CFTC rule to shed light on delays for block trades

Thu Feb 23, 2012 5:59am EST

* CFTC to vote on proposal for block trades

* Regulator to set initial level, before revising later

* Agency to hold next rule-making meeting on March 9

By Christopher Doering

WASHINGTON, Feb 23 (Reuters) - The U.S. futures regulator will shed more light Thursday on how it will determine the threshold in which dealers can delay reporting large over-the-counter swap trades to the rest of the market.

The U.S. Commodity Futures Trading Commission will vote on a proposal that would phase in the appropriate block sizes for swaps in five asset classes: interest rate, credit, equity, foreign exchange, and other commodities. The block size will determine at what level trades are big enough that they can be subjected to a longer reporting delay.

"If we go too far in, for example, setting block levels too low, we will possibly not promote (swap execution facilities)swaps trading," said Bart Chilton, a CFTC commissioner.

"On the other hand, if we set the block level too high, then we risk impairing the ability of participants to effectively utilize the markets at all," he said.

Initially, the CFTC proposal would set the block threshold size for each group that would be in effect for at least a year. During that year, registered swap data repositories would collect data on the asset classes that the CFTC would use to establish new block sizes for each swap category.

The appropriate minimum block sizes would be updated no less than once a year, the agency said.

End users entering into a trade do so with a dealer, who then hedges that risk. In most cases there is sufficient liquidly to offset the risk, but in block trades or those where there may not be enough liquidity, it can take more time to complete.

Block trades are large deals negotiated off an exchange's trading facility and posted later. Voice brokering is often used for these transactions.

Major swap dealers, such as Goldman Sachs, argue they need sufficient time to hedge the price risk of their over-the-counter swaps in other markets, such as futures, before reporting the trade, or risk the market moving against them. Without sufficient time, end users could face higher prices to conduct the trade.

The final real-time reporting rule passed by the CFTC in December provided temporary measures such as interim caps on the reporting of notional and principal amounts until the regulator established appropriate minimum block sizes.

Until the new block rule is in place, the CFTC said all trades will be reported post transaction to a repository with a time delay, as if they were a block.

The CFTC also on Thursday will vote on a final rule establishing reporting, recordkeeping and daily trading record requirements for swap dealers and major swap particpants.

Among their requirements, the final rule requires swap dealers and major swap participants to establish measures to monitor for and prevent violations of position limits set by the CFTC, exchanges or a swap execution facility.

The futures regulator, along with the Securities and Exchange Commission, had been scheduled to vote this week on a long-awaited rule that would impose tougher rules on the swaps market by defining who will be a designated swap dealer and a major swap particpant.

CFTC officials interviewed by Reuters said the SEC was responsible for pulling the rule. Another official said the CFTC wanted to make changes, but the SEC was unwilling to support last minute modifications.

The rules are part of the new regulatory framework to boost oversight for the previously opaque $700 trillion over-the-counter derivatives market required under the 2010 Dodd-Frank law. The CFTC's next rule-making meeting is scheduled for March 9.

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