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Gensler: CFTC, SEC Close to Completing Swap Rule

The Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) are close to issuing a final rule further defining the terms "swap" and "securities-based swap," which would trigger a rule establishing limits on speculative positions in the futures and swaps markets, the CFTC chief told Senate members last week.

"It's essential that the two commissions move forward expeditiously to finalize this rule," CFTC Chairman Gary Gensler testified at a Senate Banking Committee hearing, which was called to review the agencies' progress in implementing the Dodd-Frank Wall Street Reform Act.

He said both the CFTC and SEC have received a draft of the rule from their staffs. "It's been worked out through staff and hopefully we'll be able to finalize [it] in the near term."

When the rule on "swap" and "securities-based swap" is completed, dealers will be required to register with the agencies. "Later this year we envision the dealers to register and the trading will commence on swap execution facilities," Gensler said.

In October 2011, the CFTC voted out the rule to curb excessive speculation in commodity futures contracts and economically equivalent swaps, but it has withheld its implementation pending a rule defining swap and security-based swap (see NGI, Oct. 24, 2011). "The rule ensures that "no single speculator is able to obtain an overly concentrated aggregate position in the futures and swaps markets," Gensler told the banking panel.

The CFTC rule established limits on speculative positions in 28 core physical commodity contracts, four of which are energy contracts: Nymex Henry Hub Natural Gas, Nymex Light Sweet Crude Oil, Nymex New York Harbor Gasoline Blendstock and Nymex New York Harbor Heating Oil. Spot-month position limits for any of the referenced 28 contracts will be set at 25% of estimated deliverable supply.

The rule requires "compliance for all spot-month limits 60 days after the CFTC and SEC jointly adopt the rule to further define the term 'swap' and 'securities-based swap' and for certain other limits, following a collection of a year's worth of large trader swap data."

In response to pleas from commercial energy companies, the CFTC on May 18 proposed loosening restrictions on the aggregation of speculative trades under its position limits rule (see NGI, May 21). Under the rule, as initially stated, a company would have to aggregate with its own all the trades of any entities in which it had more than a 10% interest.

"The proposal [now] would permit any person with a 10-50% ownership or equity interest in an entity to disaggregate the owned entity's positions, provided there are protections and firewalls in place to ensure trading decisions are made independently or one another," Gensler said.

"We are on track to finish the [Dodd-Frank] reforms this year. We're looking soon to finalize the end-user exception" rule, which would exempt those who use swaps to mitigate commercial risk.

"We are...giving the market time to phase in implementation to lower the costs and burdens on this very significant transition," he said. So far, the agency has completed 33 rules and has less than 20 more to go, according to the CFTC. The rules will lower risk through central clearing, and comprehensively regulate dealers, Gensler said.

Speaking to the Financial Industry Regulatory Authority in Washington, DC, last Monday, Gensler focused on the "cross-border application" of Dodd-Frank swap market reforms.

"Some commenters have expressed the view that if a transaction is done offshore, it should not come under Dodd-Frank. Others contend that as long as an offshore dealer is regulated in some capacity elsewhere, many of the Dodd-Frank regulations applicable to swap dealers should not apply," he said. But the long arm of Dodd-Frank does and will apply, Gensler vowed.

"The Dodd-Frank Act mandates...that swaps reforms shall apply in activities outside the U.S. if those activities have 'a direct and significant connection with activities in, or effect on, commerce' of the United States," he said.

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