LCH.Clearnet Group Ltd. asked to be exempted from a rule taking effect next week requiring the largest clearer of interest-rate swaps between banks and their customers to confirm trades in less than 60 seconds.
LCH.Clearnet is seeking the relief as it switches from a system in which trades are processed every 15 minutes, according to two people familiar with the situation who declined to be identified because the matter is private. Clearinghouses must meet the limit by Oct. 1, Ananda Radhakrishnan, director of the Commodity Futures Trading Commission’s division of clearing and risk, told executives at the largest firms in an Aug. 31 e-mail.
While the Dodd-Frank Act overhauling rules governing financial markets was passed into law more than two years ago and the trade confirmation rules were completed in March, regulators are still working out details. The final rule for swaps said only that transactions had to be completed as soon as technologically possible, leaving regulators confused and market participants struggling to comply.
“We’re in the dark about where the one-minute standard came from,” CFTC Commissioner Scott O’Malia said in a telephone interview. While he said he supports confirming cleared trades as quickly as possible, it’s important that clearinghouses have the time to assess the risk in a trade. “I don’t even know what the standard is because it hasn’t been shared with us,” he said.
Juliana Wheeler, a spokeswoman for LCH.Clearnet, which has processed more than $4 trillion of rate swaps between banks and clients, didn’t return telephone calls seeking comment on the clearing times.
Two rules take effect next week affecting the trades in the $648 trillion swaps market. In addition to the limit on clearing times, banks will have two minutes initially to approve trades with their customers. The world’s largest banks won’t be required to clear their transactions until the first quarter.
Starting Oct. 1, banks and brokerages that are members of clearinghouses will have two minutes to accept or reject trades with their customers. Ninety days after separate rules mandating clearing for certain types of transactions are published in the Federal Register, that limit will be lowered to one minute, Radhakrishnan wrote in an e-mail on Sept. 21.
“As far as I’m concerned the rule says as soon as technologically practicable, and that doesn’t mean 120 seconds,” Jill E. Sommers, a CFTC commissioner, said in a telephone interview. “I didn’t vote for a rule that says 120 seconds.”
LCH.Clearnet Chief Executive Officer Ian Axe wrote to the CFTC in an Oct. 11, 2011, letter that the time limits for accepting trades should be conditioned on whether the customer placing the order has sufficient margin deposited at the same time the transaction is submitted.
The company, based in London, is working to keep its system of accepting trades that have margin attached in less than a minute, a person familiar with the matter said. The company has alternatives to continue accepting swaps for clearing next week, said the person, who declined to be more specific.
CME Group Inc. (CME), which had cleared $746 billion of rate swaps as of Sept. 25, has systems in place to let their clearing member firms automate the trade confirmation process, said Kim Taylor, president of the company’s clearinghouse.
“We accept trades in sub-second time,” Taylor said in an e-mail. “Though we have heard other clearing houses take upwards of 15 minutes to accept trades, it has always been our goal to provide the market with immediate clearing certainty.” CME Group will be able to accept or reject trades in under a second come Oct. 1, said Mark Cox, an executive director in the company’s clearinghouse unit.
Intercontinental Exchange Inc., owner of the world’s largest credit-default swap clearinghouse, doesn’t disclose its average time to accept or reject trades, said Brookly McLaughlin, a spokeswoman. She said the company will be able to meet the Oct. 1 requirement.