WASHINGTON The U.S. futures regulator on Tuesday put the brakes on reforms to the massive swaps market scheduled to automatically kick in July 16 and threaten the validity of billions of dollars in derivatives trades.
The U.S. Commodity Futures Trading Commission's proposed delay was a relief to traders, who were facing a daunting gap between the old regulatory regime and the new one called for in last year's Dodd-Frank financial reform law.
The CFTC, which must write regulations to cover dozens of complex reforms for the $600 trillion global swaps markets, has missed a series of deadlines for finalizing them.
The lack of finalized rules risked creating a legal void for off-exchange derivatives trades used by companies and traders to offset risk on interest rate shifts or commodity price swings. It created fears that trades could be challenged or invalidated.
The CFTC unanimously voted 5-0 on Tuesday to delay so-called "self-executing" reforms until as late as December 31, or until the agency has finalized corresponding rules.
The agency plan would grant temporary relief from the new guidelines for certain transactions in exempt or excluded markets -- primarily in financial, energy and metals. It also would delay measures that do not require rule-making but refer to terms such as swap, swap dealer or major swap participants that still must be further defined by regulators.
Those rules that require rule-making and therefore do not go into effect on July 16 include defining a swap trade, clearing exemptions for companies that use swaps to hedge everyday business risks, real-time reporting of derivatives trades, and capital and margin requirements for trades.
"This provides the market and market participants the relief on what happens at the one-year anniversary of Dodd-Frank," CFTC Chairman Gary Gensler told reporters.
The CFTC is racing to create a brand new regulatory framework for the over-the-counter derivatives market, including credit default swaps such as those that helped amplify the 2007-2009 banking crisis.
The agency has received criticism for both moving too fast on hastily crafted reforms and for missing Dodd-Frank-imposed deadlines.
The CFTC could impose further relief delays on certain swaps rules beyond December 31, but Gensler said at this time he doesn't expect that to occur.
The proposal, which will be open to a 14-day public comment, must be finalized by the commissioners, which they plan to do by the July 16 deadline.
The Securities and Exchange Commission, which will oversee security-based swaps, said last week it also plans to provide temporary relief from some provisions.
LEGAL CERTAINTY REMAINS AN ISSUE
The CFTC said the proposals "provide the needed clarity for market participants" and should address any legal concerns for swaps beginning on July 16.
Still, there are some doubts if the CFTC can legally shift deadlines laid out in Dodd-Frank.
"I just don't really know what's in their authority to do that would not be subject to some type of legal challenge," said Craig Pirrong, a professor and a director for the Global Energy Management Institute at the University of Houston.
Scott O'Malia, a Republican commissioner, said the CFTC should have gone further in its relief. He proposed the agency remove the six-month time period and instead grant relief until the rules are finalized by the CFTC. The amendment failed to muster enough support among the commissioners.
"I have concerns that this proposal will not provide the appropriate level of legal certainty, and if it is to last only a few months, will likely only serve to further confuse and frustrate the markets and market participants," O'Malia said.
During the meeting, Gensler laid out a rough roadmap of the agency's rule-making schedule. The CFTC may hold votes on anti-manipulation regulations, large trader reporting, agricultural commodity definition and clearing measures in July and early August. Its next meeting is July 7.
Gensler said he hopes to finalize regulations on clearing, swap execution facilities in September. The agency also has targeted taking up entity and product definition rules shortly after Labor Day. He did not offer a time for position limits.