CFTC issues swap definitions, initiates Dodd-Frank rules

Gary Gensler

The Commodity Futures Trading Commission approved swap definitions in a 4-1 vote on Tuesday, initiating rules that would increase collateral requirements and public trading of financial products.

The approval of swap definitions will allow nearly 20 Dodd-Frank reporting, trading, clearing and record-keeping requirements to take effect as early as September, bringing enhanced oversight to the $648 trillion swaps market. The Securities and Exchange Commission already voted unanimously on the definitions earlier this month.

“This is significant to the American public because now we will bring transparency to these markets,” CFTC Chairman Gary Gensler said on Tuesday, according to Bloomberg. “We will have dealers registering. We will lower the risk to the American public. Congress said further define a term. We further defined it. Two months from now a lot of Dodd-Frank comes into being.”

The definitions provide exemptions for retail and insurance transactions, including life insurance, property and casualty insurance. The interest-rate limits of consumer mortgages, residential heating oil agreements and forwards of non-financial commodities are also exempt. The regulator is also pushing to exempt energy contracts with “volumetric optionality.”

CFTC Commissioner Bart Chilton, who opposed the measure, expressed concern regarding the means by which the financial industry could try to circumvent Dodd-Frank.

“I’m a little concerned that if you go back to the financial crisis, complexity in financial products is really what got us,” Chilton said, Bloomberg reports. “I’m a little concerned that these good forwards, these forwards used for legitimate purposes, are going to morph, kind of chimerical.”

Steven D. Lofchie, the co-chairman of the financial services department at Cadwalader Wickersham & Taft LLP, expressed concern about the full and possibly unintended consequences of the measure.

“For many contracts nobody would have thought of as swaps, they’ll fit in the technical definition,” Lofchie said, according to Bloomberg. “They will capture at least 300 or 400 percent of what was intended.”

Swap dealers and major swap participants – approximately 125 firms, according to CFTC estimates – will be required to register within two months following the publication of the definition. Rules that regulate bank-swap buyer relationships, agricultural swaps, interest-rate data and credit swaps will also be subject to the new definition and requirements.

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