The Securities and Exchange Commission (security-based swaps) and the Commodity Futures Trading Commission (the rest), face a huge task. The CFTC alone has proposed more than 1,000 pages of rules, with lots more required by a July deadline. On top of this they have to draw up “conforming” amendments in areas where existing rules have to be reworked. No wonder JPMorgan has 350 people trying to get their heads round Title VII.
The regulators get high marks for seeking input. Unusually, they requested comments before they had even proposed any rules (they have received nearly 5,000). ...
Dealers are still miffed about some of the regulators' proposed rules. As some interpret it, one would impose on them a fiduciary duty towards pension funds and municipalities. ...
Banks argue that some rules designed to boost transparency will instead sap liquidity. ...
End-users fret about possibly having to start stumping up initial margin on OTC trades despite assurances from the CFTC's chairman that genuine hedgers will remain exempt. Either way, they can expect dealers to pass on costs as their own capital requirements rise.
Derivatives
ReplyDeleteUnlucky for some
Proposed rules on taming swaps markets are proving controversial
The Economist
http://www.economist.com/node/18285615
Seven is a lucky number in some cultures, but for regulators tasked with fleshing out America's Dodd-Frank act on financial reform it is more curse than blessing. Writing rules for Title VII of the law, the section on over-the-counter (OTC) derivatives, is proving devilish.
ReplyDeleteFew question the push for more regulation. Freewheeling swaps markets were not the main cause of the crisis but they played an unwelcome role, multiplying and masking leverage. The reforms seek to put them on a sounder footing by, among other things, forcing more trading through clearinghouses, exchanges and exchange-like “swap execution facilities” (SEFs).
But as details of the rules emerge, swaps peddlers and their clients are howling. “End-users”—firms, from airlines to brewers, that use swaps to hedge risk—worry that their costs will rise. Big dealers, such as JPMorgan Chase and Goldman Sachs, moan that regulators are rushing things, that they are going beyond the law's intent, and (of course) that there will be “unintended consequences”. One consequence they fear is the slaughter of a cash cow: American bank-holding companies made $12.2 billion from derivatives trading in the third quarter of last year.
The two agencies tasked with penning the rules, the Securities and Exchange Commission (security-based swaps) and the Commodity Futures Trading Commission (the rest), face a huge task. The CFTC alone has proposed more than 1,000 pages of rules, with lots more required by a July deadline. On top of this they have to draw up “conforming” amendments in areas where existing rules have to be reworked. No wonder JPMorgan has 350 people trying to get their heads round Title VII.
The regulators get high marks for seeking input. Unusually, they requested comments before they had even proposed any rules (they have received nearly 5,000). And some of the industry's bugbears, like the requirement that banks spin out most swaps activities into non-bank affiliates, were set in stone by the law.
But dealers are still miffed about some of the regulators' proposed rules. As some interpret it, one would impose on them a fiduciary duty towards pension funds and municipalities. Dealers might conclude that they are safer steering clear of such clients if regulators insist on “importing retail compliance standards to an institutional market”, as one lawyer puts it.
Banks argue that some rules designed to boost transparency will instead sap liquidity. New requirements on post-trade reporting could make a dealer warier of offering quotes on customised contracts for fear of being “picked off” by rivals as the dealer tries to trade out of its position later. Dealers may also be put off by the CFTC's insistence that swap-trading venues offer a minimum of five quotes for any given transaction. “Sunshine is the perfect analogy,” says one banker. “Too much of it in dealer markets and we all get skin cancer.”
ReplyDeleteEnd-users, too, are anxious. They fret about possibly having to start stumping up initial margin on OTC trades despite assurances from Gary Gensler, the CFTC's chairman, that genuine hedgers will remain exempt. Either way, they can expect dealers to pass on costs as their own capital requirements rise. The oil-price spike has heightened sensitivity over hedging costs.
Another area of concern is regulatory co-ordination. The SEC and CFTC diverge on several issues, including standards for reporting large trades and for quoting prices on SEFs. Cross-border co-ordination has also proved elusive. The European Union is on a slower, somewhat different path. Its derivatives rules will be shaped by the review of its financial-markets directive, expected to take more than two years. American banks worry that they will be at a disadvantage, although some of Europe's final rules are set to be harsher.
America's tight deadline looks set to slip in any case. Mr Gensler says that some rules may not be finalised by July, and implemented only well after that. To some that still looks like indecent haste. Says Annette Nazareth, an ex-SEC commissioner with Davis Polk, a law firm: “Regulators are trying to replicate in a year the kinds of rules and infrastructure that evolved over decades in equities markets.”