UPDATE 4-CFTC grants last-minute relief on CME commodity swaps

Fri Oct 12, 2012 7:44pm EDT

* Reprieve lasts until new year for energy, ag swaps traders
    * Move draws criticism of regulator


    NEW YORK/WASHINGTON, Oct 12 (Reuters) - U.S. regulators
granted a last-minute reprieve to CME Group Inc and big
energy traders on Friday, giving them until the end of the year
to convert billions of dollars in commodity swaps to futures
contracts.
    By saying that a swathe of widely traded energy, metals and
agricultural swaps would not be counted toward a threshold
triggering costly new regulations until Dec. 31, the Commodity
Futures Trading Commission brought relief to big traders like BP
 and Cargill Inc, which have argued that new rules
covering "swap dealers" were meant for banks, not merchants.
    The delay, under intense negotiation up to the last moment,
also gives the CME more time to revamp its rules so that
customers can conduct their trades as "futures" contracts, not
swaps, making them exempt from a key measure of big dealers.
Rules requiring traders to tally swaps take effect from Monday.
    Rival IntercontinentalExchange Inc had announced
months ago that all its contracts would automatically convert to
futures by the deadline. But the CME's transition was less
certain, as many of its contracts are first agreed in the
over-the-counter market as bilateral "contingent swaps" before
being converted to futures on its Clearport platform.
    In the past, the "swaps" market was distinguished from the
highly regulated futures market because trades were typically
conducted bilaterally, prices were opaque and regulation was
almost nonexistent. 
    But under the Dodd-Frank financial overhaul, "swap"
contracts will fall under significant new regulations, which
some critics say now make them even more onerous to trade than
futures contracts.
    While the industry is likely to welcome the delay, the fact
that it was announced at the 11th hour may intensify criticism
that CFTC Chairman Gary Gensler is moving too fast with the
reforms, creating more confusion than clarity.
    "We brace ourselves for the results of new regulations meant
to bring transparency to the market that have in reality brought
confusion, concern and do not inspire confidence in the CFTC's
leadership," U.S. Sen. Pat Roberts, ranking Republican of the
Senate agricultural committee, said in a statement, calling for
Agriculture Committee hearings on the agency's leadership.
    At least one CFTC commissioner, Scott O'Malia, agreed with
that criticism. 
    "The fact that market participants are fleeing the
Commission's swap regulations is proof that the Commission has
not developed clear and cost-effective rules," O'Malia said in a
statement. Noting that the CFTC has had to issue several other
special reprieves from deadlines, O'Malia added, "The Commission
should never have gotten to the point where it was forced to
issue such last-minute piecemeal relief."
    For ICE and CME, the stakes for getting it right are
substantial. Over-the-counter energy clearing generated about
$400 million or 30 percent of ICE's revenue last year, and about
$300 million, or 9 percent of the CME's.
    
    SWAPS TO FUTURES
    The 2010 Dodd-Frank Wall Street overhaul law empowered the
CFTC and the Securities and Exchange Commission jointly to
police the $648 trillion over-the-counter market.
    A key pillar of the law requires companies that make markets
in swaps to register, hold additional capital and post
collateral to back their trades.
    Industry players have been waiting for more clarity from the
CFTC on how to determine whether they meet the definition of a
"swap dealer." Under rules approved in April, most companies
will be deemed dealers if they trade more than $8 billion of
swaps in a 12-month period.
    Also on Friday the CFTC said it would give energy firms that
deal in swaps with public utilities more time to comply with
requirements that any such firm that trades more than $25
million in swaps must register as a dealer. In addition, the
CFTC late Friday issued a broader temporary exemption on how all
energy, agricultural and metal swaps are counted toward the swap
dealer threshold. 
    In economic terms, the switch from a swap to a future is
wholly semantic - the new "futures" contracts are identical to
the swaps. But by converting their trades into futures, some big
traders could fall below the $8 billion threshold and avoid the
new rules.
    The CFTC said it believed the delay was warranted "in order
to provide participants in the market ... sufficient time to
determine whether and in what manner to transition those swap
activities to similar products in the futures markets that will
become available in the near future, and to enable any such
transition to proceed in an orderly manner".
    Separately, the CME gave new details on how it will build
out its long-successful Clearport business model, which allows
traders to clear swaps deals as futures contracts, to one where
the contracts will trade as futures from the get-go.
    It will withdraw a proposal it had made last month that
would allow customers to trade off-exchange futures contracts in
unlimited size for certain illiquid markets, called 9(B)iii
trade types, essentially mimicking swaps deals.
    But it will press ahead with a plan for lower block-trade
thresholds from next week, which will allow customers to
negotiate bigger deals as off-exchange futures trades. Such
limits are typically set at higher levels for the most
established, liquid futures contracts.