* Many U.S. rules for derivatives market yet to be defined
* Delay stokes anxiety about vulnerability to Europe
* Investors embrace clearing in boon for CME, LCH, ICE
* CFTC inundated with thousands of industry letters
By Jonathan Spicer and Ann Saphir
CHICAGO, Oct 12 (Reuters) - Europe’s debt problems are increasing anxiety about the vulnerability of global markets as too many new U.S. derivatives rules intended to prevent a repeat of the 2008 crisis have yet to be defined.
Investors have responded in recent months by embracing the clearing of swaps, essentially beating regulators to the punch, to protect themselves in volatile markets.
Clearing allows investors to avoid the credit risk of trading with banks that appear newly vulnerable amid Europe’s debt crisis. In 2008-2009 banks’ worries about the health of their trading partners resulted in a widespread freezing of credit, which nearly sank the global economy.
Executives at a futures industry conference here urged regulators to speedily adopt rules for trading and clearing in the over-the-counter swaps market. The longer we wait, they said, the more dangerous it becomes.
“If we were the five senior staff on the Titanic, I’d like to think we wouldn’t be standing back, looking at the safety boats and thinking about whether we can design them better,” CME Group Inc chief executive Craig Donohue said at the Futures Industry Association.
“We’d be thinking about how to get people on the boats and get them to safety, and maybe we can improve on that in the future,” he said.
It has been three years since a U.S. financial crisis sent the global economy into a tailspin, and more than a year since lawmakers passed a bill designed to prevent a new crisis from taking down the financial system in similar fashion. Regulators are scrambling to finish writing the rules.
Now, with Europe’s debt crisis showing some of the same signs as the United States’ meltdown, investors have rushed into clearing credit and interest rate swaps, a boon in volatile markets for companies like CME and Europe’s LCH.Clearnet.
The Commodity Futures Trading Commission, which must make final about 50 new rules under the Dodd-Frank law, has struggled to keep up with the rule-making process, having finished only about a dozen of the rules.
Several key rules, including capital and margin requirements, will be pushed into the first quarter of 2012, putting the agency well behind a July 2011 deadline Congress had set.
Regulators have benefited from public meetings that provided input for the rules-writing, said CFTC Chairman Gary Gensler. “But the American public needs us to move forward and get the job done and finish these rules,” he told reporters.
“The crisis emanating from Europe reminds us that the public is still unprotected.”
Investor appetite for CME’s cleared swaps soared last month, with trading in credit default and interest rate swaps rising to $42 billion in September, from less than $1 billion about a month earlier.
CME’s futures business has also benefited, as swaps users seek safer alternatives to their bilateral dealings with banks. Asset managers are increasingly shifting their trades to CME, doubling their use of CME’s short-term interest rate futures in the past year for instance. Trading in currency futures rose to records in September as investors sought safety through clearing.
“The trend is there,” said Jeffrey Sprecher, chief executive of IntercontinentalExchange Inc , which began clearing CDS in early 2009 and saw an 11 percent jump in credit-related revenues from the second to the third quarter of this year.
“It’s obviously a very complicated global environment right now for global exchange risk, and you are seeing a migration towards futures more than the OTC market.”
Despite delays by the CFTC and other agencies in defining the Dodd-Frank rules, the expectation that they will eventually come into force has allowed investors to begin clearing products they never had before.
In a global market of some $480 trillion in clearable interest rate swaps, an estimated $180 trillion has yet to be cleared.
Yet some, including Donohue and Sprecher, cautioned in interviews that it was important the CFTC takes the time to sift through the thousands of comment letters and get the rules right. “I think it’s well intentioned,” Sprecher said.
There is also the real threat of lawsuits from the industry once the rules — from limits on excessive speculation to real-time reporting of trades to end-user exemptions — are formally adopted.
“You don’t have to read too closely between the lines to see that people are laying the groundwork for legal challenges,” said former CFTC chief economist James Overdahl, who is now vice president at consulting firm Nera.
But based on interviews with several traders and industry executives, the euro zone crisis is giving a new urgency to the need to define how exactly regulators want to safeguard the market.
“Let’s fish or cut bait,” said Chris Hehmeyer, chief executive of Chicago-based proprietary trading firm HTG Capital Partners. “It’s time for them to go ahead and get the definitions out there so that we can get on with it.”