Swap-to-future conversion prompts CFTC scrutiny of rules

WASHINGTON: The US Commodity Futures Trading Commission is reviewing whether energy futures contracts that are replacing swaps on the largest exchanges have enough transparency before they are traded, chairman Gary Gensler said.

The commission has scheduled a roundtable meeting with industry representatives for Jan 31 to consider whether changes in oversight are needed after CME Group Inc and Intercontinental Exchange Inc began converting energy swaps to futures, a move that helps oil and gas traders avoid the stiffest DoddFrank rules for swap dealers.

The CFTC, which has regulated futures contracts since 1974, won authority under the 2010 Dodd-Frank law to oversee swaps, which had been largely unregulated since they developed in the early 1980s.

Under a Dodd-Frank rule that took effect in October, energy and other firms that annually deal in more than US$8bil in swaps fall under the most costly capital, collateral and business conduct requirements for dealers.

Gensler said in a telephone interview that the CFTC was looking at whether the new futures contracts were being traded transparently and competitively.

“Futures and swaps are both derivatives and with Congress’s movement, they’re now both to be fully overseen,” he said.

Areas where the CFTC could make changes include tightening the rules for deciding when a futures contract can be traded outside the central exchanges.

As part of Dodd-Frank, Gensler has sought to increase the ability to see bids and offers for derivatives before they are traded to improve transparency, competition and liquidity in markets.

The switch in energy trades, and the potential for a similar conversion in interest-rate and credit derivatives, has prompted the agency to consider if its rules are strong enough.

Futures are agreements to buy or sell an asset or commodity at a specific price and time. They have standard sizes and maturities, are traded on exchanges and guaranteed at clearinghouses that take collateral from buyers and sellers.

Swaps are traditionally traded directly between buyers and sellers, sometimes with customised maturities and sizes, and often aren’t guaranteed at clearing houses.

Credit swap contracts helped fuel the 2008 credit crisis that followed the failure of Lehman Brothers Holdings Inc and led to the US rescue of insurer American International Group Inc and prompted lawmakers to write new rules for the market. The law seeks to have most swaps guaranteed at clearing houses and traded on exchanges or on alternative platforms known as swap-execution facilities, or SEFs. –