UPDATE 1-Costly swaps rules shift players into futures: O'Malia

Fri Sep 21, 2012 3:41pm EDT

By Alexandra Alper

WASHINGTON, Sept 21 (Reuters) - Overly tough new swaps rules drafted by the Commodity Futures Trading Commission are unintentionally pushing swaps players into the futures market, a Republican regulator said on Friday.

Scott O'Malia, a commissioner at the CFTC and frequent critic of many of the agency's rules, said that the cost and complexity of the new swaps regime has caused a market shift towards futures that was not intended by Congress or the Commission.

"I believe the regulatory uncertainty was so great that energy markets voted with their pocketbooks and moved their trading business from the complex regulatory nightmare of the swaps markets to the well-functioning futures markets," O'Malia said, citing the recent decision by IntercontinentalExchange Inc's to transition some energy products to futures contracts.

"I'm not certain that other asset classes like interest rates or credit default swaps will be able to find the same relief from the regulations, but I am certain that market participants at all levels and in all asset classes are discussing a possible move to the futures market," O'Malia said at the University of Notre Dame Business Law Forum.

The rules that may be driving the shift were mandated by the 2010 Dodd-Frank financial reform law, aimed at boosting transparency and limiting risk in the $648 trillion over-the-counter global swaps market.

The law was crafted as a response to the 2007-2009 financial crisis, which was fueled by risky swaps trades at firms like insurer American International Group that required multi-billion dollar taxpayer bailouts.

In July, ICE announced plans to transition all its cleared energy products to futures contracts by January, citing regulation as the primary reason.

"Based upon our extensive analysis of new swap rules and consultations with a wide variety of customers, we believe that these policies will increase the cost and complexity for swaps market participants, both in absolute terms and relative to that of futures market participants," Chuck Vice, ICE president and chief operating officer, said in July.

Under the new rules, most swaps will have to be traded on transparent exchanges or special trading platforms and routed through clearinghouses. Major players, so-called "swap dealers," will face new requirements that they back their trades with collateral and capital.

All swaps will have to be reported to a swap data repository, which ICE has described as "a new and untested reporting regime."