The U.S. Commodity Futures Trading Commission may complete rules designed to curb the abuses of banks that sell derivatives to municipalities as it moves to impose new Wall Street regulations under the Dodd-Frank Act.
CFTC commissioners are scheduled to vote today on final regulations, first proposed a year ago, that would set business conduct standards between swap dealers and clients, including pension funds, endowments and state and local governments.
The rules are part of the CFTC’s effort to reduce risk and boost transparency in the $708 trillion global swaps market after largely unregulated contracts helped fuel the 2008 credit crisis. Dodd-Frank, the financial-regulation overhaul enacted in 2010, seeks to have most swaps guaranteed by central clearinghouses and traded on exchanges or other platforms.
Municipalities faced unforeseen fees during the crisis to escape from derivative contracts pitched by banks as a way to save money. The CFTC regulation to be weighed today marks Washington’s broadest effort to rein in a segment of the derivatives industry that flourished during the past decade, only to cost taxpayers billions when the deals collapsed.
The CFTC may also complete rules to protect swap traders’ collateral that is used to reduce risk in trades. Segregation and protection of collateral gained new urgency after as much as $1.2 billion in client funds went missing as MF Global Holdings Ltd. collapsed last year. The CFTC, Securities and Exchange Commission, Justice Department and court-appointed bankruptcy trustee are investigating whether funds were misused.
Moore Capital Management LP, Paulson & Co. Inc., Fidelity Investments, Tudor Investment Corp. and Och-Ziff Capital Management Group LLC are among companies that have urged the CFTC since November to adopt tougher standards than the agency has proposed. The CFTC should allow investors the option to set aside collateral in separate accounts at third-party banks instead of allowing funds to be pooled, the companies have said in letters to the agency.
The CFTC may also vote to propose limits on proprietary trading and investments in private equity and hedge funds under the so-called Volcker rule. The CFTC is the last of five U.S. regulators to consider proposing the limits.