U.S. regulators voted today to define which companies will facenew oversight in the $708 trillion global swaps market, wherelargely unregulated trades helped fuel the 2008 financialcrisis.

A rule approved unanimously by the Securities and ExchangeCommission today and awaiting a Commodity Futures TradingCommission vote will initially define a regulated dealer as onethat conducts swaps with a notional value of at least $8 billion ina 12-month period. The banks, hedge funds and energy firms definedas swap dealers will be subject to the highest capital andcollateral requirements for market participants.

“Adopting these entity definitions is a foundational step in theestablishment of the new regime to regulate trading in this verysignificant market,” SEC Chairman Mary Schapiro said before thevote. “These rules clarify for market participants whether theircurrent activities will subject them to comprehensive oversight inthe coming months.”

The $8 billion threshold will fall to $3 billion within fiveyears unless new market data persuade regulators to use a differentlevel. While a lower threshold will capture more dealers, it stillexceeds the $100 million level that was initially proposed.

The SEC and CFTC met separately today to weigh parallel versionsof the rule. The rule was mandated by the Dodd-Frank Act of 2010 togovern clearing, trading, capital, collateral and internalcompliance standards, as well as swap dealers' relationships withclients including pension funds and cities. Dodd-Frank calls formost swaps to be guaranteed by central clearinghouses and traded onexchanges or other platforms.

'Major Swap Participants'

A CFTC staff member who briefed reporters yesterday didn'tprovide details on how many companies would be subject to theheightened oversight.

The rule also defines a smaller group of “major swapparticipants” that hold large positions in categories such ascurrency exchange rates or commodity swaps. One threshold for“substantial position” would be daily uncollateralized exposure of$1 billion in any major swaps category except for rate swaps, where$3 billion will be the mark.

For dealers, swap activity for portfolio hedging andanticipatory hedging wouldn't be counted in the thresholdcalculation. Major swap participants will also be allowed toexclude hedging or the mitigation of commercial risk from theirposition total.

Swaps are a type of derivative, a financial contract tied tointerest rates, currencies or events such as a change in weather ora company default.

Companies won't be subject to the new oversight immediately. TheCFTC must define what a swap is before it can impose requirementson dealers. For securities-based dealers, the SEC must alsocomplete registration rules.

Today's votes cap a nearly two-year debate among the regulatorsover how broadly to apply the oversight required by Dodd-Frank.That debate was influenced by a lobbying campaign by companiesincluding Regions Financial Corp. and BP Plc that demonstrated howmany industries the rule could affect.

Wall Street banks dominate dealing of swaps and otherderivatives. JPMorgan Chase & Co., Bank of America Corp.,Citigroup Inc., Morgan Stanley and Goldman Sachs Group Inc.controlled 95 percent of cash and derivatives trading for U.S. bankholding companies as of Dec. 31, according to the Office of theComptroller of the Currency.

The CFTC also voted 5-0 in favor of a rule today that treatscommodity options like all other swaps.

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.