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CFTC Finalizes Swap-Database Rules to Expose ‘Dark Market’

The U.S. Commodity Futures Trading Commission completed the first set of Dodd-Frank Act rules governing companies at the center of the $601 trillion swaps market by adopting regulations for information databases.

CFTC commissioners voted 4-1 today to adopt a rule registering the databases, part of a Dodd-Frank requirement that all transactions be reported to swap data repositories that will make information on trading volumes and prices available to financial regulators.

“With this rule regulators -- for the first time -- will have specific information on the market’s scale and risk,” CFTC Chairman Gary Gensler said at the commission’s Washington meeting.

Dodd-Frank, the regulatory overhaul enacted in July 2010, aimed to reduce risk and boost transparency in the swaps market after largely unregulated transactions helped fuel the 2008 credit crisis. Private derivatives contracts complicated efforts to resolve the crisis by making it difficult for regulators to unravel trading links among financial firms after the September 2008 collapse of Lehman Brothers Holdings Inc.

The law requires the CFTC and Securities and Exchange Commission to write rules for the new repositories. The rules will govern trades conducted by financial firms such as Goldman Sachs Group Inc. and Morgan Stanley as well as energy and commodity firms including Cargill Inc.

‘Dark Markets’

“We used to call these dark markets for swaps trading,” CFTC commissioner Bart Chilton said in a statement prepared for today’s meeting. The databases are about “letting the sunshine in,” said Chilton, one of three Democrats on the five-member commission.

The database rule is the first in a series that will determine registration requirements for market participants such as swap dealers, major swap participants, end-users and clearinghouses.

The CFTC altered an earlier version of the data rule, originally proposed in November, to ease information-sharing with overseas regulators, according to an agency summary of the final rule. Under the final version, foreign regulators wouldn’t need to indemnify swap-data repositories or U.S. regulators for litigation costs if databases are registered with U.S. and overseas regulators.

‘Ensuring Confidentiality’

European regulators and repositories such as the Depository Trust & Clearing Corp. had questioned the original proposal, saying it might cause the global swaps data market to become fragmented.

“Ensuring confidentiality is essential for exchanging information among regulators and such indemnification agreements undermine the key principle of trust,” Carlos Tavares, vice chairman of the European Securities and Markets Authority, wrote in a January letter to U.S. regulators.

New York-based DTCC controls a data warehouse for credit-default and equity swaps, and has won private industry contracts to serve as a data repository for interest rate and commodity derivatives as well. Michael V. Dunn, a Democratic commissioner, said he has “grave concerns” that the agency isn’t requiring databases to have independent directors on corporate boards. The agency could consider a separate rule about the governance of databases, Gensler said.

The CFTC also voted 4-1 to complete a rule that will let corporate whistleblowers collect as much as 30 percent of penalties when they report financial wrongdoing to the agency. Whistleblowers would be eligible if information they provide leads to a successful enforcement action that results in sanctions of at least $1 million. There are fewer than 50 enforcement actions a year that produce sanctions of at least that value, a CFTC official told reporters yesterday.

Internal Compliance

A CFTC panel would determine the amount of the award, which could range from 10 percent to 30 percent of the sanctions. The panel would include representatives from three of the agency’s divisions.

The Futures Industry association and Securities Industry and Financial Markets Association had criticized the proposed rules for failing to require whistleblowers to report wrongdoing first to internal company compliance offices. Under the final version, the CFTC could consider increasing the value of an award if a whistleblower turned first to a company’s compliance office.

The agency also voted 5-0 to finish a third rule that would remove regulations that for more than a decade treated agricultural swaps differently than interest rate, credit and other swaps in the overall market.

Next Meetings

Agricultural swaps “do not pose greater risk than other types of swaps,” John T. Hyland, chief investment officer of U.S. Commodity Funds LLC, an Alameda, California-based firm whose exchange-traded products include the U.S. Natural Gas Fund and U.S. Oil Fund, said in an October letter to the CFTC.

The CFTC has scheduled meetings to vote on Dodd-Frank rules on Sept. 8 and 22, Oct. 4 and 18, and Nov. 1 and 17. The agency may consider rules governing clearinghouses and limits on speculation in September or October and rules governing trading systems later in the year, Gensler said at the meeting.

Republican Commissioners Jill E. Sommers and Scott O’Malia voted against scheduling the meetings in October and November, citing a desire that the agency publish a full timetable for when the rules will be implemented in the market.

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