The rules constitute a compromise that critics say means
supervisors have fewer tools in hand to rein in the opaque
derivatives trading between two parties that was among the
causes of the 2007-2009 credit meltdown.

They are part of a global crackdown on financial markets,
aimed at increasing transparency by making prices visible to
more than just the two trade counterparties and give regulators
more grip on the vast trading activities.

The five members of the Commodity Futures Trading Commission
had struggled for months to agree on the rules as banks lobbied
fiercely to keep the changes to their profitable business as
small as possible.

“While the rules finalized today have some important
reforms, they were also needlessly weakened in key areas,” said
Dennis Kelleher, who heads Better Markets, a lobby group for
greater transparency in financial markets.

The rules set standards for new platforms to trade swaps
called Swap Execution Facilities (SEF), designed to make trading
less opaque as part of the Dodd-Frank law overhauling Wall
Street practices, using lessons learned from the crisis.

The Dodd-Frank law of 2010 threatens one of banks’ most
profitable businesses worth billions of dollars in revenues each
year, and is expected to lower prices for bank clients, such as
investors and hedge funds.

The SEF rules are one of the CFTC’s last remaining building
blocks in implementing Dodd-Frank, triggering rising speculation
that Chairman Gary Gensler – whose term expires at the end of
the year – could soon leave the agency.

Only Republican Commissioner Jill Sommers voted against the
SEF rule, though two other related rules were adopted on 3-2
splits, with the Democrats in the majority.

In a sign of how fundamental the changes for the industry
are despite the compromises, the Securities Industry and
Financial Markets Association (SIFMA), an investment banking
lobby, said it “strongly disagreed” with the commission’s rules.

“(We) believe as drafted (the rules) will negatively impact
investors and hinder the ability of American businesses to
manage risk contrary to intent,” SIFMA head Kenneth Bentsen said
in an emailed statement.

The swaps market had modest beginnings in the 1980s,
offering companies risk management tools but rapidly started to
attract speculators, causing it to mushroom out of regulators’
ability to oversee in the following decades.

(Factbox on swaps: )

INDUSTRY SWEETENERS

In an important nod to an industry dominated by big banks,
such as Citigroup Inc, Bank of America Corp and
JPMorgan Chase & Co, the CFTC lowered the number of
quotes clients need to collect from banks.

Firms such as Blackrock and Fidelity as well as hedge funds
will have to speak to three banks before entering into a swap,
which will put an end to bilateral trading but is less onerous
than the number of five proposed earlier.

The outcome was a “massive convenience” for the largest
banks, said Will Rhodes, an analyst at Tabb Group, a market
structure research and consultancy firm.

“I don’t think it’s going to have the same impact in terms
of … the decentralization of risk that would have occurred had
there been a requirement (for five quotes) in place.”

Critics of the industry say the lower the number, the
smaller the move away from bilateral trading.

The rules will also allow banks to continue to negotiate
deals over the phone, a practice critics say is hard to monitor.

Derivative brokers such as ICAP Plc, GFI Group Inc
and Tullett Prebon Plc, which sign up for the
bulk of trading between banks, had lobbied hard to retain
so-called voice-broking, the core of their business.

The interdealer brokers have all announced plans to set up a
SEF, but there is also a host of new entrants, such as Bloomberg
LP, TradeWeb, which is majority-owned by Thomson Reuters
, and MarketAxess.

GENSLER’S FUTURE

The debate about the request-for-quote, or RFQ, trading
system has been the subject of a fierce debate in the
commission, with Gensler sticking to a minimum of five and the
other commissioners pushing for a lower number.

Even Gensler’s fellow Democrats – Bart Chilton and Mark
Wetjen – disagreed with Gensler’s tough line, and the debate had
delayed the vote for months. The fact that the final vote was
split makes it susceptible to legal challenges.

Wetjen is seen as the possible next chairman of the CFTC
should Gensler leave, but a perception among the political left
that he is weak toward the big banks could hurt his chances.

Amanda Renteria, the former chief of staff of Democratic
Senator Debbie Stabenow, has been mentioned by lobbyists and
others as a possible next chairwoman.

