At a meeting scheduled for Friday, October 1st, the Commodity Futures Trading Commission (CFTC) will vote on proposals to implement the over-the-counter derivatives provisions in the Dodd-Frank financial-regulation law enacted in July.
According to news sources, the agency is expected to establish procedures for clearinghouses, exchanges and swap trading platforms. It will also propose rules targeting clearing venues that are deemed systemically important to the U.S. financial market.
In addition, the CFTC is expected to establish a timeline for firms to report data about outstanding swap trades that were executed before the passage of Dodd-Frank law. The data on these privately negotiated trades must be submitted to regulators or to specialized swap data warehouses in an effort to strengthen transparency in the $615 trillion over-the-counter derivatives market.
The Dodd-Frank law gives the CFTC and the Securities and Exchange Commission broad authority to regulate the over-the-counter derivatives market. It will require key players in the market, including swap dealers and major traders, to execute many of their deals on trading platforms and transmit their swaps through clearinghouses. If a swap isn’t suitable for clearing, then each counterparty to the trade will have to post collateral and abide by stricter capital standards.
Although Congress excluded “end-users” from these regulations, there is still concern because the law gives the CFTC and SEC broad discretion in how they craft their rules. Thus, the agencies must also establish the definitions of a swap dealer and a major swap participant. If they create a very wide definition, then some end-users fear they will be regulated. Typically, the “end-user” firms use swaps as hedging tools to protect their balance sheets from volatile price swings or interest-rate fluctuations.
Mr. Gensler has said he suspects about 200 different entities will qualify under the definition of a swap dealer. As long as a company is not considered a dealer and isn’t “substantial enough to be relevant to the economy,” then the company will likely qualify for an exemption, Gensler explained.
According to news sources, on the proposals to be revealed this Friday, the agency will also suggest some rules that will apply to all clearinghouses and some requirements that will specifically target the systemically important venues.
Under the law, the newly established Financial Stability Oversight Council of regulators, including the CFTC, SEC and Federal Reserve, will have authority to decide which clearing organizations are important to the overall system. If they are considered to be systemically important, they will be subject to heightened oversight and also may qualify for access to the Fed’s discount window.
