Wall Street’s largest swap dealers, including Goldman Sachs Group Inc. and JPMorgan Chase & Co., will be required to guarantee trades at clearinghouses starting in March under a rule made final by the top U.S. derivatives regulator.
The five-member Commodity Futures Trading Commission voted unanimously in a private process yesterday to complete the final determinations, the agency said in a statement. The rule, which had been scheduled for a public vote, determines which credit and interest-rate swaps must be guaranteed at clearinghouses owned by LCH.Clearnet Group Ltd., CME Group Inc. and Intercontinental Exchange Inc. The commissioners can vote on paper outside of their public meetings in a process known as seriatim.
“Central clearing lowers the risk of the highly interconnected financial system,” CFTC Chairman Gary Gensler said in statement. “It also democratizes the market by eliminating the need for market participants to individually determine counterparty credit risk, as now clearinghouses stand between buyers and sellers.”
The CFTC and Securities and Exchange Commission are required by the 2010 Dodd-Frank Act to write rules to curb risk in a $639 trillion global market. Lawmakers took action after unregulated trades helped fuel a credit crisis that in 2008 led to the collapse of Lehman Brothers Holdings Inc. and U.S. bailouts for companies including American International Group Inc., the New York-based insurer.
Clearinghouses accept collateral from buyers and sellers to reduce the risk from default in a trade. The commission’s rule requires swaps in four interest-rate swap classes and two credit-default classes to be submitted to clearinghouses. Goldman, JPMorgan, Bank of America Corp. and other banks that dominate the swaps market will face the clearing requirement by March 11.
The Clearing Coalition, a group including investment company Citadel LLC and trading firm Getco LLC, has urged the CFTC to adopt the clearing requirement by the end of the year.
“We welcome today’s final rule from the CFTC and commend the commissioners and staff for their continued efforts to reduce systemic risk, improve transparency and promote competition in the OTC derivatives markets,” Adam Cooper, Citadel’s chief legal officer, said in a e-mail statement before the vote was announced. “The implementation of central clearing is critical to achieving these goals.”
The CFTC requirements will help promote clearing of trades between dealers and asset managers that buy swaps, Richard Repetto, a New York-based analyst at Sandler O’Neill & Partners LP, said in a telephone interview yesterday. “It may not come immediately in March but this is setting the structure in place for a new market,” Repetto said before the announcement.
Third-party investment managers and pensions must comply on Sept. 9, while other financial entities will need to meet the mandate on June 10, the CFTC said.
The $639 trillion measure of the global swaps market represents the total notional amounts outstanding of over-the-counter derivatives through June, according to the Bank of International Settlements, a Basel, Switzerland-based organization that promotes global financial collaboration and serves as a bank for central banks.