Stabenow told Reuters this week that Renteria was talking to
the Obama administration about a number of possible positions
but declined to elaborate.

“I understand that she’s under consideration for a number of
different positions, and … I believe she would be a tremendous
asset to the administration,” Stabenow said.

Renteria could not be reached for comment.

Asked about his future after the Thursday meeting, Gensler
would only say he was focusing on the work that remains to be
done at the CFTC, such as finalizing the cross-border remit of
the agency’s rules, another thorny issue.

The rules will allow banks to continue to negotiate deals over the phone, a practice critics say is hard to monitor, and lower the number of quotes investors need to get before entering a swap to move away from bilateral trading.

The Commodity Futures Trading Commission is writing a host of new rules based on lessons learned from the 2007-09 financial crisis, which highlighted the opacity of derivatives and triggered a regulatory crackdown.

On Thursday, the CFTC’s five members – three Democrats and two Republicans – are expected to vote in a public meeting starting at 10 a.m. (1500 GMT) on new platforms for swaps that will bring bilateral trading to an end.

Bilateral trading, which is also seen as difficult to monitor, was blamed for exacerbating the crisis.

“We will bring to this once-opaque marketplace the transparency that Congress and President Obama laid out,” CFTC Chairman Gary Gensler said on a call with journalists when presenting the rules on Wednesday.

The swaps market had modest beginnings in the 1980s, offering companies risk management tools, but rapidly started to attract speculators, causing it to mushroom out of regulators’ sight in the following decades.

(Graphic with key metrics of the swaps market: link.reuters.com/beh28t)

In an important nod to an industry dominated by big banks such as Citigroup Inc, Bank of America Corp and JPMorgan Chase & Co, the CFTC will continue to allow swaps deals to be negotiated over the telephone.

Derivative brokers such as ICAP Plc, GFI Group Inc and Tullett Prebon Plc, which sign up for the bulk of trading between banks, had lobbied hard to retain so-called voice-broking, the core of their business.

The rules for the new platforms, called Swap Execution Facilities (SEF), were one of the last remaining building blocks in the CFTC’s rules, which are part of the Dodd-Frank overhaul of the financial industry after the crisis.

Another compromise in the rules for SEFs was the minimum number of quotes that a prospective client needs to get before entering a swap deal, a requirement aimed at bringing more transparency to the market.

The rules set a minimum of three quotes in so-called request-for-quote trading systems after a one-year phase-in period when the minimum number of quotes is two. The CFTC had initially proposed a minimum of five quotes.

Critics of the industry had said the lower the number, the smaller the move away from bilateral trading.

(Reporting by Douwe Miedema; Editing by Lisa Von Ahn)

The Commodity Futures Trading Commission (CFTC) is writing a
host of new rules based on lessons learned from the 2007-09
financial crisis, which highlighted the opacity of derivatives
and triggered a regulatory crackdown.

The rules for exchange-like platforms to trade swaps – which
the commission is expected to vote on on Thursday – will put an
end to the bilateral trading between banks that was the norm
before the crisis and which fueled speculation and risk-taking.

“We will bring to this once-opaque market place the
transparency that Congress and President Obama laid out,” CFTC
Chairman Gary Gensler said on a call with journalists.

The swaps market had modest beginnings in the 1980s,
offering companies risk management tools, but rapidly started to
attract speculators, causing it to mushroom out of sight of
regulators in the following decades.

In an important nod to the industry – which is dominated by
big banks such as Citigroup Inc, Bank of America Corp
and JPMorgan Chase & Co – the CFTC will continue
to allow swaps deals to be negotiated over the telephone.

Derivative brokers such as ICAP PLC, GFI Group Inc
and Tullett Prebon PLC – who sign up for the
bulk of trading between banks – had lobbied hard to retain
so-called voice-broking, the core of their business.

The rules for the new platforms, called Swap Execution
Facilities (SEF), were one of the last remaining building blocks
in the CFTC’s rules, part of the Dodd-Frank overhaul of the
financial industry after the crisis.

The regulator has already sketched out how clearing houses
need to stand between buyers and sellers of swaps to reduce risk
and prevent market panic, and has adopted extensive requirements
for data reporting.

