CFTC swaps rules hurt liquidity, burdensome - groups

Tue Feb 8, 2011 4:38pm EST

* CFTC rules would reduce liquidity, burden end users

* Regulators must balance transparency vs confidentiality

* CFTC 60-day comment periods ended on Monday

By Christopher Doering

WASHINGTON, Feb 8 (Reuters) - Wall Street banks and major energy companies urged the U.S. futures regulator to revise new rules meant to increase transparency in the vast swaps market, saying they will make hedging riskier and more costly.

Firms including Barclays Capital (BARC.L) and utility giant Dominion Resources (D.N) registered their objections with the U.S. Commodity Futures Trading Commission at the end of a public comment period on the rule, which governs the speed at which companies must report the details of swaps trades.

It is the latest wave of industry push-back against regulators that are implementing the sweeping Dodd-Frank financial reforms passed last July, particularly aspects that will bring the estimated $600 trillion over-the-counter market under their oversight for the first time.

The companies argued the CFTC's proposal requiring swap trades to be reported "as soon as technologically practicable" could be detrimental to both buyers and sellers, who may need to protect that information long enough to offset their position with a hedge in the futures market.

"An appropriate balance must be struck between increasing price transparency and maintaining confidentiality to prevent situations where information disseminated to the market might impact the effectiveness of hedging strategies, create potential "front running" and ultimately affect the depth and breadth of the market," Simon Greenshields, co-head of Morgan Stanley's (MS.N) commodities business, said in a letter to the CFTC.

To provide counterparties a time buffer before swap trades are made public, the CFTC also proposed that standardized block trades and large notional swaps would be held by so-called swap data repositories, or third-party data collectors, for 15 minutes after they are executed before being released and made public. [ID:nN19130908]

Dominion Resources "has concern that the real time public availability of certain transactions and pricing data ... can harm its competitive position as a participant in the marketplace," wrote vice president David Holden.

Certain legitimate trading, he added, "could spur a market response that would reduce the market's liquidity."

Dominion, which uses swap trades to reduce fluctuations in commodity prices, urged the CFTC to allow an exclusion from the public disclosure of data between two end users or an end user and a regulated entity tied to swaps that do not perform a significant price discovery function.

An end user is generally described as an entity such as an airline, a utility or a farmer that uses swaps for hedging against volatile commodity prices rather than speculating for a profit.

Metlife Inc (MET.N) said if the costs of hedging insurance products goes up, consumers may have to pay higher premiums, and that it may be forced to stop offering certain products.

Todd Lurie, an assistant general counsel with MetLife, said for block trades to work effectively, their position must not be reported to the market until it has had time to hedge its exposure and reduce its market risk.

"Allowing the market access to such critical information within the time frames contemplated by the Proposed Rules will provide an opportunity for unaffiliated derivatives traders to trade ahead of Swap Dealers hedging positions on behalf of their customers, through the use of high-speed algorithmic trading programs and other similar means," he said.

(Editing by Russell Blinch and Lisa Shumaker)