WASHINGTON U.S. futures and securities regulators are poised to fill in a crucial missing part in the swaps reform puzzle this week when they define what swaps products will be covered by the sweeping financial reform legislation the agencies are putting in place.
The U.S. Commodity Futures Trading Commission and the Securities and Exchange Commission have introduced dozens of regulations to implement the derivatives reforms in the Dodd-Frank law, including crucial proposed definitions for swap dealers and details on swap trading facilities.
But until now they have not released a detailed definition for swaps products to be covered by those rules. The SEC will meet publicly to vote on its plan on April 27. The proposal must also be approved by the CFTC, which also is meeting Wednesday for a vote.
"It's a huge deal. It's one of the threshold rule-makings for the implementation of Dodd-Frank," said Michael Sweeney, a partner with Hunton & Williams law firm in Washington.
"It's not only who are you in the market but what are you trading and whether the products you're trading today in physical markets are going to be regulated as swaps," he said.
The regulators have been criticized for not acting on the rule sooner. Critics say it is problematic to move forward on other regulations without first clearly laying out which products will be covered.
Among some key areas that have raised questions include whether contracts such as commodity options, floating rate loans and insurance contracts will be deemed "swaps" by the CFTC and SEC.
CFTC Chairman Gary Gensler has offered few hints on the proposal. But he told Congress last month he supported excluding cash forward contracts -- transactions where a seller agrees to provide a specific commodity at some point in the future -- from the swap definition.
"I know that Wall Street is making the argument that they can't figure out what the regulations mean without having the definition of what a swap is. I do not buy into that argument," said Michael Greenberger, a former senior official at the CFTC and now a law professor at the University of Maryland.
Greenberger said there have been enough signals from Dodd-Frank, recent proposals from the CFTC to implement the legislation, and previous work with swaps by the industry to provide them a detailed road map of what's coming.
He expects the agency will call for the clearing of credit derivatives, currency derivatives, commodity index swaps, energy swaps, and agriculture swaps. They could also offer guidance on whether contracts that are individually tailored and negotiated need to be cleared.
The Dodd-Frank Wall Street reforms of 2010 gave regulators new found responsibility, including oversight of the roughly $600 trillion global over-the-counter derivatives market. It requires standardized swaps to go through clearinghouses, and be traded on exchanges or swap trading venues.
Under the law, regulators have until July to finish their regulations. They have worked furiously to try to meet their deadlines, but have missed or intend to miss several.
A scathing report from the CFTC's Inspector General made public last week found the futures regulator has rushed to meet arbitrary deadlines and failed to sufficiently analyze the costs and benefits of new rules for swaps traders.
The rule-making meeting next week, the 14th for the futures regulator as it works to implement Dodd-Frank, also will provide more insight into capital requirements for end users. Earlier this month, the CFTC issued its margin requirement in swap transactions. It largely spared energy companies, airlines and other end-users from paying billions of dollars in margin on uncleared swap trades.
The SEC also plans to issue more proposals that would strip references to credit-ratings from federal rules. Under Dodd-Frank, all federal agencies are required to remove references to ratings to help reduce investor reliance.
(Additional reporting by Sarah N. Lynch; Editing by David Gregorio)