Swaps users may face a “black hole” when Dodd-Frank Act rules take effect next month because too much remains unresolved for markets to operate properly, the Senate Agriculture Committee’s top Republican said.
“We don’t even know what a swap is” under the financial overhaul, Senator Pat Roberts said in an interview today at Bloomberg’s office in Washington. The Kansas Republican said the Commodity Futures Trading Commission needs to outline what provisions will apply when Dodd-Frank takes effect, and which will require rule-making that will delay implementation.
The CFTC and the Securities and Exchange Commission are writing new regulations required by the legislation enacted last July, after largely unregulated swaps helped fuel the 2008 credit crisis. Dodd-Frank seeks to reduce risk and boost transparency in the $601 trillion global swaps market by having most swaps guaranteed by central clearinghouses and traded on exchanges or other venues.
A swap is an agreement between two parties to exchange the difference between two price payments, one fixed and one floating, for a specific commodity over a period of time. The instruments, a form of derivative, are used to hedge against swings in prices for commodities such as energy and crops.
Roberts joined Republican Senators Saxby Chambliss of Georgia and Richard Lugar of Indiana in a letter to CFTC Chairman Gary Gensler on May 27 asking for a list of Dodd-Frank provisions that would become effective on July 16. They also asked the CFTC’s view of how swaps transitions would be governed while new regulations are put in place and how the commission would provide greater legal certainty for the transactions during the transition.
“We’re getting into swaps purgatory,” Roberts said today. “You have Dodd-Frank going into effect, and you say, ‘What are the regulations?’ And the CFTC says, ‘We don’t know.’”
Gensler was traveling in New York, and CFTC spokesman Steven Adamske didn’t immediately respond to an e-mail and phone call seeking comment.
The CFTC is holding a meeting on June 14 to discuss effective dates for Dodd-Frank provisions. Gensler said in an interview June 2 that “we have ample latitude in the statute to address anything on the 16th,” and that congressional action wouldn’t be needed to deal with any gaps in rules.