UPDATE 2-U.S. swaps watchdog rushes trading approvals as shutdown looms

Fri Sep 27, 2013 6:01pm EDT

By Douwe Miedema

WASHINGTON, Sept 27 (Reuters) - The U.S. derivatives regulator has been rushing through approvals for a new untested type of trading platform before a possible government shutdown next week, the head of the agency said on Friday.

The agency has hastily pushed out permits for companies to run the exchanges to trade swaps - called Swap Execution Facilities - that will go live Wednesday, as part of an overhaul of Wall Street after the crisis.

"We now have this date of Oct. 2 coming, so we did move through the 17 temporarily registered Swap Execution Facilities," Commodity Futures Trading Commission Chairman Gary Gensler told journalists.

"Frankly, the documents get only the briefest of reviews to get them ... out the door," he said at a conference, adding the agency was starved of funds anyway because of budget cuts.

The U.S. government was bracing for the possibility of a shutdown of operations on Oct. 1, as a fight over public spending reached fever pitch and Congress struggled to pass an emergency spending bill.

The measure would affect the CFTC because unlike the banking regulators, it is not self-funded.

Swaps are complex financial contracts that can be used to offset financial risk, but are also a favorite speculation tool for hedge funds, and were widely blamed for exacerbating the 2007-09 financial crisis.

The new platforms are one measure to regulate the $630 trillion market - dominated by investment banks such as JP Morgan Chase & Co, Bank of America and Citigroup - to make it more transparent and less risky.

The companies that had registered to run a SEF have to comply with the CFTC's new rules that regulate how trading takes place on Oct. 2, but many had complained that they and their clients weren't ready to make the shift.

At a meeting with the industry this month, two CFTC Commissioners signalled the SEFs might get more time to comply with its rules and let them sort out a spate of logistical issues before trading started.

But Gensler - a former Goldman Sachs banker - indicated that a wholesale delay of the date was not an option, even though the agency was working on a few minor last-minute exemptions from the rules.

"Any relief that we might issue ... we'll get out by Monday because if there were a government shut-down employees can't come in to do such things," he said.

The relief would only be for the obligation to report trades to data warehouses in two asset classes - foreign exchange and energy - where platforms were less well prepared than for interest rates and credit, Gensler said.

It would be for 15 days, a spokesman for the agency later added, putting Gensler at a collision course with fellow Democrat Commissioner Bart Chilton, who in a statement urged a two-month delay, and for all asset classes.

Gensler also said that swaps trading will no longer be permitted outside SEFs from Wednesday, and that electronic platforms where trading is taking place now must shift their business to the new exchanges.

"I don't think there is any doubt about what Congress said that a facility that trades swaps had to register as a Swap Execution Facility ... the words of the statute are really unambiguous," Gensler said.

Lobbyists had been railing against the rule, laid out in an arcane provision known as footnote 88.

The CFTC also told banks in a letter to give all clients equal access to the SEFs, banning them from demanding that their clients draw up separate risk agreements as a precondition for letting them trade.