CFTC's Gensler Says More Than 200 Financial Firms May Get Swap Dealer Tag
More than 200 global financial firms may qualify as swap dealers under new over-the-counter derivatives regulations being crafted by the Commodity Futures Trading Commission, according to Chairman Gary Gensler.
The designation would impose prescribed capital requirements to back trades, mandate the use of clearinghouses for most transactions and require a higher level of oversight than other market users. The makeup of swaps dealers may mimic the self-imposed category of “primary member” of the International Swaps and Derivatives Association, an industry trade and lobbying group, Gensler said in prepared remarks he’s scheduled to deliver to the group today in New York.
“Initial estimates are that there could be in excess of 200 entities that will seek to register as swap dealers,” Gensler said. “Of ISDA’s 830 members, 209 are ‘primary members.’ Under ISDA’s bylaws, a firm is only eligible for primary member status if it deals in derivatives for purposes other than ‘risk hedging or asset or liability management.’”
ISDA primary members include the largest swap dealers such as JPMorgan Chase & Co., Deutsche Bank AG and Goldman Sachs Group Inc. as well as firms such as China Construction Bank, Citadel LLC, Cargill Inc., BP Plc and OAO Gazprombank, according to a list posted on ISDA’s website.
Other likely swap dealers include affiliates of U.S. financial firms being forced to spin off derivatives business from the deposit-taking units of commercial banks, Gensler said. The separation was included in legislation written by Arkansas Senator Blanche Lincoln meant to lessen the likelihood of a taxpayer bailout of a bank unit trading swaps.
‘Real Change’
Congress sought to regulate the $615 trillion OTC derivatives market, including swaps, after the trades complicated efforts to solve the financial crisis when regulators and market participants couldn’t easily determine how interconnected banks had become through the contracts.
Creating the detailed rules to govern the market is now the task of the CFTC and the Securities and Exchange Commission, which have in most cases until July 2011 to write the new guidelines.
Another major change is how interest-rate, credit-default and other swaps required to be processed by clearinghouses are allowed to be traded. Swaps that are to be cleared must be traded on a regulated exchange or swap-execution facility, according to the new law.
Between 20 and 30 new entities may register as exchanges or swap-execution facilities, in addition to the 16 futures markets the CFTC already oversees, Gensler said.
“This is a real change in this marketplace,” Gensler said. “The CFTC faces challenges in the months ahead, but we are prepared and geared up to meet those challenges. I look forward to continued dialogue with the public and market participants such as ISDA.”
To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net.
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