CFTC to vote on swaps clearing requirements

Tue Mar 20, 2012 9:30am EDT

* Dodd-Frank rules require increase in use of clearing

* CFTC remains far behind on major rules from 2010 law

By Christopher Doering

WASHINGTON, March 20 (Reuters) - The U.S. futures regulator on Tuesday will vote on rules outlining clearing requirements for swaps, a step regulators hope will increase transparency to Wall Street's risky bets and make markets operate more smoothly.

The Commodity Futures Trading Commission measures being finalized detail the documentation for customer clearing, requirements for processing of their positions and risk management procedures that must be followed by clearing members.

Credit default swaps, a type of over-the-counter derivative, were blamed for amplifying market distress in 2008 as the world slipped into economic recession.

Congress passed the Dodd-Frank law in 2010, which established a framework for regulators to use to boost oversight of the previously opaque $700 trillion OTC swaps market.

The law requires swaps dealers and large participants to trade swaps on exchanges or platforms known as swap execution facilities, and use clearinghouses that guarantee the trades to lower risk.

Swap data repositories would act as a warehouse to collect the information.

The CFTC rules establish documentation requirements that protect a customer by banning so-called tri-party agreements between customers; swap dealers and FCMs that are clearing members; and clearinghouses.

The measure prevents certain documentation that would disclose the identity of a customer's original executing counterparty, limit the number of counterparties that a customer may enter into a trade with, or restrict the size of the position a customer can take with any individual counterparty.

The rules also include procedures to be followed when trades are submitted for clearing.

The regulations require a clearing member, or the clearinghouse, to accept or reject each trade submitted for clearing as quickly as "technologically practicable," but usually between milliseconds to at most a few minutes.

A swap dealer, swap execution facility, designated contract market, and FCM also would have a limited time to submit swaps to a clearinghouse.

In addition, the CFTC would require swap dealers and FCMs that act as clearing members to follow risk management rules.

Clearing members would have to establish certain procedures, including establishing limits for their customers, monitor accounts for adherence to those limits and conduct stress tests of their positions.

The futures regulator has competed about 30 Dodd-Frank rules and has 20 more to go, including swap and swap dealer definitions and measures outlining capital and margin requirements - factors that will highlight who will have to comply with the potentially costly and onerous measures.

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