WASHINGTON May 13 The top U.S. derivatives
regulator is probing the legality of a large number of trades in
energy and metals markets, asking the largest banks for data
going back to 2010, the Financial Times reported on Monday.
The Commodity Futures Trading Commission's inquiry, a
so-called "special call", was into derivatives transactions
known as exchanges of futures for swaps, or ESFs, the FT said.
The CFTC declined to comment.
The agency is one of the U.S. regulators writing new rules
for the $650 trillion swaps market, as politicians across the
world crack down on the industry after the 2007-09 credit
meltdown, to make it more transparent.
Like futures - a similar type of derivative - swaps can be
used to protect against losses on financial assets such as
positions in commodities, or exposure to interest rates or
foreign exchange rates.
Futures have long been regulated, and are traded on
exchanges, but swaps - while similar in how investors use them -
only came to the attention to regulators during the financial
crisis, and rules are only being written now.
The CFTC's investigation focused on whether traders were
using over-the-counter swaps markets to trade what were in fact
futures, the Financial Times said.
Until last year, a large proportion of off-exchange energy
and metals derivatives were traded as EFS via the ClearPort
mechanism of futures exchange CME.
This allowed traders to convert swaps into cleared futures
products - a process that had been approved by the CFTC.
Hit first by the Enron meltdown a decade ago and then by
Wall Street's wobble in 2008, the oil industry had moved to
embrace clearing as a way to reduce counterparty risk in
over-the-counter trades, fuelling a surge in EFS trades.
In such a transaction on the ClearPort system, the actual
"swap" typically existed for only a fraction of a second,
immediately converting to a futures contract after execution.
But EFS trade has diminished, people in the industry said,
because the new Dodd-Frank law would impose onerous new rules on
these trades, because they were deemed swaps even if that was
only the case for a moment.
"In a way they're fighting last year's war," one regulatory
executive told Reuters, who was aware of the CFTC special call.
Some industry participants fear that the request for more
data is a sign that the CFTC - and in particular chairman Gary
Gensler - are uneasy with the industry's rapid move to convert
hundreds of energy, metals and agricultural swap contracts into
futures, and sidestep new regulations.