Irony futures

Throughout the Dodd-Frank Act's creation in Congress, swap users and dealers insisted that swaps are sufficiently distinguishable from futures and options that they should be addressed separately, so they were. For example, swap dealers needed a new registration category, as did swap markets.

Recall that the Commodity Futures Trading Commission (CFTC) allowed swaps, with conditions, for a long time but as a "policy" or "exemption." It has never said that they are not within the family of futures contracts or options that the Commodity Exchange Act has covered since the 1920s. Indeed, if they weren't, the CFTC would have no reason to act at all.

Aside from having been entered into privately, there is precious little about the workings of an interest rate or energy swap that is different from an interest rate or energy futures contract. A credit default swap is structured like a credit default option. But Congress felled forests to construct a massive law on the assumption that folding swaps into the CFTC's existing futures and options regime (with exemption powers intact) simply would not do.

Now, however, the song has been rewritten. The CFTC is being sued by Bloomberg, among others, for setting collateral requirements for some swaps higher than initial margins on competing futures contracts. The case was thrown out in the lower court but may be appealed.

And the wiley futures exchanges have launched futures contracts on some swaps with this advantage in mind. They will be traded and cleared like any other futures contract. If there was really any difference between those products for most swap users, these initiatives would crash and burn but so far, so good.

And so, after pleading for separate treatment in Congress, we now learn that swaps aren't all that different after all. "Be careful what you wish for" has never been more apt.

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