The US swaps regulator is set to finalize this week a critical reform that will trigger banks and traders having to comply with costly new derivatives rules. The Commodity Futures Trading Commission will vote on Tuesday on a definition of a "swap," which will start a countdown on compliance dates for big swaps players to start registering with regulators and reporting their trades.
Market watchers say this is a big step in regulators' efforts to bring the $650 trillion over-the-counter swaps market out of the shadows.
Widespread ignorance of swaps exposure at failed investment firm Lehman Brothers and insurer American International Group aggravated the 2007-2009 financial crisis, which led to billions of dollars in taxpayer bailouts.
The CFTC has struggled to keep pace with the rulemaking timetable laid out in the 2010 Dodd-Frank financial reform law, and it has been criticised for moving ahead on rules that lay out requirements for swap dealers before even defining a swap.
The CFTC is expected to vote unanimously to finalize a swap definition that closely follows what is laid out in Dodd-Frank. Gabe Rosenberg, an attorney at Davis Polk, called it a "critical moment for the industry."
"Up to this point, potential swap dealers have had to guess when they will need to gear up and comply," he said. "The task is massive."
The toughest requirements will fall on those institutions labelled swap de lers, which are mostly banks with more than $8 billion in swap trades annually. Major Wall Street firms and banks dominate the derivatives market and have been widely expected to be captured in the swap dealer category.
J. P Morgan Chase & Co, Bank of America, Citigroup, HSBC and Goldman Sachs control 96 percent of cash and derivatives trading for commercial banks and trust companies as of December 31, according to the Office of the Comptroller of the Currency.
Swap dealers will be required to register with the CFTC two months after the final swap definition is published and will have to get their recordkeeping and reporting operations in place.
Top executives at swap dealing banks will have to be fingerprinted as part of the registration process.
Firms will also have to decide which legal entities should register as swaps dealers. Some banks may choose to shut down trading desks or shift trading to different offices to avoid registering in certain places.
Another key concern will be swaps data reporting. As of the compliance date, banks will have to begin reporting not just current trades but limited information about trades that took place before the rules were in place.
So far, the CFTC has only approved one swaps data warehouse - Intercontinental Exchange's ICE Trade Vault - to store the information, but more approvals are expected soon.
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