Wall Street vs commodity traders at US watchdog swaps hearing

Thu Jan 31, 2013 9:53am EST

* CFTC writing rules for swaps for first time
    * Banks complain that new rules favor futures
    * Exchanges have launched new products to move clients out
of swaps

    By Douwe Miedema
    WASHINGTON, Jan 31 (Reuters) - Wall Street banks and Chicago
commodity traders on Thursday will each try to sway the top U.S.
derivatives regulator their way at a public hearing on whether
new rules unduly favor one of the two rivals.
    The Commodity Futures Trading Commission (CFTC) is drawing
up rules for swaps, speculative financial instruments that were
unregulated at the time of the 2007-09 financial crisis, and
were widely blamed for exacerbating it.
    Investment banks, which dominate the $650 trillion swaps
market, are now worrying that clients will stop using swaps and
turn to futures instead because while similar, the new rules
have made futures cheaper. 
    Swaps are often traded over the phone in bilateral deals,
with a small group of so-called "dealers" including Citigroup
, Bank of America and JPMorgan holding the
vast majority of the market.
    These banks often trade with each other through brokers such
as ICAP and Tullett Prebon, who are outspoken
critics of the CFTC's rules. 
    Under the CFTC's new rules - part of the Dodd-Frank overhaul
of Wall Street - trading needs to move to exchange-like
platforms, with clearing houses standing between buyers and
sellers, and data publicly reported.
    Half of the respondents in a recent study by UBS 
said they were more likely to use futures instead of swaps
because of the new rules, up from just 18 percent in the
previous study in March 2011.
    In October, the IntercontinentalExchange changed its
energy swaps products to futures to avoid the increased
regulatory burden. 
    Futures exchanges such as the CME Group 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.
    Still, volumes at these two groups have dawdled, and are
negligible when compared with the vast swaps market, which
comprises interest rate swaps, credit default swaps, foreign
exchange swaps and commodity swaps.
    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.
    CFTC Commissioner Scott O'Malia, on whose initiative the
Thursday meeting was called - said he expected the SEF rules to
come out in the middle of February.
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