CFTC chairman wants new derivatives rules implemented quickly

Commodity Futures Trading Commission Chairman Gary Gensler on Tuesday laid out an aggressive timetable for implementing regulations for the multitrillion-dollar derivatives market.

In a speech at the U.S. Chamber of Commerce, Gensler said the commission will propose a wide array of new regulations this fall, with most of the rules scheduled for final adoption by mid-July 2011.

The commission will hold a meeting on Oct. 1 to propose regulations for governance and risk management practices at derivatives clearinghouses that stand between buyers and sellers of the complicated financial products. 

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The commission is also slated at the meeting to consider a timeline for requiring the reporting of outstanding derivatives in the $615 trillion market to a new repository or to the commission.

“Our goal is to publish proposed rules this fall,” Gensler said, adding that it could take between four and six months before the commission adopts final versions of the regulations. 

The new rules are at the heart of the Obama administration’s effort to revamp the financial regulatory system following the worst crisis since the Great Depression. Derivatives trades were blamed for exacerbating the crisis, crippling large firms, such as American International Group (AIG), which led to massive taxpayer bailouts of the system.

President Obama and congressional Democrats pushed for a greater role for clearinghouses, public exchanges and “swap execution facilities” to limit the overall risk in the derivatives market and bring transparency to a largely opaque market.

At the CFTC, Gensler said, 30 teams of agency officials are working on the new rules. The commission has already held roughly 100 meetings with private companies and trade associations, including the International Swaps and Derivatives Association (ISDA), Morgan Stanley, Southwest Airlines Co. and PIMCO, the major bond trading firm.

The U.S. Chamber of Commerce, alongside other trade groups, has been pushing regulators to ensure a “strong, clear exemption” for so-called “end-users” of derivatives. The financial law provides an exemption for companies that use derivatives to hedge business or commercial risks rather than for speculative purposes. But it is up to regulators to spell out the full details of the exemption.

Gensler said 90 percent of derivatives trades are between two financial companies and the rest of the market is made up of non-financial companies using the products to hedge or reduce commercial risks.

The business groups argue that without the end-user exemption, companies could be forced to post billions of dollars in margin to cover the risks in the trades. They argue the requirement would tie up capital and limit their ability to invest in other parts of their businesses.

Gensler said roughly 200 companies could be deemed “major swap participants” under the law, thereby facing more stringent regulation than the end-users. Those companies would be regulated akin to large financial derivatives dealers on Wall Street.

Although “much work needs to be done” on the definition of a major swap participant, Gensler said regulators are focused on companies whose failure would have a large impact on the broader financial system and economy.

In a sense, if they fail, do we have another AIG on our hands?” he said.