The Commodity Futures Trading Commission (CFTC) plans to issue rules next week for reporting some swaps and on the requirements for derivatives clearing organizations and swap execution facilities, said Chairman Gary Gensler.
“We plan to actively publish proposed proposed rules in the fall, using weekly public…meetings for this purpose. Our first such meeting will be next Friday,” he told the U.S. Chamber of Commerce Tuesday.
The agency intends to consider governance arrangements for derivatives clearing organizations (DCO), designated contract markets and swap execution facilities (SEF). And it will act on proposed risk management standards for DCOs that are designated as systemically important under the Dodd-Frank financial reform bill, which President Obama signed into law in July (see Daily GPI, July 22). The public will have 30 days to comment.
Of particular interest to the energy industry, the new law marks the first time the $600 billion-plus over-the-counter (OTC) derivatives market will be regulated by the federal government. It requires OTC transactions to be traded on regulated exchanges much like stock, and to be cleared in clearinghouses in order to limit excessive speculation in markets.
However, it grants a narrowly crafted clearing exemption for large commercial traders that use derivatives to hedge the risk associated with trading of physical products or end-users that use derivatives to legitimately hedge their commercial risk rather than for speculative purposes. The exemption would apply to a broad array of commodities, including oil, natural gas, electricity and coal. Despite the exclusion for bona fide hedgers, industry still has reservations about the bill.
The most critical area of the new law to Chamber members is the end-user exemption, Gensler said. “The statute on this is clear: those nonfinancial entities that are ‘using swaps to hedge or mitigate commercial risk’ will be able to choose whether or not to bring their swaps to clearinghouses. Financial entities, however, such as swap dealers, hedge funds and insurance companies, will be required to use clearinghouses when entering into standardized transactions with other financial entities,” he said.
“There are three tests to determine whether an entity is a major swap participant, and they all relate back to whether the entity is substantial enough to be relevant to the economy or the financial system as a whole,” Gensler said, adding that the agency expects about 200 entities to register as swap dealers.
Under the Dodd-Frank law, OTC derivatives can be traded on SEFs as well as exchanges. An SEF is “a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants. This transparency brought about by this trading requirement should improve pricing for the Chamber’s member businesses,” Gensler said.
“The more pre-trade transparency there is, the more likely there will be additional competition in the markets and tighter pricing for your transactions,” he noted.
Regulators have until July 15 of next year to write the rules. “The statute also envisions a transition period after rule-writing to allow the marketplace to comply with the new rules…Thus I would imagine that the earliest that real-time reporting would come into effect will be in September of next year,” he said.
In the meantime, the CFTC is soliciting “broad public” comment on the proposed rules, Gensler said. It also is having roundtables with the Securities and Exchange Commission on various market issues. “Additionally, many individuals have asked for meetings with either our staff or me to discuss swaps regulation. In the last 61 days we have had at least 100 such meetings.” The CFTC has pledged to post details of all meetings relating to the rulemakings.
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