulatory oversight of futures, they should enjoy all the benefits and obligations of a similarly traded futures contract on a DCM. What should matter is what's substantive about a financial instrument, not the name of the wrapper or the package in which it is delivered.

It is incumbent upon the regulators to ensure a vibrant, well-functioning, transparent, and regulated futures as well as a swaps market to ensure consistent regulation and treatment so people and firms who utilize these instruments can choose for themselves their own wrapping paper.

Thank you.

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