Wall Street joins CME in winning delays of U.S. swaps rules

Relief intended to promote orderly transition

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CME Group Inc., energy traders and Wall Street banks won delays and exemptions from the U.S. Commodity Futures Trading Commission as regulations intended to improve oversight of the swaps market took effect.

Among a flurry of short-term extensions, the CFTC announced that foreign entities including the overseas branches of U.S.- based banks would not have to begin tallying swaps right away and perhaps not until the end of the year.

The agency also said that swaps traded by companies transitioning to futures at CME, owner of the world’s largest futures exchange, will not count toward new swap dealer registration requirements until Dec. 31.

The relief is intended “to enable any such transition to proceed in an orderly manner,” Gary Barnett, director of the CFTC’s division of swap dealer and intermediary oversight, said in a letter released in Washington yesterday, the day the rules took effect.

The CFTC is among several agencies writing and implementing rules mandated by the 2010 Dodd-Frank Act, which overhauled U.S. financial regulation in the wake of the 2008 financial crisis. The act required U.S. regulators to oversee the over-the-counter swaps market for the first time.

‘Opaque’ Market

“The days of the opaque swaps market are ending,” CFTC Chairman Gary Gensler said in a speech Oct. 10 at George Washington University, where he compared the new regulations to securities rules enacted in the 1930s. “The swaps market reform going into effect this week holds out similar potential. Bright lights of transparency will shine. Dealers will have to come under comprehensive regulation.”

Swaps trading has been a major source of revenue for large U.S. banks, and some have conducted roughly half of such trades overseas, often through branches or subsidiaries. JPMorgan Chase & Co., for example, derives as much of its quarterly revenue from global operations.

The CFTC has yet to complete guidance for the reach of Dodd-Frank clearing, trading and capital regulations and the temporary relief is intended to ease transition. The agency released a no-action letter governing the international scope of the regulations, providing temporary relief until as late as the end of the year for certain foreign entities.

Substituted Compliance

The CFTC’s interpretive guidance allowed for so-called substituted compliance for branches, subsidiaries and other overseas affiliates of U.S. banks when foreign jurisdictions have comparable rules. The CFTC’s June proposal failed to sufficiently clarify the reach of the rules and could lead to conflicts, according to letters submitted to the agency by overseas regulators. The letters were sent by the U.K.’s Financial Services Authority, European Commission, European Securities and Markets Authority, Financial Services Agency in Japan, the Bank of Japan, Bank of France and Swiss Financial Market Supervisory Authority.

The delay relating to CME Group’s ClearPort system that converts swaps into equivalent futures positions as the trade is entered into the Chicago-based company’s clearinghouse. The company earns more per contract on ClearPort than any other asset class such as interest-rate, equity index or energy futures.

CME and Atlanta-based Intercontinental Exchange Inc. are trying to shift energy swaps to futures trades to help their clients avoid the threshold. While Intercontinental is ready, CME hasn’t completed the change, according to people familiar with the matter. In the three months ended in August, CME Group earned $2.65 per ClearPort trade, compared with 48 cents per trade in interest rates or 67 cents in equity indexes.

‘Huge Deal’

“It’s a huge deal. It’s one of their biggest products,” said Andrew Lebow, a senior vice president in energy derivatives at Jefferies Bache LLC in New York.

There remains a lot of uncertainty within the energy industry about what the CFTC would do, Lebow said.

“There’s a fair amount of confusion,” he said. In general “I don’t know how ready the industry is” to comply with all the other Dodd-Frank rules Lebow said.

Scott O’Malia, a Republican CFTC commissioner, said that the agency would release 18 no-action letters and other guidelines granting temporary relief from regulations. “While this is a step in the right direction, the commission should never have gotten to the point where it was forced to issue such last-minute piecemeal relief,” O’Malia said yesterday in an e- mailed statement.

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