Regulators May Miss Swaps Reform Deadline, Credit Suisse Says

U.S. regulators may miss the deadline for some new regulations in the $583 trillion private derivatives market because of the number and complexity of the required rules, according to Credit Suisse Group AG.

“We believe full rule implementation is a minimum of two-to-three years away with potential for delays,” analysts led by Howard Chen in New York wrote in a note to clients yesterday. The Dodd-Frank Act, signed into law in July to overhaul Wall Street practices, requires most derivative reforms to be implemented by July 2011.

The Commodity Futures Trading Commission and Securities and Exchange Commission are unlikely to meet that deadline for complex issues such as position limits and a mandatory clearing requirement for most swaps, Chen said.

Congress mandated that most swaps be processed by clearinghouses after being traded on regulated exchanges or so-called swaps-execution facilities to lessen risk and increase price transparency. Regulators are writing the rules after the over-the-counter derivatives market complicated efforts to resolve the financial crisis.

The changes could lead to 10 percent volume growth for exchanges CME Group Inc. and Intercontinental Exchange Inc., with revenue gains of 10 percent to 15 percent next year for brokers Goldman Sachs Group Inc. and Morgan Stanley, Chen said in the report.

“We don’t expect a meaningful impact from derivatives reform until 2012 or later,” he said. “We continue to prepare for a very broad range of outcomes. Given the uncertainty, we remain conservative with our forward expectations.”

Chen didn’t immediately respond to e-mailed questions for further comment.

Wall Street Profit

The reforms threaten to cut Wall Street profit because they will make swaps prices known to the public, which may lead to compressed differences between what buyers and sellers want to pay for the contracts, known as the bid-offer spread. That could be combated by increases in the rate of swaps trading and greater market efficiency, Chen said.

Clearinghouses, which are capitalized by members such as banks and brokers, are meant to reduce systemic risk by absorbing and sharing responsibility if a member defaults on its payment obligations. They use daily margin calls to keep accounts current and provide regulators with access to prices and positions.

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