U.S. futures regulator: cover more of swaps market in regulation overhaul

By Reuters Staff
October 16, 2009

Gary Gensler, chairman of the Commodity Futures Trading Commission, July 22, 2009. File photo) REUTERS/Yuri Gripas WASHINGTON, Oct 16 (Reuters) – The U.S. futures regulator said on Friday that proposed legislation to reform rules for the over-the-counter derivatives market should cover a larger share of the $450 trillion market.

Gary Gensler, chairman of the Commodity Futures Trading Commission, said he wants to allow fewer exemptions, saying, “Quantitatively, we want to bring more people into it.

Gensler, who spoke said to reporters about a bill approved on Thursday by the House Financial Services Committee, in a 43-26 vote, said, “We do want to build
upon it.” He described the bill as “very strong.”

The bill sets a general requirement for “standardized” swaps to go through clearinghouses, as a step to reduce market risk, and it requires standardized swaps that involve financial speculation to trade on regulated exchanges or electronic platforms. Regulators would decide which swaps or class of swaps must be cleared.

Swaps that involve end users — businesses ranging from airlines to utilities that use derivatives to hedge against risks that can affect their operations, such as changes in fuel and commodity prices — would be exempt from clearing and from the requirement to trade on exchanges. Swaps also would be exempt from trading if no exchange wants to handle them.

By comparison, the Obama administration says clearing and on-exchange trading should be mandatory for all standardized OTC derivatives. Customized derivatives would be assigned higher capital and margin requirements than standardized swaps. [ID:nN15302346]

Gensler noted the exemption for end users while discussing his desire to “bring more people in” to coverage.

White House economic adviser Larry Summers said financial firms benefited from federal aid after markets plunged last fall and they should realize the need for tighter regulations to prevent a future crisis.

“The time has come for fundamental change in the financial sector of our economy — both in how financial institutions conduct their business and how they are regulated,” Summers said in remarks prepared for delivery at conference in New York sponsored by The Economist magazine.

Five large banks — Goldman Sachs, JPMorgan Chase, Citigroup <C.N>, Bank of America and Morgan Stanley — dominate the derivatives market and reap huge profits from it.

The House Agriculture Committee is scheduled to work on its version of OTC regulation next week. It also would exempt end users from going through clearing but says all swaps accepted for clearing must be traded on regulated exchanges and platforms.

(Reporting by Charles Abbott; Editing by Leslie Adler)
((chuck.abbott@thomsonreuters.com; +1 202 898 8319))

One comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Do you really think this will impact the markets? Money is already flooding the commodities markets since there has been poor performance in equities…