Another compromise in the rules for SEFs was the minimum
amount of quotes that a prospective client needs to get before
entering a swap deal, a requirement that is aimed at bringing
more transparency in the market.

The rules set a minimum of three quotes in so-called
request-for-quote trading systems after a one-year phase-in
period in which the minimum number of quotes is two. The CFTC
had initially proposed a minimum of five quotes.

Critics of the industry had said the lower the number, the
smaller the move away from bilateral trading.

The CFTC also determined the minimum size for large trades
that may be reported with a delay – so-called block trades – so
that buyers and sellers don’t immediately show their hand and
sway the market to their own disadvantage.

Using that rule, up to 14 percent of the market for interest
rate swaps and credit default swaps would be counted as block
trades in an initial phase-in period, after which it would drop
to between 5 percent and 10 percent.

The commission’s five members – three Democrats and two
Republicans – are expected to vote on the proposals in a public
hearing on Thursday, starting at 10 a.m. (1500 GMT).

In a wide-ranging speech explaining the Fed’s role in monitoring the stability of the banking system, Bernanke also said the central bank was closely monitoring asset markets for signs of excessive risk taking.

“While the shadow banking sector is smaller today than before the crisis … regulators and the private sector need to address remaining vulnerabilities,” Bernanke said in the text of a speech due for delivery in Chicago.

More work was needed to ensure the repo market – the wholesale market banks use for their everyday funding needs – could deal with the potential consequences of a default by a large borrower or a broker-dealer.

And a run on money market funds also still remained a possibility, Bernanke said.

Bernanke said the Fed was monitoring a wide range of asset markets for signs investors were “reaching for yield” in a way that might pose risks to the financial system, given that interest rates were so low.

Bernanke did not address the outlook for monetary policy or the economy, nor did he discuss remarks by Fed Governor Daniel Tarullo last week that current globally agreed limits on how much banks can borrow might need to be toughened.

(Editing by Andrea Ricci)

The design of so-called Swap Execution Facilities, or SEFs,
is the last remaining building block in the Commodity Futures
Trading Commission’s overhaul of the derivatives market after
the 2007-09 credit meltdown.

But the Commission’s five members have failed to agree on
the issue for months and it was not clear whether one of the
proposals that have been circulating will pass at the meeting,
scheduled for next Thursday.

The CFTC is writing a ream of new rules as a result of the
2010 Dodd-Frank law, which aims to prevent a repeat of the
financial crisis by making derivatives markets less prone to
risk and more transparent.

The agency has vastly expanded its powers since the crisis
and is now also overseeing swaps, financial contracts that were
first designed to insure against losses on financial assets, but
are now largely used to speculate.

The rules would put an end to cozy bilateral trading – often
over the telephone – that is now common in the swaps market,
which is dominated by Bank of America Corp, Citigroup
Inc, JPMorgan Chase & Co and other large banks.

One of the most thorny issues is how many quotes a customer
needs to collect before entering a deal. The CFTC’s provisional
rule sets the number at five, but the industry has lobbied hard
to get it lower and some commissioners agree.

Another issue is whether trading over the telephone, known
as voice broking, would continue to be allowed.

The rules are especially important for brokers such as ICAP
Plc, GFI Group Inc and Tullet Prebon Plc
, which function as middle-men between investment banks
dealing swaps, who conduct much of their business over the
phone.

They have been prohibited from starting a SEF because the
rules are not ready yet. New entrants such as Bloomberg,
Tradeweb – which is majority-owned by Thomson Reuters -
and MarketAxess are also setting up SEFs.

The CFTC has already finished rules that force buyers and
sellers of swaps to route their trades through clearing houses,
which take on the risk that either party cannot pay and diminish
the chance of a sudden market panic.

Participants in the market also need to report their trades
to regulators through data warehouses and partially also to the
wider public, to make the market less opaque.

The Commodity Futures Trading Commission said it would hold a public meeting on May 16 to consider the rules for so-called Swap Execution Facilities (SEFs), newly designed platforms to trade swaps.

The CFTC’s five members normally vote about new rules at such meetings, but they have failed to agree on SEFs for months, and it was not clear whether one of the proposals that have been circulating will now pass.

