US derivatives regulator, the Commodity Futures Trading Commission (CFTC), has set out final rules for swaps trading that could "break open" Wall Street’s dominance of the US$630 trillion market.
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.
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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 aims to put an end to the bilateral trading between banks that were the norm before the crisis and which fuelled speculation and risk-taking.
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.
CFTC will continue to allow swaps deals to be negotiated in the industry – which is dominated by big banks such as Citigroup Inc, Bank of America Corp and JPMorgan Chase & Co.
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By GlobalDataDerivative brokers such as ICAP PLC, GFI Group Inc and Tullett Prebon PLC , who sign up for the bulk of trading between banks, had lobbied to retain so-called voice-broking, the core of their business.
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.
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% 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% and 10%.
