CFTC’s Gensler wants U.S. swaps bills to have more clearing, exchange requirements

October 22, 2009

By Jonathan Spicer
CHICAGO, Oct 21 (Reuters) – The U.S. commodities regulator’s chief said he would work with lawmakers to toughen new derivatives rules recently approved by two congressional groups, signaling he wants more products run through exchanges and clearinghouses, and few companies exempted from clearing.

Gary Gensler, chairman of the Commodity Futures Trading Commission, on Wednesday also repeated the need to limit excessive speculation in energy markets to protect the economy.

Public debate on tightening exchange position limits could begin as soon as late November, another CFTC commissioner said.

Meanwhile, lawmakers in Washington took another step toward regulating the $450 trillion over-the-counter derivatives market, widely blamed for amplifying the financial crisis. A second House committee voted to require many swaps to move onto regulated exchanges, but with exemptions for end-users such as airlines and utilities.

Any clearing exemptions for end-users, such as airlines and manufacturers, should “be very narrowly defined to include only nonfinancial entities that use swaps as an incidental part of their business to hedge actual commercial risks,” Gensler told a Futures Industry Association conference in Chicago.

He said hedge funds, financial firms or other investment funds should not be exempted from a clearing requirement — which is intended to shed more light on the private OTC markets and protect participants from the default of a major player.

“We need to protect the public, that large swap dealers and entities that are holding themselves out to the public dealing in these complex derivatives are registering and regulated as swap dealers — that we cover the next AIG so to speak,” Gensler told reporters, alluding to the near collapse last year of U.S. insurer American International Group.

Nonfinancial companies say it would be a burden to go through clearing and have to post cash reserves. They say it is common to pledge noncash assets as collateral.

U.S. and European lawmakers moved in the last seven days on new derivatives rules meant to avoid a repeat of Wall Street-inspired economic meltdown.  While the European Commission unveiled its plans on Tuesday, the U.S. House Financial Services Committee passed a bill last week.

“We look forward to working with both committees and the rest of Congress to build upon this effort,” Gensler said of the two U.S. bills, in an interview with Reuters TV, adding he will work with Congress to expand the number of transactions run through exchanges or clearinghouses.

CENTRAL CLEARINGHOUSES

The two U.S. proposals would require many OTC swaps run through a central clearinghouse, but, in general, would not require as many as the original Obama administration proposal.

The versions will be merged in a wider package of financial rule reforms for a House vote expected early next month.

DRIVE FOR LIMTS
Gensler also defended his push to impose position limits on energy traders. The CFTC faces intense pressure from Congress to tighten limits on the size of positions traders take in markets after crude oil futures hit a record near $150 a barrel last year and gas prices topped $4 a gallon at the pump.

“Excessive speculation in terms of concentrated large
positions can — particularly in stormy times, and we did have a crisis last year — (be) very tricky and treacherous for the economy,” Gensler told the conference.

The proposed regulations target crude oil and energy
markets, but would also affect everything from trading in
currencies, securities — even corn and wheat.

The CFTC could call for public comments on new position
limit rules by the end of November, CFTC Commissioner Bart
Chilton said on the sidelines of an energy conference in
Houston on Wednesday.

In some commodities, such as agricultural products, the CFTC puts position limits on how many contracts an investor can hold. In energy markets, the limits are set by the exchanges, like CME Group and IntercontinentalExchange.

“We’re trying to find the right balance,” Gensler said.

Traders and some exchanges warn that limits could reduce market liquidity and actually drive prices higher, or shift trading to overseas markets with looser rules. Large investors are preparing by rebalancing their portfolios, often sharply reducing positions that fall under U.S. regulation.

“There is already a lot of evidence of people migrating to these alternative markets,” said Craig Donohue, chief executive of CME Group, the world’s largest derivatives market operator.

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