By Douwe Miedema
WASHINGTON May 15 The top U.S. derivatives
regulator unveiled rules for swaps trading that could break open
Wall Street's dominance of the $630 trillion market, yet contain
important concessions to the industry.
The Commodity Futures Trading Commission (CFTC) is writing a
host of new rules based on lessons learned from the 2007-09
financial crisis, which highlighted the opacity of derivatives
and triggered a regulatory crackdown.
The rules for exchange-like platforms to trade swaps - which
the commission is expected to vote on on Thursday - will put an
end to the bilateral trading between banks that was the norm
before the crisis and which fueled speculation and risk-taking.
"We will bring to this once-opaque market place the
transparency that Congress and President Obama laid out," CFTC
Chairman Gary Gensler said on a call with journalists.
The swaps market had modest beginnings in the 1980s,
offering companies risk management tools, but rapidly started to
attract speculators, causing it to mushroom out of sight of
regulators in the following decades.
In an important nod to the industry - which is dominated by
big banks such as Citigroup Inc, Bank of America Corp
and JPMorgan Chase & Co - the CFTC will continue
to allow swaps deals to be negotiated over the telephone.
Derivative brokers such as ICAP PLC, GFI Group Inc
and Tullett Prebon PLC - who sign up for the
bulk of trading between banks - had lobbied hard to retain
so-called voice-broking, the core of their business.
The rules for the new platforms, called Swap Execution
Facilities (SEF), were one of the last remaining building blocks
in the CFTC's rules, part of the Dodd-Frank overhaul of the
financial industry after the crisis.
The regulator has already sketched out how clearing houses
need to stand between buyers and sellers of swaps to reduce risk
and prevent market panic, and has adopted extensive requirements
for data reporting.
Another compromise in the rules for SEFs was the minimum
amount of quotes that a prospective client needs to get before
entering a swap deal, a requirement that is aimed at bringing
more transparency in the market.
The rules set a minimum of three quotes in so-called
request-for-quote trading systems after a one-year phase-in
period in which the minimum number of quotes is two. The CFTC
had initially proposed a minimum of five quotes.
Critics of the industry had said the lower the number, the
smaller the move away from bilateral trading.
The CFTC also determined the minimum size for large trades
that may be reported with a delay - so-called block trades - so
that buyers and sellers don't immediately show their hand and
sway the market to their own disadvantage.
Using that rule, up to 14 percent of the market for interest
rate swaps and credit default swaps would be counted as block
trades in an initial phase-in period, after which it would drop
to between 5 percent and 10 percent.
The commission's five members - three Democrats and two
Republicans - are expected to vote on the proposals in a public
hearing on Thursday, starting at 10 a.m. (1500 GMT).