Swaps-market participants will have a grace period before trades are required to be cleared, settling confusion over a rule that will begin early next year, said Commodity Futures Trading Commission Chairman Gary Gensler.
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. While the firms were wrong, misreading one sentence in 17,000 words of regulation, Gensler said today the idea was always to allow a grace period.
“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 into clearinghouses. “This was an easy one for me,” Gensler said.
Dealers and money managers that trade swaps had faced the potential need to find cash and Treasuries to back the trades sooner than they anticipated. The 2010 Dodd-Frank Act is requiring swaps be moved to the central counterparties to limit the kinds of risks that fueled panic during the 2008 credit crisis.
Referring to the Davis Polk e-mail, Gensler said some market users were confused about how the final rule, passed by the CFTC on June 30, was written.
“The language in the final could be read two different ways,” he said.
The mix-up surrounding when most swaps would need to be cleared arose after the CFTC established two separate deadlines: one setting an effective date in which the clearing mandate begins and another by which market participants must be in compliance. Three categories 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 swaps executed on and after their applicable compliance date, thus providing time to comply with the clearing requirement,” Gensler said today in a speech at the Sifma conference.
Clearing the trades sooner than expected might have required swaps users to acquire as much as $50 billion in additional collateral, according to Anshuman Jaswal, senior analyst at financial research firm Celent in New York.