WASHINGTON Wall Street will be required to report complex swap trades in "real time" under a final rule the U.S. futures regulator approved on Tuesday, moving to lift the veil on the murky $700 trillion market, but the agency delayed a decision on block trades until next year.
The rule is the latest to be voted on by the Commodity Futures Trading Commission, which has struggled to keep pace with the rulemaking timetable laid out in the 2010 Dodd-Frank law that instructed it to help write a regulatory framework for the once-opaque OTC derivatives market.
"This data will provide a comprehensive view of the entire swaps market, strengthening our ability to police the markets and protect against systemic risk," said Gary Gensler, the chairman of the CFTC.
"Leading up to the financial crisis, there was no required reporting about swaps trading, and this lack of market transparency made the risk that had spread throughout the financial system all the more difficult to identify," he said.
Widespread ignorance of the swaps exposures of troubled investment firms such as Lehman Brothers and mega-insurer AIG greatly aggravated the 2007-2009 crisis that led to massive taxpayer bailouts of Wall Street.
The Dodd-Frank law requires swaps dealers and large participants to trade swaps on exchanges or platforms known as swap execution facilities, and use clearinghouses that guarantee the trades to lower risk. Swap data repositories would act as a warehouse to collect the information.
The final real-time reporting rule, passed by the CFTC's commissioners 5-0, provided temporary measures such as interim caps on the reporting of notional and principal amounts until the regulator establishes appropriate minimum block sizes.
Until the new block rule is in place, all trades will be reported post transaction to a repository with a time delay, as if they were a block. In its draft "real time" plan last year, the CFTC proposed that data on standardized block trades and large notional swaps be held for 15 minutes before being released.
Block trades are large deals negotiated off an exchange's trading facility and posted later. Voice brokering is often used for these transactions.
The final rule gives time delays to share information publicly, based on type of execution, market participant and underlying asset. Those affected would need to comply no sooner than July 16, 2012.
Swaps subjected to mandatory clearing would need to be reported within 30 minutes at first, before falling to 15 minutes after the first year. End users would have 48 hours during the first year to report prices and 36 hours in the second year.
The CFTC first proposed its real-time rule in November 2010, but delayed a vote on a final rule due to a heavy work-load and time it needed to consult with U.S. and foreign regulators.
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Industry players have argued aggregated data could provide too much information to the public, especially in the case of large trades. Major traders, such as Goldman Sachs, said they need sufficient time to hedge the price risk of their OTC swaps in other markets - such as futures - before reporting the trade, or risk the market moving against them.
The CFTC and Securities and Exchange Commission were given joint oversight of the OTC derivatives market under Dodd-Frank. The law said swaps trades must be reported in "real-time" but left it up to regulators to define what that means.
In another CFTC rule approved unanimously on Tuesday, swap data records would be kept for the duration of the swap, and for five years after it has terminated or expired. Records also must be accessible during the life of a swap and for 15 years after the swap has ended.
The recordkeeping and reporting requirement rule is to ensure all necessary data is given to the swap data repository and available to regulators overseeing the market.
"These rules...will level the playing field and benefit our markets and the economy as a whole, even if we all find ourselves fumbling around for a bit getting used to the newness of having that much information at our fingertips," said Scott O'Malia, a Republican CFTC commissioner.
A review by the CFTC estimates that each rule will impose costs of more than $100 million on the American economy as market participants spend money to build out complex and costly technology systems, O'Malia said.
The CFTC has now finalized 22 rules, but has not finished most of the high-profile and controversial measures, including capital and margin requirements and the definition of a swap.
The CFTC has scheduled its next rule-making meetings to vote on Dodd-Frank measures on January 11 and 17. Gensler said the CFTC could vote on rules such as segregation for cleared swaps, entity definitions, which it is working on with the SEC, and its version of the Volcker Rule.
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