Friday, February 24, 2012 4:04:07 AM
Regulators Adopt New Derivatives Rules
Gary Gensler [ http://topics.nytimes.com/top/reference/timestopics/people/g/gary_g_gensler/index.html ], chairman of the Commodity Futures Trading Commission [ http://topics.nytimes.com/top/reference/timestopics/organizations/c/commodity_futures_trading_commission/index.html ].
Joshua Roberts/Bloomberg News
By BEN PROTESS
February 23, 2012, 2:00 pm
The big banks and traders that dominate the $600 trillion derivatives industry will face new oversight under a plan approved by regulators on Thursday.
The Commodity Futures Trading Commission voted 3 to 2 on Thursday to adopt new rules for the biggest players in the derivatives world.
The final rules, originally proposed in late 2010, spell out numerous requirements to bolster internal business standards. Firms must, for example, manage the risks posed by derivatives trading, prevent conflicts of interest and empower a chief compliance officer to prepare an annual report detailing a firm’s internal controls.
“It will lower the risk that swap dealers pose to the rest of the economy,” Gary Gensler, the agency’s chairman, said at a meeting in Washington on Thursday.
The rules apply to swap dealers – big banks, brokerages and large energy-trading firms that create derivatives contracts. The agency’s plan also affects hedge funds and other traders that have large positions in swaps, the derivative contracts tied to the value of commodities, interest rates and mortgage securities.
But the agency has yet to define the exact universe of swaps dealers and so-called major swaps participants. The agency initially planned to put the finishing touches on the definitions on Thursday, but delayed the vote while other regulators finalized a similar rule.
The flood of new derivatives rules stems from the Dodd-Frank Act, the financial regulatory overhaul passed in response to the financial crisis. The law mandated greater federal oversight of swaps trading, requiring the C.F.T.C. to adopt more than 50 new rules.
Under the new rules, banks and traders must adopt new risk management policies to control for the danger and volatility that come with derivatives trading. Firms must also keep an eye on the size of their trading positions to comply with laws that cap the number of contracts a trader can hold.
The rules take aim at another sore spot for Wall Street: conflicts of interest. The agency will now require firms to create firewalls that prevent, say, a derivatives trader from influencing the content of the firm’s derivatives industry research. The rules also bar banks from offering favorable research to clients, or threatening negative reports, in exchange for potential business.
Republican members of the commission voted against the rules, saying the agency was overreaching the mandate Congress laid out in Dodd-Frank. In a series of testy exchanges, Scott D. O’Malia, a Republican member of the commission, pressed agency staff members to justify what he called “duplicative” requirements.
“I believe the commission has failed to carefully and precisely identify a clear baseline against which the commission measured costs and benefits and the range of alternatives under consideration in this rule,” Mr. O’Malia said.
Mr. Gensler recalled, however, that under the Clinton administration, the government exempted derivatives trading from new oversight, an initiative that allowed the industry to ratchet up risk in the lead up to the financial crisis. Mr. Gensler, who supported the lax oversight when he was an official at the Treasury Department [ http://topics.nytimes.com/top/reference/timestopics/organizations/t/treasury_department/index.html ] in the 1990s, said the crisis cast doubt on the wisdom of light regulation.
“That was a false assumption and I will even say I was part of that assumption,” Mr. Gensler said. “That’s why I’m so happy today to be able to support this rule, that this agency does have a role and Congress asked us to do it.”
Copyright 2012 The New York Times Company
http://dealbook.nytimes.com/2012/02/23/regulators-adopt-new-derivatives-rules/ [with comments]
Gary Gensler [ http://topics.nytimes.com/top/reference/timestopics/people/g/gary_g_gensler/index.html ], chairman of the Commodity Futures Trading Commission [ http://topics.nytimes.com/top/reference/timestopics/organizations/c/commodity_futures_trading_commission/index.html ].
Joshua Roberts/Bloomberg News
By BEN PROTESS
February 23, 2012, 2:00 pm
The big banks and traders that dominate the $600 trillion derivatives industry will face new oversight under a plan approved by regulators on Thursday.
The Commodity Futures Trading Commission voted 3 to 2 on Thursday to adopt new rules for the biggest players in the derivatives world.
The final rules, originally proposed in late 2010, spell out numerous requirements to bolster internal business standards. Firms must, for example, manage the risks posed by derivatives trading, prevent conflicts of interest and empower a chief compliance officer to prepare an annual report detailing a firm’s internal controls.
“It will lower the risk that swap dealers pose to the rest of the economy,” Gary Gensler, the agency’s chairman, said at a meeting in Washington on Thursday.
The rules apply to swap dealers – big banks, brokerages and large energy-trading firms that create derivatives contracts. The agency’s plan also affects hedge funds and other traders that have large positions in swaps, the derivative contracts tied to the value of commodities, interest rates and mortgage securities.
But the agency has yet to define the exact universe of swaps dealers and so-called major swaps participants. The agency initially planned to put the finishing touches on the definitions on Thursday, but delayed the vote while other regulators finalized a similar rule.
The flood of new derivatives rules stems from the Dodd-Frank Act, the financial regulatory overhaul passed in response to the financial crisis. The law mandated greater federal oversight of swaps trading, requiring the C.F.T.C. to adopt more than 50 new rules.
Under the new rules, banks and traders must adopt new risk management policies to control for the danger and volatility that come with derivatives trading. Firms must also keep an eye on the size of their trading positions to comply with laws that cap the number of contracts a trader can hold.
The rules take aim at another sore spot for Wall Street: conflicts of interest. The agency will now require firms to create firewalls that prevent, say, a derivatives trader from influencing the content of the firm’s derivatives industry research. The rules also bar banks from offering favorable research to clients, or threatening negative reports, in exchange for potential business.
Republican members of the commission voted against the rules, saying the agency was overreaching the mandate Congress laid out in Dodd-Frank. In a series of testy exchanges, Scott D. O’Malia, a Republican member of the commission, pressed agency staff members to justify what he called “duplicative” requirements.
“I believe the commission has failed to carefully and precisely identify a clear baseline against which the commission measured costs and benefits and the range of alternatives under consideration in this rule,” Mr. O’Malia said.
Mr. Gensler recalled, however, that under the Clinton administration, the government exempted derivatives trading from new oversight, an initiative that allowed the industry to ratchet up risk in the lead up to the financial crisis. Mr. Gensler, who supported the lax oversight when he was an official at the Treasury Department [ http://topics.nytimes.com/top/reference/timestopics/organizations/t/treasury_department/index.html ] in the 1990s, said the crisis cast doubt on the wisdom of light regulation.
“That was a false assumption and I will even say I was part of that assumption,” Mr. Gensler said. “That’s why I’m so happy today to be able to support this rule, that this agency does have a role and Congress asked us to do it.”
Copyright 2012 The New York Times Company
http://dealbook.nytimes.com/2012/02/23/regulators-adopt-new-derivatives-rules/ [with comments]
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