Swaps-market participants will have a grace period before tradesare required to be cleared, settling confusion over a rule thatwill begin early next year, said Commodity Futures TradingCommission Chairman Gary Gensler.

Firms dealing in $648 trillion of outstanding swaps contractsexpected that trading during a phase-in period wouldn't need to beprocessed by central clearinghouses, according to an Oct. 5 e-mailsent to clients by Davis Polk & Wardwell LLP, which representsthe Securities Industry and Financial Markets Association. Whilethe firms were wrong, misreading one sentence in 17,000 words ofregulation, Gensler said today the idea was always to allow a graceperiod.

“I know what I believed when I voted on it, it was prospective,”he told reporters today at Sifma's annual conference in New York,saying that the market needs time to adjust to the “paradigm shift”of bringing U.S. oversight to unregulated interest-rate,credit-default and other swaps and to move them intoclearinghouses. “This was an easy one for me,” Gensler said.

Dealers and money managers that trade swaps had faced thepotential need to find cash and Treasuries to back the tradessooner than they anticipated. The 2010 Dodd-Frank Act is requiringswaps be moved to the central counterparties to limit the kinds ofrisks that fueled panic during the 2008 credit crisis.

Two Interpretations

Referring to the Davis Polk e-mail, Gensler said some marketusers were confused about how the final rule, passed by the CFTC onJune 30, was written.

“The language in the final could be read two different ways,” hesaid.

The mix-up surrounding when most swaps would need to be clearedarose after the CFTC established two separate deadlines: onesetting an effective date in which the clearing mandate begins andanother by which market participants must be in compliance. Threecategories of swaps users were established, giving them 90 days,180 days, or 270 days after the effective date to comply.

“Market participants will be required only to clear swapsexecuted on and after their applicable compliance date, thusproviding time to comply with the clearing requirement,” Genslersaid today in a speech at the Sifma conference.

Clearing the trades sooner than expected might have requiredswaps users to acquire as much as $50 billion in additionalcollateral, according to Anshuman Jaswal, senior analyst atfinancial research firm Celent in New York.

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