CFTC's Gensler introduces New Era of Swaps Market Reform

Regulating Dealers

This week, swap dealers begin the process of registering and, for the first time, will come under comprehensive regulation to lower their risk to other market participants and the economy.  Once registered, swap dealers will implement crucial back office standards that lower risk and increase efficiency.  Swap dealers also will be required to implement sales practices that prohibit fraud, treat costumers fairly, and improve transparency.


The Commission has made significant progress on bringing swaps into central clearing, which will lower the risk of the highly interconnected financial system.  For over a century, through good times and bad, central clearing in the futures market has lowered risk to the broader public.

Dodd-Frank financial reform brings this effective model to the swaps market.  Clearing is particularly critical given the current economic uncertainty in Europe and recent ratings downgrades of many of the world’s leading banks.

Based on completed rules, clearinghouses are adopting risk management reforms that will be implemented by November 8.

Among these are customer protection enhancements that require clearinghouses to collect margin on a gross basis and the so-called “LSOC rule” (legal segregation with operational comingling) for swaps.  This rule prevents clearing organizations from using the collateral attributable to cleared swaps customers who haven't defaulted to cover losses of defaulting customers.

Reforms Ahead

Looking forward, in line with the historic reforms that Congress and the President enacted, we’ll be furthering the swaps market reform structure. 

First, the initial set of clearing determinations may be finalized as early as next month.  This would lead to required clearing by swap dealers and the largest hedge funds as early as February.  Compliance would be phased in for other market participants through the summer of 2013.

Second, the CFTC is looking to finalize later this fall a set of rules promoting further transparency for the swaps marketplace.  This includes rules on minimum block sizes, as well as for trading platforms called swap execution facilities.

And third, the CFTC is working on final guidance on the cross-border application of Dodd-Frank swaps market reform.  This guidance is critical because swaps executed offshore by U.S. financial institutions can send risk straight back to our shores.  This happened with the London and Cayman Islands affiliates of AIG, Lehman Brothers, Citigroup, Bear Stearns and Long-Term Capital Management.  Earlier this year, it happened again when JPMorgan Chase executed swaps through its London branch.\

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