U.S. derivatives industry slams CFTC's 85 pct rule

Tue Jun 5, 2012 1:12pm EDT

* CFTC hosts roundtable on Dodd-Frank's 85 percent rule

* Derivatives exchanges push back on the reform

* Gensler said final rule slated for vote later this summer

By Alexandra Alper

WASHINGTON, June 5 (Reuters) - The U.S. derivatives industry on Tuesday criticized a rule it says would force exchanges to delist hundreds of contracts because of low volume, stifling innovation and damaging market liquidity.

The rule aims to protect price discovery in the swaps and futures markets by requiring at least 85 percent of a contract's trading to occur on an exchange's centralized market.

But market participants, speaking at a roundtable hosted by the Commodity Futures Trading Commission, said the so-called 85 percent rule would have the opposite effect, driving business off exchange and damaging competition.

"Our greatest anxiety around this proposed rule is that it would have a very chilling effect on the ability of new exchanges to compete and upon new contracts to succeed," said Thomas Callahan, chief executive of NYSE Liffe U.S.

The rule is part of a raft of regulations mandated by the 2010 Dodd-Frank financial reform law, which tasked the CFTC with boosting transparency and limiting risk in the $708 trillion over-the-counter swaps market.

Widespread ignorance of swaps exposure at failed investment firm Lehman Brothers and insurer American International Group aggravated the financial crisis, which led to billions of dollars in taxpayer bailouts.

The CFTC proposed the 85 percent rule in December 2010 to fit into a larger framework of regulations aimed at beefing up oversight of derivatives exchanges. Those regulations were finalized last month, but regulators postponed a vote on the section covering the 85 percent rule.

CFTC Chairman Gary Gensler has said a vote on the provision would be delayed until the commission could finalize rules on swap-execution facilities this summer.

Participants in the roundtable said exchanges could create economic incentives to achieve the rule's goal, such as discounts for centralized trading.

They added that such trading benefits the exchanges too.

"That is where we generate volume, that is where we make money," said Thomas Farley, president of ICE Futures U.S.

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