Regulator Tightens Requirement Under New Swaps-Trading Rules

By Katy Burne


A federal regulator has tightened up requirements on the processing of derivatives trades called swaps, under new U.S. rules that are overhauling the market in the wake of the financial crisis.

The Commodity Futures Trading Commission wrote to brokers, banks and trading platforms Thursday clarifying their obligations when handling swaps traded over newly registered venues, and sending them to clearinghouses that guarantee trades.

The regulator is requiring straight-through processing of the trades, speeding up earlier guidelines that allowed industry more time to process swaps.

“A near-instantaneous acceptance or rejection of each trade provides certainty of execution and clearing, reduces cost, and decreases risk,” the CFTC wrote Thursday in a joint letter from two of its divisions covering market oversight and clearing and risk.

The CFTC told clearing brokers they “must screen orders” before they go over registered platforms and in accepting transactions on behalf of customers, they “must ensure compliance with the limits” to ensure smooth processing.

“Screening orders … provides clearing [brokers] the ability to reject orders before execution,” the CFTC said. “Accordingly, a clearing [broker] may not reject a trade that has passed its pre-execution filter, because this would violate the requirement that trades should be accepted or rejected for clearing as soon as technologically practicable.”

In the letter, the CFTC’s division of clearing and risk said it previously interpreted the reference in the law to clearinghouses having to act “as soon as technologically practicable” to mean 60 seconds. But it said that, having looked at data showing that clearinghouses can accept at least 93% of trades within three seconds or less, and 99% of trades within 10 seconds or less, it is requiring clearinghouses to accept or reject trades now “within 10 seconds.”

Trades that fail before they get to be cleared, because they are rejected, should be voided, the CFTC said.

A spokesman for the regulator didn’t immediately return a request for comment on the clarifying letter.

Some industry watchers said the swaps market is being revamped so quickly and is so complex that the CFTC’s new guidance leaves too little margin for error.

“The 10-second limit supports the goal of creating fast and efficient markets, but it also ignores the fact that growing pains are a given within market-structure changes of this magnitude,” said Kevin McPartland, principal at researcher Greenwich Associates.

Clearinghouses for swaps include ones operated by CME Group and LCH.Clearnet Group, while trading platforms for swaps include new venues operated by Javelin Capital Markets, TeraExchange and trueEX Group.