July 19, 2011 / 5:51 PM / 7 years ago

CFTC proposes clearing rules, lawmaker challenge looms

WASHINGTON (Reuters) - The U.S. futures regulator on Tuesday approved proposals giving clearinghouses more time to accept a trade, along with risk-management guidelines for clearing members, as a top Republican lawmaker warned legislation to correct the agency’s missteps was imminent.

The measures, which passed by a vote of 3-2, are among the last expected from the Commodity Futures Trading Commission as it carries out the Dodd-Frank financial reform law that gave it oversight of the $600 trillion global swaps markets. The CFTC has largely moved beyond the proposal phase and is now finalizing rules.

Regulators missed a July 16 deadline for implementing most of the rules in Dodd-Frank. As a result, the CFTC granted temporary relief to the industry from complying with some swap rules that had been set to go into effect until as late as December 31.

“Until the CFTC completes its rule-writing process and implements and enforces these new rules, the public remains unprotected,” said Gary Gensler, the CFTC’s chairman.

He said the CFTC may need to consider additional relief around November for the industry. “I don’t want to manage against the clock,” said Gensler.

The CFTC’s latest proposal would prohibit futures commission merchants (FCM), swap dealers and major swap participants from arrangements that could impair open access or competitive execution of trading.

The regulator also made changes to a plan introduced earlier this year that determined how quickly a derivatives clearing organization must approve a swap for clearing. Instead of requiring derivatives clearing organizations to accept or reject a trade immediately, they would be required to do so as soon as technologically possible -- in this case, somewhere between milliseconds and a few minutes.

A second clearing proposal would set risk management standards for members of clearinghouses. It would require swap dealers, major swap participants and FCMs to have risk management procedures in place. They would be required to set risk-based limits for their customers, monitor those limits and conduct stress testing, among other things.

The two proposals are open for comment for 60 days.

The agency’s two Republican commissioners voted against the measures, which they said are unnecessary and riddled with flaws. Michael Dunn, a Democrat, was concerned the plan was “too prescriptive” but would look to public comments to determine whether he would support a final draft.

“I have serious concerns with both proposed rules as they rely on weak statutory authority, poorly articulate a necessity for either rule and are neither justified nor required under the Dodd-Frank Act,” said commissioner Scott O‘Malia.

The CFTC’s five commissioners also voted unanimously to finalize rules for reviewing swaps for mandatory clearing, and the removal of credit ratings in agency regulations.

The CFTC will hold its next meeting on August 4. The agency is expected to finalize its whistleblower measure -- a rule that was originally scheduled for Tuesday’s hearing -- along with swap data repository registration rules and other proposals. Gensler said the agency hopes to take up clearinghouse registration in late September or early October.


Missed deadline notwithstanding, Republican lawmakers and even some CFTC commissioners have criticized the agency’s fast pace, and what a few have called an “irrational” sequence of rules. Legislation has been introduced in Congress to delay or scale back the Dodd-Frank law.

A U.S. House chairman said lawmakers will try to correct CFTC missteps on derivatives rules before they can take effect. Agriculture Committee chairman Frank Lucas, whose panel oversees CFTC, said he was looking at “a number of bills” that could be drafted as soon as September.

The legislation would make clear the CFTC cannot force so-called commercial “end users” such as manufacturers to post cash reserves when they use swaps. Other topics would include the application of financial reforms on pension fund investments, market transparency and coordination with overseas regulations.

“We are the ones standing between a steamroller of regulations and America’s economy and jobs,” said Lucas.

Additional reporting by Charles Abbott; Editing by Alden Bentley and Lisa Shumaker

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