Regulators part curtain on swaps and hedge funds

WASHINGTON Fri Nov 19, 2010 3:22pm EST

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WASHINGTON (Reuters) - Regulators moved on Friday to bring more transparency to the sprawling derivatives market, hedge funds and private equity, all dimly lit corners of the financial world getting more scrutiny.

Proposed rules issued by the Commodity Futures Trading Commission and the Securities and Exchange Commission showed regulators stepping cautiously as they implement hundreds of new regulations mandated in July by Congress.

Shining a brighter light on derivatives was one of the key goals of the landmark Dodd-Frank reforms, pushed through by Democrats and President Barack Obama over the resistance of most Republicans and a host of Wall Street lobbyists.

The CFTC's and SEC's proposed rules target a range of derivatives including credit default swaps, which were implicated in the downfall of troubled giants Lehman Brothers and AIG during the 2007-2009 credit crisis.

Swaps in interest rates, currencies, credit risk or other underlying values, are a big chunk of the $583-trillion global market for derivative contracts traded over-the-counter (OTC), or among private firms, rather than on exchanges.

Until now, the market has been virtually unregulated, despite its tremendous size. Its opacity has made it a lucrative business for the largest OTC derivatives dealers: Bank of America, Goldman Sachs, Citigroup, JPMorgan Chase and Morgan Stanley.

The CFTC and SEC, following through on Dodd-Frank, have proposed new standards for OTC swap reporting and record-keeping. The CFTC's proposal on the timing of swaps reporting met some skepticism.

"This proposal merely repeats the vague statutory direction provided in the Dodd-Frank Act," said Scott O'Malia, a Republican CFTC commissioner, in prepared remarks.

In its proposal on Friday, the CFTC did not set specific time limits for reporting most swap trades. It said only that they be submitted "as soon as technologically practicable." It proposed that data on standardized block trades and large notional swaps be held for 15 minutes before being released.

The legislation approved in July is known as the Dodd-Frank Act after its Democratic co-authors Senator Christopher Dodd and Representative Barney Frank.

'REAL-TIME' STANDARD MANDATED

Much of the world's derivatives trading is done in New York and London. The leaders of the Group of 20 (G20) leading economies agreed in 2009 that derivatives must become less risky and more transparent. A report on the issue is expected from G20 regulators in January.

Dodd-Frank called for requiring market participants to report swap trades in "real-time" and left it up to regulators to define what that means -- one of many Dodd-Frank details still to be fleshed out in the implementation phase.

"I am not convinced we are doing the best thing by mandating a 15-minute time limit to report block trades and large notional swap trades between dealers and end users, while providing little to no direction on the reporting of all remaining trades," O'Malia said.

The agencies will evaluate comments from the public on their proposals over the next two months, with changes possibly resulting. Under Dodd-Frank, the deadline for final implementation of most new derivatives rules is April 2011.

The CFTC's preliminary recommendation came on the same day the SEC proposed rules for security-based swaps. Taken together, the agencies' proposals gave an early outline of not only when, but where and how swap data will be disclosed.

Dodd-Frank opens a business opportunity to play a data handling and warehousing role for Depository Trade & Clearing Corp and major exchanges, such as CME Group Inc and IntercontinentalExchange. ICE this week applied to make its ICE Trust unit a registered clearer under the CFTC.

HEDGE FUNDS TARGETED

The SEC on Friday also proposed, under another Dodd-Frank mandate, requiring hedge funds and private equity firms with more than $150 million in assets under management to register with the investor protection agency.

This rule is designed to help the SEC root out fraud and abuse in the $1.65-trillion hedge fund business.

Recently, the hedge fund sector, which includes giants such as Bridgewater Associates and Paulson & Co, has not posted the immense profits that some years ago made it famous.

Many hedge funds are already registered with the SEC, taking some of the edge off the agency's proposals. "They are not going to be hard to comply with," said Ron Geffner, who works with hedge funds as a partner at Sadis & Goldberg LLP.

The European Parliament on November 11 approved new rules to regulate managers of hedge funds and private equity beginning in 2013. EU member-states had already approved the package.

The implementation deadline for the SEC rule on hedge fund and private equity firm registration is April 2011.

(Additional reporting by Ayesha Rascoe and Dave Clarke in Washington, Jonathan Spicer in New York; Writing by Kevin Drawbaugh; Editing by Jackie Frank and Tim Dobbyn)

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Comments (4)
THeRmoNukE wrote:
They better take the stance that everything out there existing already is grand-fathered. You think the dollar has been volatile lately? Try messing with this stuff. US physical printed dollar is leveraged 300:1 in derivatives markets.

Nov 19, 2010 1:33pm EST  --  Report as abuse
THeRmoNukE wrote:
They better take the stance that everything out there existing already is grand-fathered. You think the dollar has been volatile lately? Try messing with this stuff. US physical printed dollar is leveraged 300:1 in derivatives markets.

Nov 19, 2010 1:35pm EST  --  Report as abuse
breezinthru wrote:
It seems to me that the markets functioned more safely before derivatives.

The global derivatives market figure mentioned here was 583 trillion dollars, but I have seen that estimate as high as 700 trillion dollars.

According to the World Bank, the entire world’s GDP is about 60 trillion.

Derivatives are simply a leveraged bet on the direction of the price of a particular asset. They do not represent real assets, but the outcome of those bets must be paid in real assets.

Derivatives might be a great tool for hedging and a great tool for building wealth, but derivatives were a key ingredient in undermining the world’s economies a few years ago.

Frank/Dodd made only a feeble attempt to regulate a market that in my opinion shouldn’t exist in the first place.

What ahead then? Continued wealth building for the world’s big money managers and continued high risk of economic instability.

Nov 20, 2010 6:26am EST  --  Report as abuse
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