The U.S. Commodity Futures Trading Commission has given the world’s largest banks until May 3 to prove they are complying with a part of the Dodd-Frank Act.
The 2010 law requires swaps brokers to accept or reject a trade for clearing in less than 60 seconds. Goldman Sachs Group Inc. (GS), Bank of America Corp., Credit Suisse Group AG (CSGN), UBS AG (UBSN), Barclays Plc (BARC) and JPMorgan Chase & Co. (JPM) were among the banks that received the April 17 letter, a copy of which was given to Bloomberg News. The CFTC in November granted three-month delays to at least eight banks for implementing the time standard.
The CFTC is writing and implementing rules mandated by Dodd-Frank, which overhauled U.S. financial regulation in the wake of the 2008 credit crisis. The act gave regulators oversight of the over-the-counter swaps market for the first time, including requirements that most trades be sent to clearinghouses to reduce systemic risk. To help the market move to electronic trading, the CFTC said cleared trades must be accepted “as quickly as would be technologically practicable if fully automated systems were used.”
The CFTC cited an April 9 article on the website of Risk magazine that quoted unnamed swaps brokers saying some banks are not adhering to the time limits, according to the letter in which Ananda Radhakrishnan, director of the CFTC’s division of clearing and risk, asks the banks’ futures commission merchants to prove they are adhering to the regulations.
“DCR requests data from your FCM demonstrating compliance” with the rules, according to the letter. “Please provide data showing how many trades your firm has cleared” and “how many were accepted or rejected within 60 seconds.”
Steve Adamske, a CFTC spokesman, and representatives of the banks, declined to comment.
Clearinghouses, which are capitalized by their bank and brokerage members, are meant to lessen the effect of default by requiring collateral and marking positions daily so losses don’t build.
The CFTC set three phases for the clearing mandate to begin. The first became effective March 11, requiring dealer banks, major swaps participants and so-called active traders to clear their transactions. The CFTC defined active traders as any firm trading 200 or more swaps per month.
The second clearing deadline is June 10, when hedge funds, insurance companies, regional brokers and other swaps users will have to begin clearing trades. The third phase of the clearing rule takes effect in September.
The delay granted by the CFTC in November was intended to help banks comply with time limits, a person familiar with the decision said at the time. The banks receiving the reprieve were JPMorgan, Barclays, Citigroup Inc. (C), Credit Suisse, Deutsche Bank AG (DBK), Goldman Sachs, Morgan Stanley (MS) and UBS, the person said.