June 7, 2010 / 5:52 PM / 9 years ago

FACTBOX-U.S. lawmakers to finalize new rules for swaps

June 7 (Reuters) - The U.S. House and Senate have each passed legislation to regulate the $615 trillion market in over-the-counter derivatives for the first time.

The proposals are part of a sweeping package of financial reforms aimed at preventing a repeat of the 2007-2009 financial crisis — a crisis that regulators say was exacerbated by OTC derivatives.

Negotiators from each chamber now must merge their bills, and Democrats hope to conclude work in time for President Barack Obama to sign the reforms into law by July 4.

The reforms will fundamentally alter the unpoliced market, dominated by banks like Goldman Sachs (GS.N), JPMorgan Chase (JPM.N), Morgan Stanley (MS.N), Citigroup (C.N) and Bank of America (BAC.N).

Exchanges stand to gain traffic, such as CME Group Inc (CME.O) and IntercontinentalExchange Inc (ICE.N).

Also affected will be hedge funds, insurance companies and other speculators who seek profits in the swaps market — as well as a wide range of manufacturers, commodity producers, small banks, and other businesses that rely on swaps to hedge price and other risks.

Here are the key elements of the proposed swaps reforms, along with key differences between the House and Senate bills:

SWAPS DESK SPIN-OFF

* Objective: prevent taxpayer funds from supporting risky trades, including deposit insurance and access to the Federal Reserve discount window, and other supports for banks. Measure would require banks to spin off desks into affiliates.

* House-Senate dynamic: Not in House bill. Representative Barney Frank — who will chair the conference committee — said he is not in favor of it. Some regulators oppose it.

CLEARING OF SWAPS

* Objective: reduce systemic risks from bad trades by sending “standardized” swaps through clearinghouses, which would require margins and guarantee payment. Regulators can require particular swaps or types of swaps to be cleared.

* House-Senate dynamic: both allow for “end-user” exemptions from clearing to prevent hedgers from being saddled with new costs — but the House exemption is broader.

House: exemption available for swaps involving companies hedging “commercial risk, including operating or balance sheet risk” that are not swap dealers or major swap participants.

Senate: exemption for swaps involving commercial end users — primarily producers, processors, distributors and marketers of goods, services and commodities hedging their own risk. Financial entities, large banks and swaps dealers cannot claim the exemption. At regulators’ discretion, clearinghouses can accept non-cash collateral for swaps.

MANDATORY TRADING

* Objective: increase transparency, increase liquidity, lower prices by requiring cleared swaps to be traded on exchanges or electronic platforms.

HIGHER MARGINS FOR UNCLEARED SWAPS

* Objective: Reduce risk by ensuring traders put up adequate margin and capital as defined by regulators.

REPORTING OF SWAPS

* Objective: increase transparency and make it easier for regulators to police trades by requiring all swaps be reported to trade repositories or regulators.

FOREIGN EXCHANGE SWAPS AND FORWARDS

* House-Senate dynamic: House exempts them from regulation unless the CFTC decides and the Treasury agrees they should be regulated. Senate requires them to be cleared and traded unless the Treasury Department rules otherwise.

REGULATION OF CLEARINGHOUSES

* Objective: give regulators oversight of clearinghouses. Both bills require clearinghouse boards to include market participants, and both prevent clearinghouses from receiving federal bailouts.

REGULATION OF DEALERS AND MAJOR SWAP PARTICIPANTS

* Objective: ensure major market players do not become systemically risky by requiring registration with regulators, which would set capital and margin standards, and other requirements.

POSITION LIMITS

* Objective: give regulators the ability to limit swaps positions held by a trader or class of traders.

* House-Senate dynamic: House bill says regulators “shall set position limits, as appropriate” while Senate bill says regulators can limit swaps positions and “shall” set aggregate limits on futures and swaps based on the same underlying commodity performing a significant price discovery function.

IMPACT ON FOREIGN TRADERS AND EXCHANGES

* Objective: both bills include measures to try to prevent swaps trade from moving to unregulated offshore markets.

INSIDER TRADING

* Objective: prevent trading on undisclosed federal government information, and other fiduciary standards for derivatives traders and advisors.

* House-Senate dynamic: Senate version includes details recommended by the Commodity Futures Trading Commission. (Reporting by Charles Abbott and Roberta Rampton; Editing by Neil Stempleman)

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