But what is a "swap?"

The CFTC, which is facing snipers all around as it tries to do what our Congress (don't get me started) wants, has just issued new regulations for "swap data repositories" as the Dodd-Frank Act requires. Nothing exceptional here, except that enforcement will be deferred until the agency finalizes what is a "swap." That is the heart and soul of the whole D-F regime.

 Imagine that we were mandated to follow a particular religion but not until the word "god" is defined.

 The CFTC, of course, is right. Everything hinges on that decision. Dodd-Frank itself torpedoed the CFTC's long-standing program for commodity options by flipping them into its "swap" definition and requiring that new rules be written. If instruments allowing physical delivery (in lieu of cash) are allowed by the CFTC to be classified as "swaps," the distinction from futures could be swept away as well.

 Then, what? A lot of swaps will be exempt from the central trading/clearing requirement. Not so for futures. Collateral standards will be far more self-set by the parties for exempt swaps but not for futures.

New clearing systems created to handle these exempt swaps may not impose mutualized risk among participants, leaving every man for himself. Futures clearers will remain collectively responsible if a default occurs (a system that required -$0- TARP funds).

Keep an eye on this. There are massive incentives in D-F to choose the swap regime and, if the CFTC allows futures look-alikes to be classified as "swaps," its rules and regulations will become historical footnotes. We may end up with what might be better named The OTC Derivatives Preservation Act of 2010.

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