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CFTC Votes on New Derivatives Regulations

CFTC Votes on New Derivatives Regulations
February 29
21:29 2012

On Thursday, Feb. 22 the Commodity Futures Trading Commission voted to adopt new rules for players in the $600 trillion derivatives arena.

In a 3-2 vote by the agency, the new rules will affect swap dealers such as big banks, brokerage firms and energy-trading firms that produce derivatives contracts. It will also encompass other players such as hedge funds and traders with large swap positions valued on commodities, interest rates and mortgage securities derivative contracts.

The new rules will list a number of requirements to raise internal business practices. Now, firms will be required to manage risks from derivatives trading, avoid conflicts of interest and ask chief compliance officers to create annual reports describing the firm’s internal controls.

The agency was also scheduled to vote on the definitions of swap dealers and key swaps participants with Thursday’s vote but the final vote was delayed by the agency.

According to Gary Gensler, CFTC chairman, the new rules “will lower the risk that swap dealers pose to the rest of the economy.”

These new rules, which had initially been proposed in 2010, came as a result of the 2008 financial crisis and the ensuing Dodd-Frank Act. From this, came a directive for increased federal oversight of swaps trading, which required the CFTC to administer more than 50 new rules.

To date, the agency has now finalized 27 Dodd-Frank rules.

As a result of Thursday’s vote, risk management guidelines have been included in the new rules, which will help manage the hazards and volatility that comes from derivatives trading. Firms will be required to closely watch their trading positions in compliance of the laws which limit the number of contracts a trader can own.

One area expected to bring grumblings from Wall Street is conflict of interest. Per the new rules, firms will now be required to create firewalls that prevent traders from persuading their firm’s derivatives research. It will now be forbidden for banks to bargain with clients for either positive research or pressure them with negative ones as a means to gain business.

With the new rules, came some political battles on Thursday. The two opposing votes came from the agency’s Republican members. They believed the agency went too far in imposing the obligations listed in Dodd-Frank. One heated conversation between the parties included the topic of “duplicative” requirements

Scott D. O’Malia, Republican member of the commission, spoke about this and said, “I believe the commission has failed to carefully and precisely identify a clear baseline against which the commission measured costs and benefits and the range of alternatives under consideration in this rule.”

Gensler, who was an official in the Treasury Department during the 1990s, said that under the Clinton administration, derivatives trading had been excluded from new oversight, which led to increased risk as the financial crisis. Gensler, a supporter of this action, said the financial crisis has shown the effect of less regulation.

He said, “That was a false assumption and I will even say I was part of that assumption.That’s why I’m so happy today to be able to support this rule, that this agency does have a role and Congress asked us to do it.”

Next up for the agency and its march toward more regulation is the two-day public meeting on Feb. 29 and March 1 that will discuss greater customer protection in light of the MF Global Holdings collapse.

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