WASHINGTON U.S. regulators do not plan to toughen their proposal to limit banks' voting power in derivatives clearing and trading venues, despite concerns by the Justice Department the rule may not combat anti-competitive practices, according to people familiar with the matter.
A draft of a final rule, which is slated for a vote by the Commodity Futures Trading Commission on Thursday, is very similar to one proposed by the agency in October, said people who spoke anonymously because the rule has not been made public yet.
Changes to the rule could still be made before it is unveiled next week, they added.
The rule will mark the first final vote by the CFTC to implement a provision in the Dodd-Frank financial-overhaul law. Its goal is to reduce potential conflicts of interest by big banks, which create and sell derivatives products and also help decide which products will be passed through clearinghouses.
Clearinghouses stand in between parties to guarantee trades and help reduce risk.
The Securities and Exchange Commission is expected to vote on a similar proposal, but it has not announced a date yet.
The CFTC's rule would place percentage caps on the voting shares that clearing and trading member firms such as JPMorgan, Goldman Sachs and Morgan Stanley can control. It also shakes up the board structure at clearing and trading venues by requiring more representation by public directors.
But the plan's voting caps as drafted are unlikely to force any banks to give up some of their voting rights in most major clearinghouses and trading platforms operating today, including LCH.Clearnet, IntercontinentalExchange's ICE Trust, and Tradeweb, a trading platform that is majority owned by Thomson Reuters and minority-owned by big banks.
The Justice Department and other critics of the plan, including some Democratic lawmakers, say the plan fails to do enough to crack open the dominance that banks have the approximately $600 trillion over-the-counter derivatives market.
TWO PATHS FOR CLEARINGHOUSES
The voting cap portion of the plan is widely opposed by big banks, and the two Republican CFTC commissioners also expressed concerns about the plan in October.
Under the CFTC's proposal, clearinghouses would have to opt for one of two paths. They could limit their clearing member firms from individually controlling 20 percent of the votes and collectively restrict banks and other financial firms from controlling 40 percent of the votes. Or, they could choose a less stringent plan that places a 5-percent voting limit on each individual clearinghouse member.
Exchanges and swap trading venues, meanwhile, would not face any collective voting caps. Instead, each company that is a member of a trading platform would face a 20 percent individual voting cap.
The CFTC's proposal would also require clearing and trading platforms to have boards composed of at least 35 percent in the form of public directors.
Although the voting caps have proven to be the most controversial part of the proposal, the CFTC's plan as drafted would not actually force banks to lose some of their voting power in any existing derivatives platforms.
The part of the rule that will have the greatest impact on existing companies is the public director portion, although critics have expressed concern the voting caps could stifle competition by making it harder for start-up companies.
The Department of Justice's antitrust division letter, which was sent to the CFTC in late December after the closure of the public comment period, said the rule may not go far enough.
Antitrust officials expressed concern that the CFTC's plan proposes no collective voting restriction for banks that have an interest in exchanges or swap trading venues.
Additionally, the Justice Department would like to see more public directors on boards and committees.