Question

Summary article "Swaps rules due for overhaul in bid to boost liquidity" and analysis it

Answer 1

The article gives details of the market suffering due to the liquidity problem and the center of causes to this problem is stringent regulations governing the trade of SWAP derivatives. It is the Dodd-Frank Act that made SWAP only to be traded on selected platforms and it has since been used by the enterprises as a part of the payment and hedging strategy, then it creates liquidity crunch in the market if the SWAP derivative market is heavily regulated. It is well acknowledged by the CFTC (Commodity Future Trade Corporation) chairman Mr. Giancarlo and the accompanied economist Mr. Tuckman, as the article suggests. It makes these people to demand for the regulatory reforms that can resolve the liquidity problem, faced by the enterprises. In this regard, a white paper is also presented, as the article suggests. One of the reform is focussed upon the change in measurement method of the SWAP market.

The SWAP derivatives are used to swap payments on the basis of change in values of the underlying assets that can be currency also. But, there are other derivatives also that can be used to resolve the liquidity problems. For example, currency futures or options can be used. Besides, the SWAP trading can be deregulated up to a certain level, but not at the cost of adding volatility to the market. Further, there is a need to bring the best practices, what is being used across the world, rather coming up with the short term non-tested solutions. It will add credibility and confidence to the market. Further, there should be increased level of focus upon the transparency in SWAP trade. It will help the market to be more consistent and reform will show the positive impact.