WASHINGTON Feb 13 A disagreement over how to
force unregulated swaps trading onto exchange-like platforms has
kept the top U.S. derivatives regulator from issuing rules
investment banks are eagerly awaiting, two people familiar with
the discussions said on Wednesday.
The design of so-called Swap Execution Facilities, or SEFs,
is the last remaining building block in the Commodity Futures
Trading Commission's overhaul of Wall Street after the 2007-2009
But the agency's five commissioners still disagree about
details that could determine whether the $650 trillion swaps
industry will be restructured or stays much the same.
Swaps are financial contracts that are largely used for
speculation or to insure against losses on anything from
commodity prices to the risk of default.
The key issue is how many quotes a client must obtain on a
swap before entering a deal, a mechanism that is meant to
prevent the bilateral trading over the phone blamed for much of
the opacity in the market, the people said.
"The lower we go on that, the more the swaps market is going
to function the way it was before Dodd-Frank," one of the people
said, referring to the 2010 law enacted to avoid a repeat of the
CFTC Chairman Gary Gensler wants the number of those
"requests for quote" to be at least five. But others think that
is impracticably high, and the commission is largely split along
Gensler may count on the vote of his fellow Democrat,
Commissioner Bart Chilton, but not so far on the vote of the
third majority member, Mark Wetjen, the people said. The CFTC's
two Republicans are thought to oppose Gensler's position.
The SEF rules are especially important for brokers such as
ICAP and GFI, which function as middle-men
between investment banks dealing swaps, and who conduct most of
their business over the phone.
A draft of the final rules has been circulating for some
time, the people said, and while they expect a vote to take
place at the end of the month, a date had not been set and
Gensler had not yet started negotiations.
"I don't think he's going to move on it, at least anytime
soon. I think he's going to hold a hard position and maybe at
the very end he'll relent. That's kind of his pattern," the
first person said.
The CFTC confirmed that no date for the vote had been set,
but declined to comment otherwise.
Another hot issue for the industry is the broking of swaps
deals over the telephone, a common practice among the brokers
and their banking clients, who say the rarely traded derivatives
are not appropriate for trading on electronic systems.
The rule would allow the practice, though to what extent is
unclear, the people said. One possible solution is to maintain
voice broking in hybrid systems in which phone orders are
quickly entered into electronic systems.
"The current draft doesn't provide this clarity... it's
still sort of a sticking point," the second person said.