* CFTC passes block trade proposal by 3-2 vote
* Sommers, O'Malia question usefulness of data in proposal
* Agency to hold roundtable to boost customer protection
By Christopher Doering
WASHINGTON, Feb 23 The U.S. futures
regulator on Thursday approved a measure that provides more
insight on when dealers can delay reporting large over the
counter swap transactions with sensitive price and size
information to the public.
However, Republican commissioners at the Commodity Futures
Trading Commission warned that poor quality data used in the
proposed new rule was "troubling" and could serve to undermine
efforts by the agency to boost swaps transparency.
The CFTC proposal, which passed along party lines by a 3-2
vote, establishes at what level block trades are big enough to
qualify for a longer reporting delay. The agency measure will
define and categorize block sizes for five asset classes,
including interest rate and credit swaps.
"If we go too far in, for example, setting block levels too
low, we will possibly not promote (swap execution
facilities)swaps trading," said Bart Chilton, a CFTC
"On the other hand, if we set the block level too high, then
we risk impairing the ability of participants to effectively
utilize the markets at all," he said.
End users entering into a trade do so with a dealer, who
then hedges that risk. In most cases there is sufficient
liquidly to offset the risk, but in block trades or those where
there may not be enough liquidity, it can take more time to
Block trades are large deals negotiated off an exchange's
trading facility and posted later. Voice brokering is often used
for these transactions.
Major swap dealers, such as Goldman Sachs, argue they need
sufficient time to hedge the price risk of their
over-the-counter swaps in other markets, such as futures, before
reporting the trade, or risk the market moving against them.
Without sufficient time, end users could face higher prices to
conduct the trade.
The CFTC proposed the threshold for block sizes in all asset
classes to be set at 67 percent of the notional value of swaps
for each category, meaning that about a third of that dollar
amount would be subjected to the new block rules.
Still, the one-third could actually represent a small number
of large transactions. In this case, CFTC estimated 6 percent of
interest rate swaps and 6 percent of credit swaps would be
classified as block trades.
The CFTC is expected to post later on Thursday the initial
level at which transactions, using data included in the proposed
rule, would be classified as a block trade and subjected to a
delay. For example, CFTC said for a U.S. 5-10 year interest rate
swap the threshold would be $290 million and for NYMEX light
sweet crude it would be 100,000 barrels.
The CFTC also is considering whether to use a 50 percent
notional amount calculation.
Initially, the CFTC proposal would set the block threshold
size for each group, which would be effective for at least a
year. Registered swap data repositories would collect data on
the asset classes that the CFTC would use to establish new block
sizes for each swap category.
The appropriate minimum block sizes would be updated no less
than once a year, the agency said.
Scott O'Malia and Jill Sommers, the agency's two Republican
commissioners, criticized the one-size-fits-all approach and
questioned whether the agency could effectively set block sizes
using antiquated credit and interest data collected during a
three-month window in 2010.
"While I recognize there are limitations to the data
available to the Commission, using such an inapt data set
containing such a small and stale amount of data to set minimum
block sizes is very troubling," said O'Malia.
Sommers warned without "robust data" the CFTC "could
severely harm liquidity" at a time where it is seeking to bring
more swaps on to SEFs.
The final real-time reporting rule passed by the CFTC in
December provided temporary measures such as interim caps on the
reporting of notional and principal amounts until the regulator
established appropriate minimum block sizes.
Until the new block rule is in place, the CFTC said all
trades will be reported post transaction to a repository with a
time delay, as if they were a block.
The CFTC also on Thursday approved by a 3-2 vote a final
rule establishing reporting, recordkeeping and daily trading
record requirements for swap dealers and major swap particpants.
Among their requirements, the final rule requires swap
dealers and major swap participants to establish measures to
monitor for and prevent violations of position limits set by the
CFTC, exchanges or a swap execution facility.
The rules are part of the new regulatory framework to boost
oversight for the previously opaque $700 trillion
over-the-counter derivatives market required under the 2010
Meanwhile, the futures regulator will hold a two-day
roundtable on Feb. 29 and March 1 to consider changes to protect
customer collateral following the collapse of MF Global.
Gary Gensler, the CFTC's chairman, said the meeting will
consider changes, including looking at alternative custodial
arrangements for segregated funds, enhanced customer protections
and transparency provisions for futures commission merchants.