SmartBrief caught up with CME Group Executive Chairman and President Terry Duffy this week on the sidelines of the Milken Institute Global Conference. In Part one of this two-part interview, Duffy addressed the evolution of leadership in the exchange world. Today he chats about regulatory reform, the London Interbank Offered Rate and social media.
We are coming up on the three-year anniversary of the Dodd-Frank Act. What did Dodd-Frank get right?
The implementation of the first phase of mandated clearing went into effect in March and came off without a hitch because the central clearinghouses that are involved in it have been doing this for a lot of years, just using futures. We take our risk models and deploy them toward swaps. Obviously you have to add in a deeper cushion of liquidity with the swaps versus a standardized futures contract, but you are basically deploying the same kind of risk-management strategy.
One of the problems with swaps is that they were “marked-to-myth” instead of “marked-to-market.” What we do is mark-to-market and do the risk management. Those are all good things related to Dodd-Frank. Even some of the people who were opposed to Dodd-Frank would still think that is a good thing because you want to know the value of a product. When you’re marking it to a myth, it’s really not good for anybody.
What are your thoughts on what Commodity Futures Trading Commission Chairman Gary Gensler said recently about revamping Libor so it is based on transactions?
First of all, Libor has hundreds of trillions of dollars benchmarked to it and another $70 trillion in cash benchmarked to it. A lot of these contracts go out years. To try to unwind that and say that we have to have a transactional vehicle in order to price all these instruments overnight is a pretty daunting task. You hate to throw the baby out with the bath water. What they are doing is making some changes to the way they calculate Libor to take out the inherent conflicts of interest and make sure everyone is comfortable with the way things are benchmarked. … If you were creating something today, you’d probably want something that was more transactable. But that is not the case, so we have to look at how we are going to transition.
Do you have any concerns about other regulatory reform efforts taking place around the world?
My concern is timing on [the European Market Infrastructure Regulation] and [the Markets in Financial Instruments Directive] and efforts like that. You have to make sure that the coordination is similar with the U.S. as we implement these reforms. … We passed Dodd-Frank three years ago. We’ve written up a good portion of the rules and we are starting to implement them. Yet, we are still not seeing some of the roll out coming out of Europe. You could have an inherent regulatory arbitrage built into that, but I hope that is not the case. Hopefully we will get more uniformed rules across the globe because that’s what makes sense for the participants.
During one of your panel discussions here at the Global Conference, CFTC Commissioner Bart Chilton talked about the hack of the Twitter account belonging to the Associated Press that resulted in a tweet going out that said the White House had been bombed and President Barack Obama had been hurt. That tweet moved markets. What is your opinion of the role social media stands to play now that the Securities and Exchange Commission has given firms the green light to dispense investor-related information via platforms like Twitter?
It’s like any other new technology in that you have to be aware of what you are accepting. How true and how factual is it? You have to be careful. I think we need to walk a little slower before we start releasing all our information via Twitter. Operational risk is a big problem that we all have and if somebody can get into the Associated Press account and hack the information they hacked, that can be very damaging information. I am surprised markets didn’t react more to what was said in that tweet. The markets almost looked at it and said, “There is no way that is true.” But at the same time, if you are trading and you have your algorithms based on Twitter, you’d do a lot of strange things if that came across your wire.
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