WASHINGTON The U.S. futures regulator released proposals to govern the "back office" functions of swap dealers and other big players on Wednesday, but said more controversial elements for swaps participants remained to be determined.
The rules, including new firewalls between analysts and traders and registration rules for foreign exchanges, are part of a series of 50 to 60 regulations to implement the Commodity Futures Trading Commission's share of the Dodd-Frank Wall Street reform law.
It was the fourth meeting CFTC commissioners have held to consider the finer details of the draft regulations they are racing to unveil by the end of the year -- and was the iciest meeting to date, with Republican and Democrat appointees sparring over whether the agency was exceeding its reach.
"I feel like certain rules that we're proposing today are not an efficient use of our resources," said Republican Commissioner Jill Sommers, who voted against releasing four of the seven rules for further public comment.
BIG DECISIONS LOOM
When the agency has finalized its rules in July, it will receive data on all swaps deals done in the formerly opaque bilateral OTC market, and will require most swaps to pass through clearinghouses and trading venues in an effort to reduce risk and improve transparency.
The commissioners are tentatively slated to meet four more times before the end of December to address some of the most thorny measures, such as speculative position limits for commodities, rules for new swap execution facilities, timelines for reporting large "block trades" in swaps markets, and who will be exempt from clearing as an "end user".
On Wednesday, the CFTC agreed to release draft rules for comment on a registration system for swap dealers and major swap participants -- part of sweeping new rules designed to reduce risk in the $615 trillion over-the-counter market.
But the agency and the Securities and Exchange Commission have not yet precisely defined who will be classified as a swap dealer or major swaps participant -- a topic slated for a December 1 meeting.
The definitions will determine which businesses will face mandatory clearing rules and will have to put up extra capital and margin requirements.
"We are human, and I have no doubt that some rules may slip to early next year," CFTC Chairman Gary Gensler said.
NEW FIREWALLS TO PREVENT CONFLICTS
The CFTC said it would require new firewalls or informational barriers between analysts and traders at swaps dealers, major swaps participants, futures commission merchants and brokers to prevent conflicts of interest -- similar to rules the Securities and Exchange Commission has for equities markets.
The CFTC also proposed firewalls between trading units and clearing units.
Commissioners were most divided on a proposal requiring foreign exchanges to register -- a system that would replace "no-action" letters it currently issues, allowing the exchanges to provide access to U.S. traders.
Republican Commissioner Scott O'Malia said the plan is "premature" by attempting to require foreign exchanges to have tougher market access controls before they are considered in the United States.
"I have concerns with how we're rolling them out and what certainty we're giving to the market and our international regulators overseas about what we're doing," he said.
"It's not the controls that I have a problem with, it's the manner in which we're launching this."
Sommers said the proposal should provide a less onerous process for "grandfathering" exchanges who currently have no-action letters.
FUNDING QUESTIONS BUBBLE BENEATH
The agency said it had not yet determined how to monitor whether swap dealers and major swap participants were in compliance with their new requirements.
The CFTC asked for comments on whether it should be responsible for oversight, or whether self-regulatory organizations such as the National Futures Association should play a role.
Farming out certain responsibilities to industry is one way the agency might grapple with its expanded duties if it does not receive a funding increase from Congress to hire more staff.
"I just worry that if we don't get the resources that we ask for ... we'll be setting up to be failures," said Ananda Radhakrishnan, director of the CFTC's clearing and intermediary oversight division.
"We have all of these responsibilities. If we don't get the resources, something's got to give," he said.
(Editing by David Gregorio)