Swaps Rule Sends Wall Street into Clearing Limbo

Confusion on timing leaves securities firms scrambling to move swaps to clearinghouses.

The securities industry misinterpreted rules it assumed allowed as many as nine months to start moving swaps into clearinghouses that are meant to limit risks to the financial system.

Firms dealing in $648 trillion of outstanding swaps contracts expected that trading during a phase-in period wouldn’t need to be processed by central clearinghouses, according to an Oct. 5 e-mail sent to clients by Davis Polk & Wardwell LLP, which represents the Securities Industry and Financial Markets Association. They were wrong, misreading one sentence in 17,000 words of regulation.

Clearing Mix-Up

The indexes typically rise as investor confidence deteriorates and fall as it improves. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

‘Monumental Task’

The swaps industry assumed it had been given the various implementation times to complete documents between banks and their clients for the clearing process, said Supurna VedBrat, co-head of market structure and electronic trading at BlackRock Inc. BlackRock, the world’s largest money manager with $3.67 trillion of assets as of Sept. 30, has hundreds of accounts it has to bring into compliance, “a monumental task,” she said.

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