While markets participants are concerned as the CFTC begins the long process of rule writing, at least some questions about adding over-the-counter (OTC) swaps to clearinghouses were answered in rules the CFTC proposed on Oct. 1.
The first proposed rule sets margin requirements for derivatives clearing organizations (DCOs) and specifies amounts of capital that must be kept available. While the proposal provides that ordinary clearinghouses (ones not deemed systemically important) keep enough capital to cover one major clearing member default and significant clearinghouses (systemically important) have enough to cover two, some wonder if this is enough. “One can argue whether the coverage of the clearinghouses, the amount of money they are to put aside, is enough,” says Gary DeWaal, general counsel for Newedge. “I look back at 2008 and don’t remember just one firm having trouble. I [am skeptical] that only having capital to cover one big default is enough.”
The second proposed rule limits the ownership stake a single entity can control in a DCO and appears aimed at reducing conflicts of interest. While the hope is to protect investors, the cost may be too much for some to swallow. “I don’t believe a regulator should decide how a private company is structured. What the outcome of this is, is that the regulators do not want the broker-dealers to control the [over-the-counter] derivatives market,” says Paul Zubulake, senior analyst at Aite group.
Concerns center around the role regulators should take in the structure of private companies as well as the impact the rule may have on competition. “If two or three dealers can come up with a great idea and bring something innovative to the clearing front, why should they be prohibited?” DeWaal asks. “Let the marketplace decide whether they like that or not. There’s already a tremendous concentration in the United States in the clearing space and anything that discourages competition at this point is a negative.”
These rules are just the first in a laundry list of rules the CFTC was directed to write in Dodd-Frank. One of the aims of that act was to increase transparency. “No matter what comes about, let’s have transparency out there so you can decide whether you want to put your positions at this clearinghouse or another one. If that’s the case, the market will help move the industry to the strongest clearinghouses,” DeWaal adds.
The interim final rule that was passed sets deadlines for the reporting of unexpired swaps that were entered into prior to the enactment of Dodd-Frank to 60 days after the establishment of a swap data repository.