U.S. regulator seeks to “set the record straight” on size of swaps market

By Michelle Price

(Reuters) – It’s a mind-boggling figure: $542 trillion dollars is widely cited by global regulators, academics, politicians and the media as the current size of the global swaps market which stood at the heart of the decade-old global financial crisis.

The only problem with this figure is that it’s completely wrong and vastly overstates the market’s magnitude, the U.S. swaps watchdog said on Thursday.

Speaking during a conference in New York, Christopher Giancarlo, chairman of the U.S. Commodity Futures Trading Commission (CFTC), said the debate over regulating the swaps market had been misinformed and distorted by inaccurate data.

“As earthshaking as was the crisis, its impact was exacerbated by the lack of a more clear, accurate, and honest assessment of risk, value and markets…And the record needs to be set straight,” he said.

For decades, global regulators led by the Bank for International Settlements have measured the size of the global swaps market by adding up the value of every outstanding long and short position to calculate a so-called “notional” value.

But this method does not take into account that many of these bets cancel each other out, meaning the true economic value of the global swaps market is dramatically smaller than the headline notional figure suggests.

Industry participants and academics have for years bemoaned the notional figure as misleading and unhelpful, saying it has exaggerated the risks posed by the swaps market, fuelling alarmism among policymakers.

In a paper published by the CFTC on Thursday, the regulator’s chief economist proposed a new method for measuring the swaps market that nets out long and short bets in the same currency between pairs of counterparties.

This method would effectively shrink the U.S. interest rate swap market from $179 trillion to $15 trillion, Giancarlo said on Thursday.

The CFTC hopes that by pushing a more accurate method for measuring the swaps market it can drive a more informed discussion around post-crisis regulation, officials said.

“Sizing the global swaps markets in hundreds of trillions of dollars has done nothing to bring clarity to newspaper accounts, policy discussions in Congress, or regulatory policy setting in the decade since the financial crisis,” Giancarlo said.

“It’s time to set the record straight.”

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