CFTC Proposal May Give Clearinghouses More Time to Accept Swaps

By Silla Brush


The U.S. Commodity Futures Trading Commission may re-propose a Dodd-Frank Act rule to allow clearinghouses more time before they must decide whether to accept and guarantee trades in the $601 trillion swap market.

CFTC commissioners meeting in Washington today will consider easing a proposal that called for clearinghouses to immediately accept or reject executed trades. The new proposal would require decisions as soon as technologically possible, "milliseconds or seconds, or, at most, a few minutes, not hours or days," according to a CFTC summary of the rule.

"The proposed rule promotes market participants' access to central clearing, increases market transparency and supports market efficiency," CFTC Chairman Gary Gensler said in a statement prepared for the meeting.

Dodd-Frank, the financial-regulation overhaul enacted last year, aims to reduce risk in the swaps market after largely unregulated transactions helped fuel the 2008 credit crisis. Clearinghouses, which are capitalized by their members, seek to mitigate risk by guaranteeing trades and standing between buyers and sellers.

The CFTC proposal released in March was opposed by groups such as the International Swaps and Derivatives Association Inc., (ISDA) the Futures Industry Association (FIA) and CME Group Inc. (CME), the world's largest futures exchange. Requiring immediate decisions on trades would be "imprudent" and would limit "essential risk-management tools and inject a high-degree of systemic risk" into the market, CME Group Chief Executive Office Craig S. Donohue said in an April 11 letter to the CFTC.

Citadel Support

Citadel LLC, the Chicago-based hedge fund started by Ken Griffin, supported the earlier proposal, arguing that real-time decisions would allow traders to hedge prices more efficiently and eliminate bilateral credit risk, Adam Cooper, Citadel's chief legal officer, said in a June 3 letter. The Swaps and Derivatives Markets Association, whose members include MF Global Holdings Ltd. (MF) and Jefferies Group Inc. (JEF), also supported the March proposal, according to the group's website.

The revised measure would also establish rules governing documentation standards between swap dealers and their clients. It would prohibit swap dealers from limiting the number of counterparties a client may trade with and from restricting the size of a position a client may take, according to a CFTC summary of the rule.

Scott O'Malia, one of two Republicans among the CFTC's five commissioners, said the proposal alleges that a voluntary industry agreement drafted by FIA and ISDA "may restrict open access to clearing and harm competitive trading."

'An Accommodation'

"The final agreement reflected an accommodation - even if imperfect" - of the interests of both buyers and sellers, O'Malia said in prepared remarks outlining his opposition to the proposal.

The CFTC is also scheduled to consider final Dodd-Frank rules related to the process for reviewing swaps for mandatory clearing and the removal of references to credit ratings from agency regulations.

The commission delayed consideration of a final rule governing whistleblowers to await information from the U.S. Government Accountability Office, the non-partisan investigative arm of Congress, about how to use whistleblower funds, Gensler said yesterday in an interview.