October 6, 2017 / 7:40 PM / a year ago

Treasury proposes looser derivatives rules

NEW YORK, Oct 6 (Reuters) - The U.S. Treasury’s blueprint for reforming rules in the $300 trillion privately traded derivatives markets would remove some restrictions that have vexed market participants, while also giving more investors room to trade off exchanges.

Derivatives regulations were a key plank of reforms implemented after the financial crisis of 2007-2009.

The move to central clearing is seen as dramatically reducing the risks of contagion from a failed bank. However, some market participants have said that margin and trading rules have made it more difficult and costly to trade the contracts.

The Treasury recommended on Friday that U.S. rules that are stricter than those overseas should be reconsidered and brought into line with international standards. The recommendations were in a blueprint for sweeping reforms of the U.S. capital markets

This included potentially lowering margin requirements for financial firms trading swaps that are not centrally cleared, and extending the timeline for settling margin payments.

The Treasury also focused on exemptions to clearing and trading rules that are made for non-financial firms, noting that the definition of a financial firm is seen as too expansive. It recommended giving the Commodities Futures Trading Commission the ability to define which firms fall under this definition, and to make exemptions.

Large banks that dominate derivatives trading have fought for exemptions to trading and clearing rules for companies that use the contracts to hedge their business activity, arguing that it would increase their cost of doing business, which could harm economic growth.

Some bank critics, however, have argued that broad exemptions allow the banks to keep more of the market opaque, which is more profitable for them.

The Treasury also recommended the CFTC reconsider some trading rules, such as a requirement that investors seek out three quotes from different dealers before entering a trade. This is seen as too restrictive and inappropriate for some trades.

Former CFTC Chairman Gary Gensler had argued that price transparency before trades was crucial to bringing new entrants to the market, reducing trading costs and cutting the risks posed by having too few very large players.

CFTC Chairman Chris Giancarlo has said that swaps trading platforms should have the flexibility to execute trades through any means available.

The government further recommends that the CFTC re-evaluate rules that the foreign branches of U.S. banks abide by U.S. regulations, when there are comparable rules in place in that country.

Gensler had said the rule was needed so that the United States would not be exposed to losses if a U.S. bank suffers large losses from risky trading undertaken overseas. (Reporting By Karen Brettell; Editing by Jonathan Oatis)

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