CME Group’s recent decision to allow interest-rate swap future contracts users to avoid increased oversight has drawn attention from the CFTC, the regulator responsible for oversight of the derivatives market.
Laurie Bischel, a CME spokeswoman, said that contracts that begin as futures and are converted to swaps that are guaranteed by CME if held until delivery will not be included in totals used to determine whether users could face tougher capital, trading and collateral requirements. Under CFTC rules, traders who buy or sell more than $8 billion worth of swaps per year will face more stringent regulatory requirements under the designation of swaps dealer or major swaps participant, Businessweek reports.
“CFTC is currently reviewing this product, and we have not yet taken a view on whether the resulting swap counts toward a market participant’s status as a dealer or a major swap participant,” Steve Adamske, a spokesman for the CFTC, said, according to Businessweek. “Market participants are urged to consult the rules in order to determine whether certain products would be in compliance with CFTC swap regulations.”
Regulators, traders and business executives have debated whether the conversion of swaps to futures — a process known as futurization — constitutes an attempt by CME and others to take hold of a larger market share or whether it is a natural development resulting from new rules under the Dodd-Frank Act.
Most of the $18 trillion in energy swaps traded on CME Group and Intercontinental Exchange Inc. were converted to futures in October to avoid further regulatory oversight, Businessweek reports.
CME, the largest futures market in the world, is authorized to approve new contracts without regulatory go-ahead under its self-regulatory status, which has been granted by the CFTC.
“As futures contracts, deliverable swap futures don’t count against the $8 billion threshold,” Bischel said, according to Businessweek. “Even if the futures contract goes to delivery, delivery doesn’t count against the swaps dealing threshold.”
Darrell Duffie, a finance professor at Stanford University, said that while the shift to futures is a normal development, CME contracts should count toward identifying big users if they are converted to swaps on delivery.
“If the delivery-does-not-count rule is not changed, I would add this to the negative column on futurization,” Duffie said, Businessweek reports.