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CFTC passes swap rules despite ‘flaws’

Thursday 12 January 2012 – by Karina Whalley

The US futures watchdog has pushed through rules on business conduct standards as well as mandatory registration requirements for swaps dealers and major swap participants.

The Commodity Futures Trading Commission voted 4-1 on Wednesday approving the revised regulations on business behaviour that aim to curb market abuse by banks selling derivatives. But commissioner Jill Sommers, who voted against the ruling, says the measure contains “serious flaws”.

The standards require dealers to tell their counterparties the mid-market mark of their outstanding bilateral swaps on a daily basis, in order to bring more transparency to the market.

Fraud and other abusive practices are outlined in the regulation as well as disclosure requirements for material risks, conflicts of interest and material incentives of a swap before a deal is made.

The rules include restrictions on certain political contributions from swap dealers to municipal officials known as “pay to play” prohibitions. They also provide a so-called safe harbour to ensure that special entities, including certain pension plans, will still be able to access these markets and hedge their risk.

Commissioner Scott O’Malia heralded the measures as an “informed integration” of existing self-regulatory requirements and congressional intent.

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However, market participants are still concerned that the rules have not been adequately revised.

Commenting, the Securities Industry and Financial Markets Association said: “It is our hope that after a more thorough review that the commission has indeed made sufficient changes to the original proposal so as not to unnecessarily impede the ability of pension funds, states and municipalities to manage their risks.”

Commissioner Sommers had warned that the finalised rules contain “serious flaws”, arguing the regulation has not been sufficiently modified to take into account complaints by special entities.

“Shortly after our proposed rules were published, special entities began to tell us that the protections we proposed were not protections at all. We heard over and over again, right up until last week, that our rules would not provide additional protections, but would actually harm them by making it more difficult for them to enter into arms-length transactions with swap dealers,” she explained.

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