US Swaps Trading Vote Triggers Reform

By Shahien Nasiripour


Hundreds of financial institutions will have to comply with new US rules on swaps trading after the country’s leading derivatives regulator finalised its definition of a “swap”, triggering a wide-ranging overhaul of the $648tn global market.

The 4-1 vote on Tuesday by the Commodity Futures Trading Commission sets the stage for a string of rules that have been finalised, but which have yet have to be put into effect. These include new conduct standards for swaps dealers, registration requirements and near-real time reporting of prices and swaps volumes.

“Light will begin to shine on the markets for the first time,” said Gary Gensler, CFTC chairman.

Ryan Baccus of consultancy Sapient Global Markets said the swaps definition rule “represents a major milestone for the implementation of the Dodd Frank Act”.

However, Scott O’Malia, CFTC commissioner, cautioned: “I am somewhat fearful that the majority of market participants will be unprepared to comply with the cascade of requirements that are about to befall them.”

Though Mr O’Malia said he was generally supportive of swaps rules, he noted: “We are asking hundreds, if not thousands, of market participants to comply with several arduous rules at the flick of a switch.”

Companies including Goldman Sachs, Markit and JPMorgan Chase had lobbied the CFTC on the issue and the definition hews closely to the agency’s proposals last year. Market participants suggested the agency waited to finalise its definition until after related swaps proposals were in place.

The Securities and Exchange Commission finalised its related definition during a closed-door vote last Friday.

The rules are a response to the recent financial crisis, during which US regulators said they were forced to bail out financial institutions in part because opaque instruments that linked companies, such as swaps, made it difficult for government officials to allow certain institutions to fail.

The CFTC also voted unanimously to exempt so-called “end users” of swaps from certain clearing requirements.

These include big non-financial corporations such as energy producers and manufacturing companies. Small banks and credit co-operatives also won the exemption.

The move was expected as lawmakers explicitly called for such an exemption in the 2010 Dodd-Frank overhaul of US financial regulations.

Companies had lobbied furiously on the issue, raising concerns over increased costs and margin requirements resulting from forced clearing.

The agency estimates that about 30,000 entities may take advantage of the exemption.