The rules would put an end to the opaque bilateral trading that takes place over the phone that is the now norm in the swaps market, which is dominated by Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz), Citigroup (C.N: Quote, Profile, Research, Stock Buzz), JPMorgan (JPM.N: Quote, Profile, Research, Stock Buzz) and other large banks.

One of the core issues is how many quotes a customer needs to collect before entering a swaps deal. A provisional CFTC rule sets the number at five, but the industry has lobbied hard to get it lower, and some commissioners agree.

Another issue is whether trading over the telephone, known as voice broking, would continue to be allowed.

(Reporting by Douwe Miedema; Editing by Leslie Adler)

The plans are squarely at odds with a warning from Treasury
Secretary Jack Lew, who urged the Republican-controlled House of
Representatives this week not to make any changes to the broad
law drawn up after the 2007-09 credit meltdown.

“These reforms should not be weakened or repealed,” Lew said
in a letter to Representative Jeb Hensarling, chairman of the
House Committee on Financial Services, referring to a raft of
bills the panel has since adopted.

Now two senators have introduced a proposal to exempt
companies using derivatives to protect against losses – and not
to speculate on markets – from rules that would require them to
pay high safety margins.

Backed by 10 other lawmakers from both parties, the bill is
identical to one of nine measures adopted by the House committee
on Tuesday, but which few people thought stood a chance of
passing Congress because the Senate has a Democratic majority.

The proposal by Senator Mike Johanns, a Republican from
Nebraska, and Senator Jon Tester, a Montana Democrat, gives
critics of the 2010 financial overhaul a shot in the arm.

“The Coalition for Derivatives End-Users, and the hundreds
of businesses it represents, applauds this bipartisan
legislation and looks forward to Senate action,” the lobby group
that is pushing for the rule change said.

Dodd-Frank aims to make the $650 trillion derivative markets
less risky by putting clearing houses between buyers and
sellers, forcing them to pay costly safety margins.

The two main derivatives regulators – the Commodity Futures
Trading Commission and the Securities and Exchange Commission -
have already made clear that end-users are exempt from clearing,
and thus also from the margin requirements.

But the Senate bill would also include a rule issued by the
Federal Reserve that calls on banks to impose margin
requirements on all users of the most complex types of swaps,
which do not need to be cleared.

The House proposal, adopted unanimously in the financial
services committee on Tuesday, also has been vetted by the House
Agriculture Committee.

“I’m encouraged that such a large group of bipartisan
senators are joining the House’s good fight to protect farmers,
ranchers, and businesses from costly margin requirements,” said
Representative Frank Lucas, chairman of the House Agriculture
Committee.

The proposal, launched on Tuesday, has been put on the
Senate calendar, and it is up to the Democratic majority to
decide if and when it should move forward.

Bart Chilton, one of five commissioners at the Commodity Futures Trading Commission, said he had asked staff to explore whether consumers needed more protection from any mishaps with Bitcoin, whose value collapsed last month.

“Here’s what I know for sure: we could regulate it if we wanted. That is very clear,” Chilton told Reuters in an interview on Monday. The Financial Times was first to report on Chilton’s plans.

Bitcoin, a digital currency that can be moved via computer or smartphone without a financial intermediary, has gained in prominence as people start to question the safety of holding their cash in the bank. It shot up in value in March, when investors took fright at the next turn of the euro zone debt crisis.

But the price of one “coin” plunged to $130 from a record high of $260 on April 10.

The CFTC’s remit has been vastly expanded after the 2007-09 financial crisis when it was tasked with writing rules for the $650 trillion swaps market.

“There is potentially a federal role here, and we have to make sure that we’re on guard that whatever is traded is appropriately regulated,” Chilton said.

Chilton is an often outspoken Democrat on the CFTC’s board, and the adoption of any regulation he is pushing for depends on the support of the others on the board, as well as what the CFTC’s lawyers and other experts say.

A spokesman for the CFTC declined to comment.

The absence of physical Bitcoins meant people investing in the currency to speculate on a rise in its value could not be said to participate in cash markets, Chilton said, bringing them within the remit of the CFTC’s mandate.

