* CFTC writing rules for swaps for first time
* Banks complain that new rules favor futures
* Exchanges have launched new products to move clients out
By Douwe Miedema
WASHINGTON, Jan 31 Wall Street banks and Chicago
commodity traders on Thursday traded blows before the top U.S.
derivatives regulator on whether new rules for swaps unduly
favor one or the other of the two groups.
The Commodity Futures Trading Commission is drawing up rules
for swaps, which are speculative financial instruments that were
unregulated at the time of the 2007-09 crisis and were widely
blamed for exacerbating it.
Investment banks, which dominate the $650 trillion swaps
market, worry clients will stop using swaps and turn to futures
instead because while similar, the new rules have made futures
But at a public hearing, CFTC Chairman Gary Gensler, a
Democrat, did not seem overly concerned that rules being written
by the regulatory staff will bring about changes in financial
"Approximately eight-ninths of the derivatives market place
(is) swaps and until recently was unregulated. Now we bring
regulation to both sides, is it not just natural there might be
some realignment?" said Gensler.
He addressed a full room that included many industry
representatives, while others watched the debate on screens in
an adjacent corridor, underscoring the wide interest.
Swaps are often traded over the phone in bilateral deals,
with a small group of so-called dealers, including Citigroup
, Bank of America and JPMorgan Chase & Co
having the vast majority of the market.
These banks often trade with each other through brokers such
as ICAP and Tullett Prebon, who are outspoken
critics of the CFTC's rules.
FUTURE OF SWAPS
Under the CFTC's new rules required by the Dodd-Frank law
overhauling the financial industry, trading needs to move to
exchange-like platforms, with clearing houses standing between
buyers and sellers, and data must be reported publicly.
One of the topics under debate is the bigger amount of
collateral, or margin, that market parties need to set aside as
safety buffers when trading swaps.
Futures and options have a one-day margin period, which
means that counterparties ask for enough collateral to be set
aside to withstand one day of market swings.
For cleared swaps, the margin requirement is five times as
high and for uncleared swaps, it is 10 days, making these
instruments far more costly to trade.
It is also easier to delay data reporting in futures than it
is for swaps through so-called large block trades. These may be
hidden from sight for some time, allowing market parties to
trade without showing their hand.
Ironically, swap industry participants, whose markets have
long been unregulated, have now started to say that with tougher
rules for swaps, a flight into futures would mean less strict
regulation and could lead to increased risks to the financial
Such remarks did not go down well with representatives of
the futures industry.
The suggestion that futures are less regulated "is just
unacceptable to have to listen to," said an agitated-sounding
Bryan Durkin, chief operating officer at CME, the
world's largest futures exchange.
CFTC Commissioner Bart Chilton concurred, saying swaps had
been at the center of the worst financial crisis since the
"It's not all bad that some of these swaps are becoming
futures... Swaps were part of the problem and so it doesn't
bother me that we see some of the futurisation," Chilton said,
speaking to the conference over the phone.
Half of the respondents in a recent study by UBS
said they were more likely to use futures instead of swaps
because of the new rules, up from just 18 percent in the
previous study in March 2011.
In October, the IntercontinentalExchange changed its
energy swaps products to futures to avoid the increased
Futures exchanges, such as the CME Group, and much-smaller
rival Eris Exchange have launched products that promise the same
features as swaps at a far lower cost, stepping into the
opportunity created by the new rules.
The meeting is timely because the CFTC is finalizing rules
for exchange-like trading platforms for swaps - known as Swap
Execution Facilities - the details of which will determine how
costly swaps trading is.
"It's critical that we complete these rules. The commission
is close to that, and hopefully we can do that in February,"
Gensler told the meeting.