27 April 2011

NY Times: Derivatives market faces new capital rules

The new rules are largely aimed at some 200 swap dealers — brokerage firms, large energy trading shops and Wall Street affiliates. The CFTC’s plan would also apply to hedge funds and other companies that have huge positions in swaps.

The Commodity Futures Trading Commission proposed rules that would force hedge funds and other firms that trade the opaque products to bolster their capital cushion, the latest effort by regulators to curb risky behavior that fed the financial crisis. The commission also issued a long-awaited clarification about what types of derivatives contracts will face new regulations.

Gary Gensler, the commission’s chairman, said the capital rules would “help protect” companies and other market participants. But he also questioned the rigour of the requirements, saying at the commission’s public meeting on Wednesday that “my worry” is that the proposal is too lenient on the industry.

The agency’s commissioners voted 4 to 1 in favour of advancing the proposal to a 60-day public comment period. They are expected to vote on a final version of the rules by the autumn. Scott D. O’Malia, one of the agency’s two Republican commissioners, voted against the plan. Some Republicans lawmakers, meanwhile, have introduced measures in Congress to delay or derail the capital requirements and other commission rules.

For months, the commission declined to outline which varieties of swaps would be subject to the new rules, much to the consternation of market players who sought clarity on the scope of the overhaul. On Wednesday, the commission said its definition would cover most known swaps while exempting insurance products and consumer transactions, such as contracts to buy home heating oil. The agency unveiled the definition jointly with the Securities and Exchange Commission (SEC), which shares oversight of the swaps market. The SEC on Wednesday voted unanimously to propose the definition.

Under the commission’s new plan, those firms would have to put aside enough cash to cover unforeseen calamities. Regulators, until recently, had little authority to set any rules for this risky market. Still, there is no guarantee that enhanced capital levels would avert future disasters. And there is no magic capital number that regulators see as a cure-all; different firms will use different sorts of capital to satisfy the requirements.

Swap dealers and major trading firms that are already registered with the commission as futures brokers would have to hold at least $20 million in so-called adjusted net capital. Another set of firms would have to keep “tangible net equity” equal to $20 million. This standard would allow energy firms, for example, to count oil in the ground as part of their calculation.

© New York Times