CFTC adopts rule requiring real-time swap-clearing decisions

March 20 (Bloomberg) -- The U.S. Commodity Futures Trading Commission has completed Dodd-Frank Act rules requiring swaps brokers to decide within minutes whether to clear a trade in an effort to reduce risk in the $708 trillion global swaps market.

The CFTC voted 4-1 today to adopt the regulation, which requires Wall Street banks or clearinghouses operating on their behalf to accept or reject trades for clearing as soon as technologically possible -- in “milliseconds or seconds, or at most, a few minutes,” according to a CFTC summary of the rule.

“This lowers risk to the markets by minimizing the time between submission and acceptance or rejection of trades for clearing,” Gary Gensler, CFTC chairman, said at the meeting in Washington.

Vanguard Group Inc., based in Valley Forge, Pennsylvania; Citadel LLC, the Chicago hedge fund founded by Ken Griffin; and DRW Holdings LLC, a Chicago-based proprietary trading firm, have urged the CFTC to require real-time decisions on clearing to prevent the risks of disruption and uncertainty in the swaps market.

“Latency raises the potential for market movement which could lead to unacceptable breakage risks for one or both of the parties to a trade,” Vanguard’s Gus Sauter, managing director and chief investment officer, and John Hollyer, principal and head of risk management, said in a Sept. 30 letter to the CFTC.

Unregulated Trades

The CFTC and Securities and Exchange Commission are leading U.S. efforts to write new regulations for the swaps market after largely unregulated trades helped fuel the 2008 credit crisis. Dodd-Frank, the 2010 financial-regulation overhaul, is intended to reduce risk by having most swaps guaranteed by clearinghouses that stand between buyers and sellers.

The CFTC may require Wall Street banks and large funds to clear certain types of swaps as early as October, Gensler said. The agency may publish recommendations in April for which types of swaps will face the mandatory clearing requirement, which would then be open to a 90-day review process.

Once the CFTC determines that a particular type of swap must be cleared, the largest swap-dealers have 90 days before they must comply with the mandate, Gensler said. The first determinations could come as early as July, he said.

The final Dodd-Frank regulations adopted today, which will take effect Oct. 1, also prohibit dealers from drafting trade documents with buyers that restrict their relationships with other dealers. Under the regulation, a dealer can’t limit the number of counterparties with whom a customer may trade or restrict the size of the position a customer may have with any individual counterparty.

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