WASHINGTON Jan 10 The top U.S. derivatives
regulator will listen to banks and exchanges 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 also considering a rule for
block trades that could accommodate some of the concerns aired
by the industry, a senior executive said.
"We're going to have this discussion and get some of these
topics up there," Scott O'Malia, one of five CFTC commissioners
told Reuters in a telephone interview.
"It's better that we have that discussion before we make a
bad decision, than after," O'Malia said.
The meeting, which had not been announced before, is set for
Regulators across the world 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
that were blamed for aggravating the 2007-09 crisis.
Banks such as Citi, Bank of America and
JPMorgan dominate the market and fear that clients will
instead start using futures - a similar type of derivative -
because the new rules make them cheaper to use.
Futures exchanges, such as the CME Group Inc and its
much-smaller rival Eris Exchange have grabbed the opportunity,
launching products that promise the same features as swaps, but
at a far lower cost.
One concern of the banks 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 a transaction if
it is above a certain threshold, so as not to show their hand.
A proposed new CFTC rule for swaps trading imposes stringent
requirements on block trades for swaps, which does not exist for
futures. The plan is to introduce a similar restriction for
block trades in futures regulation.
"It is a concern that, depending on the block rules, the
existing rules (may) create a disparity in regulation," said
O'Malia, one of the two members of a Republican minority on the
CFTC's five-strong board.
"The staff is developing a proposed rule on futures blocks,"
said O'Malia, who is often critical of the CFTC.
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.
The CFTC's public hearing was called on concerns about a
shift out of swaps and into futures, a process known as
'futurisation,' O'Malia said.
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.
The CFTC is drawing up rules for public data reporting and
to bring swaps trading on to exchange-like platforms, with
clearing houses standing in between buyers and sellers to
protect against the risk of default.
Derivatives brokers such as ICAP, Tullett Prebon
and GFI are expected to run these new trading
platforms, known as Swap Execution Facilities (SEFs), but are
still in the dark about the rules.
The Jan. 24 meeting would discuss the different rules for
block trades between the two markets, O'Malia said, but it was
not clear whether the new rule on block trades prepared by the
CFTC's staff would come up for discussion.
It was also still not clear when the CFTC would vote on the
long-awaited SEF rules.