WASHINGTON The top U.S. derivatives regulator will discuss next week keenly awaited rules for swaps trading that have the potential to weaken Wall Street's dominant position in the $650 trillion market.
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 the derivatives market after the 2007-09 credit meltdown.
But the Commission's five members have failed to agree on the issue for months and it was not clear whether one of the proposals that have been circulating will pass at the meeting, scheduled for next Thursday.
The CFTC is writing a ream of new rules as a result of the 2010 Dodd-Frank law, which aims to prevent a repeat of the financial crisis by making derivatives markets less prone to risk and more transparent.
The agency has vastly expanded its powers since the crisis and is now also overseeing swaps, financial contracts that were first designed to insure against losses on financial assets, but are now largely used to speculate.
The rules would put an end to cozy bilateral trading - often over the telephone - that is now common in the swaps market, which is dominated by Bank of America Corp (BAC.N), Citigroup Inc (C.N), JPMorgan Chase & Co (JPM.N) and other large banks.
One of the most thorny issues is how many quotes a customer needs to collect before entering a deal. The CFTC's provisional rule sets the number at five, but the industry has lobbied hard to get it lower and some commissioners agree.
Another issue is whether trading over the telephone, known as voice broking, would continue to be allowed.
The rules are especially important for brokers such as ICAP Plc (IAP.L), GFI Group Inc (GFI.N) and Tullet Prebon Plc (TLPR.L), which function as middle-men between investment banks dealing swaps, who conduct much of their business over the phone.
They have been prohibited from starting a SEF because the rules are not ready yet. New entrants such as Bloomberg, Tradeweb - which is majority-owned by Thomson Reuters (TRI.TO) - and MarketAxess are also setting up SEFs.
The CFTC has already finished rules that force buyers and sellers of swaps to route their trades through clearing houses, which take on the risk that either party cannot pay and diminish the chance of a sudden market panic.
Participants in the market also need to report their trades to regulators through data warehouses and partially also to the wider public, to make the market less opaque.
(Reporting by Douwe Miedema; Editing by Leslie Adler and Andre Grenon)