U.S. watchdog to hear banks on flight out of swaps

WASHINGTON Fri Jan 18, 2013 6:07pm EST

WASHINGTON Jan 18 (Reuters) - The top U.S. derivatives regulator will listen to banks and others in a public hearing this month to find out if its rules are unduly forcing clients out of swaps markets.

The Commodity Futures Trading Commission (CFTC), which regulates both swaps and futures, is finishing the last building blocks of its part of the Dodd-Frank Wall Street overhaul law, meant to avoid a repeat of the financial crisis.

Global regulators are setting the first-ever rules for the $650-trillion swaps market, where trading is largely executed over the phone and data is hard to find, two factors blamed for aggravating the 2007-09 crisis.

The CFTC on Friday called the industry to a roundtable meeting on Jan. 31, asking for the submission of comments. The meeting, which was first reported by Reuters, had originally been scheduled for Jan. 24.

Banks such as Citigroup, Bank of America and JPMorgan dominate swaps and fear that clients will start using futures instead, because while similar, they are cheaper to use under the CFTC's new rules.

The meeting is timely because the CFTC is finalizing rules for exchange-like trading platforms for swaps - known as Swap Execution Facilities (SEFs) - the details of which will determine how costly swaps trading is.

Scott O'Malia, one of five CFTC commissioners told Reuters last week that his agency was considering a rule for block trades for futures that could accommodate some of the concerns aired by the industry.

One complaint is that the new rules unfairly favor futures markets by making it easier to do block trades, which allow dealers to delay the reporting of transactions above a certain threshold, so as not to show their hand.

A proposed new CFTC rule for swaps imposes stringent requirements on block trades, which does not exist for futures. The plan is to introduce a similar restriction for block trades for futures, O'Malia said.

One of the four topics up for discussion at the Jan. 31 meeting was "appropriate block rules for swaps and futures," according to the CFTC's statement. Another topic was margin requirements for both markets.

At a similar hearing in November, Asian and European regulators vented their anger over the brusque manner in which the CFTC plans to impose its rules on foreign banks. U.S. politicians later chided the agency over the plan.

Both futures and swaps can be used to protect or hedge against the effects of a change in anything from interest rates, foreign exchange rates, the risk of default of companies or governments, or commodity prices.

Futures exchanges, such as the CME Group Inc and much-smaller rival Eris Exchange have launched products that promise the same features as swaps at a far lower cost, stepping into the opportunity created by the new rules.

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