“If you’re buying Bitcoin and you are hoping that their value increases … and you could purchase something with them in a day or a week or a month or a year, that is clearly a derivative of the actual Bitcoin,” Chilton said.

The U.S. Treasury Department in March said that Bitcoin exchanges would be subject to the same money laundering rules that govern money services business like Western Union.

(Reporting by Douwe Miedema; Editing by Eric Walsh)

Bart Chilton, one of five commissioners at the Commodity
Futures Trading Commission, said he had asked staff to explore
whether consumers needed more protection from any mishaps with
Bitcoin, whose value collapsed last month.

“Here’s what I know for sure: we could regulate it if we
wanted. That is very clear,” Chilton told Reuters in an
interview on Monday. The Financial Times was first to report on
Chilton’s plans.

Bitcoin, a digital currency that can be moved via computer
or smartphone without a financial intermediary, has gained in
prominence as people start to question the safety of holding
their cash in the bank. It shot up in value in March, when
investors took fright at the next turn of the euro zone debt
crisis.

But the price of one “coin” plunged to $130 from a record
high of $260 on April 10.

The CFTC’s remit has been vastly expanded after the 2007-09
financial crisis when it was tasked with writing rules for the
$650 trillion swaps market.

“There is potentially a federal role here, and we have to
make sure that we’re on guard that whatever is traded is
appropriately regulated,” Chilton said.

Chilton is an often outspoken Democrat on the CFTC’s board,
and the adoption of any regulation he is pushing for depends on
the support of the others on the board, as well as what the
CFTC’s lawyers and other experts say.

A spokesman for the CFTC declined to comment.

The absence of physical Bitcoins meant people investing in
the currency to speculate on a rise in its value could not be
said to participate in cash markets, Chilton said, bringing them
within the remit of the CFTC’s mandate.

“If you’re buying Bitcoin and you are hoping that their
value increases … and you could purchase something with them
in a day or a week or a month or a year, that is clearly a
derivative of the actual Bitcoin,” Chilton said.

The U.S. Treasury Department in March said that Bitcoin
exchanges would be subject to the same money laundering rules
that govern money services business like Western Union.

Fed Governor Daniel Tarullo said that the limit, known as a leverage ratio, may have been set too low in Basel III, a worldwide agreement aimed at making banks safer after the devastating 2007-09 financial crisis.

“The new Basel III leverage ratio … may have been set too low,” said Tarullo, the Fed’s regulation czar, adding that the central bank could use its powers to “set a higher leverage ratio for the largest firms.”

The debate about too-big-to-fail banks – which are perceived as implicitly relying on taxpayers to bail them out no matter how risky their business conduct – has heated up in Washington in the last few weeks.

Critics of Basel III, including many regulators, have said it is too easy on the banks, and that it relies too much on letting banks use complex calculations to determine how much equity they should hold.

Many of the signatories of Basel III across the world, the Fed included, have missed the January deadline set by global leaders to introduce the global pact.

Tarullo expected the rules that the Fed is drawing up with two other regulators – the Federal Deposit Insurance Company and the Office of the Comptroller of the Currency (OCC) – to come out in the next couple of months.

Under Basel III, the leverage ratio stands at 3 percent. Tarullo declined to say by how much it should go up.

Two senators, Sherrod Brown and David Vitter, have introduced a bill that would set the leverage ratio for the biggest banks at 15 percent, a requirement so onerous that it could force them to carve up their businesses.

GovTrack, a website that calculates the likelihood of U.S. laws being adopted, attributes only a 1 percent chance to the proposal becoming law. Still, the bill has caused a flurry of headlines, and is hotly debated.

Banks complain equity is the most expensive way to fund their business, but it is the safest from a taxpayer’s or a regulator’s perspective. That is because shareholders are the first to lose their money in case of bankruptcy.

Tarullo also said he favored setting minimum requirements for how much long-term debt banks must hold. This debt buffer, which could be converted to equity if the bank failed, would absorb losses in case of financial trouble.

The main threat to bank stability was their reliance on short-term funding, Tarullo said, suggesting that big banks could be allowed to hold less capital than their peers if they relied less on short-term funding.

(Reporting By Emily Stephenson and Douwe Miedema; editing by Andrew Hay)