The Commodity Futures Trading Commission (CFTC) yesterday defined what constitutes a swap for regulatory purposes and which swaps and swap dealers are subject to and exempt from Dodd-Frank rules including central clearing. The Securities and Exchange Commission (SEC), the other U.S. regulator charged with implementing Dodd-Frank rules, approved the definitions Monday.
Foreign exchange swaps and forwards, foreign currency options, commodity options, non-deliverable forwards in foreign exchange, cross-currency swaps, forward rate agreements, contracts for difference, options to enter into swaps and forward swaps will be subject to the rules, while certain insurance products, consumer and commercial arrangements and loan participations will be exempt, the CFTC decided.
This rule means that two months after the rule is published, light will begin to shine on the swaps market for the first time, CFTC Chairman Gary Gensler said in a speech Tuesday. The agreed-upon definition rule is set to be finalized and published soon, at which time swap dealers will have barring any extensions 60 days to register with regulators and begin complying with numerous other Dodd-Frank mandates, such as reporting, collateral and record-keeping requirements.
As for the reporting requirement, Gensler said he expects swap dealers will need to supply transaction information to the newly created swap data repositories (SDRs) beginning in September for interest rate and credit default swaps and three months later for energy and other physical commodity swaps. Just one SDR has been registered with the CFTC so far ICE Trade Vault though Gensler said Tuesday at least four others are currently working on applications.
The CFTC commissioners also voted unanimously to exempt end-users of derivatives, including banks, credit unions and cooperatives with less than $10 billion of assets, from the central clearing requirement.
For over a century, through good times and bad, central clearing in the futures market has lowered risk to the broader public, Gensler said. Dodd-Frank financial reform brings this effective model to the swaps market. Clearing significantly lowers the risks of the highly interconnected financial system, which is particularly critical given the current economic uncertainty in Europe and recent ratings downgrades of many of the worlds leading banks.
In April, the regulators defined swap dealer and security-based swap dealer. Upcoming rules yet to be decided involve swap relationship documentation and confirmations, along with the required clearing of swaps between financial firms, Gensler said.
After today, the foundational rules bringing oversight to the swaps market will have been completed, he added.
Christopher Gohlke