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.
“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.
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.
“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.
Next page: Confusion, Confidence
The CFTC’s rulemaking process has brought confusion, concern and a lack of confidence in Gensler, Senator Pat Roberts, a Kansas Republican and top member of his party on the Senate Agriculture Committee overseeing the agency.
“It’s my view that CFTC Chairman Gary Gensler is using his newfound power to unilaterally impose his will on financial markets,” Roberts said in a statement yesterday. “Most distressing is that while Mr. Gensler has tried to create his regulatory agenda, he and the CFTC have miserably failed in their oversight of existing regulations and market participants.”
Roberts called for congressional hearings to oversee the CFTC.
Starting yesterday, companies had to begin tallying their derivatives trades to determine if they will be deemed swaps dealers subject to Dodd-Frank’s highest capital, collateral and trading standards, which may erode profits. Companies with $8 billion or more in dealing business must register.
$30 Billion Profit
The designation will apply to New York-based JPMorgan and Goldman Sachs Group Inc., as well as 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 consulting firm Oliver Wyman, a unit of Marsh & McLennan Cos.
The rules, more than two years in the making, will improve oversight of a market that for three decades has largely escaped federal regulation, Gensler said Oct. 10. The agency issued a series of exemptions and guidelines in recent days to ease the transition and phase in regulations.
The CFTC also provided temporary relief for companies that trade primarily foreign-exchange swaps and forwards, a market that the Treasury Department has proposed to exempt from most of Dodd-Frank’s clearing and trading regulations. Under the temporary relief, companies with foreign-exchange derivatives business putting them in excess of the $8 billion swap-dealer threshold wouldn’t be required to register with CFTC until after the end of the year.
Treasury plans to complete the decision by the end of the year, Alastair M. Fitzpayne, assistant Treasury secretary for legislative affairs, said in an Oct. 4 letter to Representative Barney Frank, a Massachusetts Democrat.
“Time limited no-action relief is warranted in order to alleviate the uncertainty on market participants who engage solely or primarily in foreign exchange swap and foreign exchange forward swap dealing activity,” the CFTC’s Barnett said in a separate letter yesterday.
Some securitization vehicles will be exempt from regulations and others may need to be evaluated in the future, the agency said Oct. 11 in a letter to the American Securitization Forum and Securities Industry and Financial Markets Association. The associations represent Charlotte, North Carolina-based Bank of America Corp. and New York-based Bank of New York Mellon Corp. among hundreds of investors, issuers and trustees who sought an exclusion from regulations.
“The commission has taken a thoughtful initial approach to this issue and we are very pleased it has formally recognized that most of the securitization market should not be considered commodity pools,” Tom Deutsch, executive director of the securitization forum, said in a statement yesterday.
The CFTC denied a full exemption to some types of securitization entities, including those used in collateralized debt and loan obligations. The agency said the industry’s request “is overly broad.”