Swap regulators face push for delays as deadline looms

Oct. 12 is key date

CFTC building, sign CFTC building, sign

The U.S. Commodity Futures Trading Commission, facing an Oct. 12 start date for a slate of derivatives rules, is being bombarded with requests from lobbying groups to ease or delay the Dodd-Frank Act measures.

Trade associations representing agribusiness firms Bunge Ltd. and Archer Daniels Midland Co. want to delay swap-dealer rules for non-banks. Banks and asset managers want regulators to finally say whether foreign exchange derivatives will be subject to the rules. And representatives of Ford Motor Credit Co. and Barclays Plc have met with CFTC staff to clarify that financial entities used for asset-backed securities are exempt.

“We urgently request that the commission delay the effectiveness of all rules until clarifying guidance, which in many cases has been promised by the commission, can be issued,” the Financial Services Roundtable, a Washington-based group representing 100 of the largest financial companies, said in a letter yesterday. “Without resolution on these points, our members cannot understand how to comply with the new rules, and accordingly cannot comply. This is in no one’s interest.”

Starting Oct. 12, companies must begin tallying their derivatives trades to determine whether they will be deemed swap dealers and face Dodd-Frank’s highest capital, collateral and trading standards, which could erode their profits. The designation will capture JPMorgan Chase & Co., Goldman Sachs Group Inc. and the other financial firms dominating a business that generates more than $30 billion in annual profit for the world’s largest banks, according to an estimate from financial consultant Oliver Wyman, a unit of Marsh & McLennan Cos.

Higher Prices

Lobbyists for energy firms that are swap buyers say their clients may face higher costs stemming from the designation if banks and other dealers raise prices in response to new rules.

The lobbying effort comes as the CFTC and Securities and Exchange Commission prepare to finally put rulemakings into effect more than two years after the passage of Dodd-Frank, the financial-regulation overhaul designed to reduce risk and increase transparency in the $648 trillion swaps market.

The CFTC has completed 39 rules and “substantive swaps market reform is now in sight,” Chairman Gary Gensler said in an Oct. 1 speech in London. The agency has yet to complete rules governing capital, margin, new swap-trading venues and the international scope of its measures.

Swaps and other derivatives are financial instruments based on stocks, bonds, loans, currencies and commodities that can be used to hedge risks or for speculation. Largely unregulated trading of derivatives tied to mortgage bonds helped spark a credit crisis in 2008 after the housing market collapsed.

Risk Management

Regulations that were set to take effect Oct. 1 about risk- management standards between brokers and their clients have already been delayed after a request from the Futures Industry Association. A separate rule governing how quickly trades must be accepted or rejected for clearing prompted requests for relief from companies including LCH.Clearnet Group Ltd., the world’s largest interest rate swap clearinghouse.

The lack of clarity around the rule requiring banks and clearinghouses to accept trades within minutes came to a head less than two weeks before the rule’s Oct. 1 effective date, as market users and regulators wrangled in a Sept. 19 meeting at the CFTC, according to seven people who participated.

Ananda Radhakrishnan, the CFTC’s director of the division of clearing and risk, organized and led the meeting, where banks argued the time limit compromised their risk standards and money managers said it was an attempt by the dealers to stymie electronic trading, said the people who asked not to be named because the discussion was private.

Arcane Rulemaking

While improving price transparency is a goal of regulators including Gensler, it would cut the amount of money banks earn from buying and selling swaps. Though it may seem an arcane bit of rulemaking, it’s vital to digital trading, said Craig Pirrong, a finance professor at the University of Houston.

“It’s an illustration that the small things are big and the big things are bigger,” Pirrong said. “It’s going to be a torturous process to get all this Dodd-Frank stuff in place.”

Under one rule scheduled to take effect Oct. 12, a company that crosses the $8 billion swap-dealer designation threshold this month would have until the end of the year before it must register with regulators. Companies with at least $25 million of business with a so-called special entity would also require registration.

The $25 million threshold has led the Electric Power Supply Association to file a petition seeking an exemption for swaps tied to utility operations.

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