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Gensler: End-Users Should be Subject to Transparency Rules

If Congress is determined to grant commercial end-users an exemption from mandatory clearing of over-the-counter (OTC) derivatives or swaps under financial reform legislation, end-users still should be required to report their trades, said the head of the Commodity Futures Trading Commission (CFTC) Friday.

"Any commercial end-user exception from clearing should not bring along an exemption from transparency requirements," said CFTC Chairman Gary Gensler in a speech Friday to the American Bar Association's Committee on Derivatives and Futures Law in Florida.

While "commercial end-users have raised concerns about posting margin if they are required to clear their transactions, there is no such concern with the trading requirement as long as the trading requirement can be separated from the clearing requirement. In fact, most commercial end-users would like greater transparency than Wall Street currently provides," he said.

"Fortunately, 21st century technology allows separation of trading from clearing, if that's what Congress decides to do. Trading platforms already exist that allow market participants to use credit filters to avoid central clearing and trade bilaterally with preselected preferred counterparties. We can harness this technology for the entire standardized over-the-counter derivatives marketplace," he said.

Any exemption granted by Congress should apply only to "those nonfinancial entities hedging their risk," Gensler said. "Hedge funds and other financial firms should not be exempt from a clearing requirement."

If Gensler had his druthers, all standardized OTC derivatives transactions -- including those by end-users and commercial traders -- would be subject to both a trading and clearing requirement. "I have heard the argument that end-user transactions comprise only a small part of the standardized markets and thus might not need regulation." However, according to statistics from the Bank for International Settlements released last month, an end-user exemption could leave up to 60% (nearly $4 trillion) of standardized transactions unregulated, he noted.

In December the House passed financial regulatory reform legislation that would regulate OTC derivatives for the first time (see NGI, Dec. 14, 2009). While preserving an exemption for commodity trades involving end-users or commercial traders hedging bona fide commercial risk, the House bill aims to bring transparency to commodity futures and derivatives trading by requiring all non-exempt OTC derivative products transactions to be centrally cleared and traded on regulated exchanges. The Senate has yet to bring its bill to the floor.

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