US regulators moved on Friday to bring more transparency to the sprawling derivatives market, hedge funds and private equity, all dimly lit corners of the financial world slated for more oversight. A raft of proposed rules issued by the Commodity Futures Trading Commission and the Securities and Exchange Commission, all preliminary, showed regulators taking cautious steps to implement reforms mandated by Congress in July.
The goal of the reforms is to shed more light on derivatives including credit default swaps, which were implicated during the crisis in the downfall of firms such as Lehman Brothers and former mega-insurer AIG. Swaps - in interest rates, currencies, credit risk or other underlying values - are a big chunk of the $583-trillion global market for derivative contracts traded over-the-counter, or among private firms, rather than on an exchange.
Under the landmark Dodd-Frank law's crack down on banking and Wall Street after the severe 2007-2009 credit crisis, the CFTC and SEC proposed new standards for reporting and record-keeping in the off-exchange swaps market. The CFTC's proposed rule on the timing of swaps reporting met some scepticism about the direction it provides to markets on an issue crucial to derivatives giants such as Bank of America, Goldman Sachs and Citigroup.
"This proposal merely repeats the vague statutory direction provided in the Dodd-Frank Act," said Scott O'Malia, a Republican CFTC commissioner, in prepared remarks. In its proposal on Friday, the CFTC did not set specific time limits for reporting most swap trades. It said only that they be submitted "as soon as technologically practicable." It proposed that data on standardised block trades and large notional swaps be held for 15 minutes before being released.
The legislation approved in July is known as the Dodd-Frank Act after its Democratic co-authors Senator Christopher Dodd and Representative Barney Frank. Dodd-Frank called for requiring market participants to report swap trades in "real-time" and left it up to regulators to define what that means.
"I am not convinced we are doing the best thing by mandating a 15-minute time limit to report block trades and large notional swap trades between dealers and end users, while providing little to no direction on the reporting of all remaining trades," O'Malia said. The CFTC and SEC will evaluate comments from the public on their proposals over the next two months, with changes possibly resulting.
Under Dodd-Frank, the deadline for final implementation of most new derivatives rules is April 2011. The CFTC proposal came on the same day as an SEC proposal concerning security-based swaps, which it regulates. Dodd-Frank failed to accomplish a thorough reorganisation of financial regulators, leaving in place a patchwork of agency duties.
The SEC was meeting on Friday to consider another proposal to require hedge funds and private equity firms to register with the investor protection agency. Also mandated by Dodd-Frank, this rule is designed to help the SEC root out fraud and abuse in the $1.65-trillion hedge fund business.
Recently, the hedge fund sector, which includes giants such as Bridgewater Associates and Paulson & Co, has not posted the immense profits that some years ago made it the hot spot on Wall Street, but some firms continue to outperform.
Many hedge funds are already registered with the SEC, taking some of the edge off the agency's proposals. "They are not going to be hard to comply with," said Ron Geffner, who works with hedge funds as a partner at Sadis & Goldberg LLP. The implementation deadline for the rule on registration of hedge funds and private equity firms is also April 2011.
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