CME Group Inc.'s decision to allow users of its interest-rateswap future contracts to avoid tougher oversight is drawingscrutiny from its government regulator.

The contracts, which begin as futures and are converted to swapsguaranteed by CME's clearinghouse if held until delivery, won't beincluded in totals determining whether users face highercollateral, capital and trading requirements, Laurie Bischel, a CMEspokeswoman, said. Under Commodity Futures Trading Commissionrules, traders who buy or sell more than $8 billion of swaps in ayear will face the tougher standards by being designated a dealeror so-called major-swaps participant.

“CFTC is currently reviewing this product, and we have not yettaken a view on whether the resulting swap counts toward a marketparticipant's status as a dealer or major-swap participant,” SteveAdamske, a CFTC spokesman, said in an e-mailed statement. “Marketparticipants are urged to consult the rules in order to determinewhether certain products would be in compliance with CFTC swapregulations.”

Executives, traders and regulators are grappling over whetherthe shift in some swaps to futures contracts, known asfuturization, constitutes a grab for market share by exchangeowners such as CME Group or is a natural progression in the marketas rules mandated by the 2010 Dodd-Frank Act take effect.

The majority of the $18 trillion energy-swaps market traded onCME Group and Intercontinental Exchange Inc. shifted to futures inOctober in part so users could avoid the higher regulatory costsassociated with being a dealer or major-swaps participant.

Futures are agreements to buy or sell an asset or commodity at aspecific price and time. They have standard sizes and maturities,are traded on exchanges and guaranteed at clearinghouses that takecollateral from buyers and sellers.

Swaps are traditionally traded privately between buyers andsellers, sometimes with customized maturities and sizes, and oftenaren't guaranteed at clearinghouses. Interest-rate swaps create aseries of payments between investors over the life of the contractthat are determined by how rates rise or fall.

CME, the world's largest futures market, has the authority toapprove new contracts it offers without regulatory blessing underits status as a self-regulatory organization, which is granted byCFTC rules. The company used that authority for the contracts,Bischel said.

“As futures contracts, deliverable swap futures don't countagainst the $8 billion threshold,” Bischel said in an e-mailedstatement.

Goldman Revenue

Darrell Duffie, a finance professor at Stanford University, saidthe CME contracts should count toward identifying large users ifthey convert to swaps upon delivery. While the shift to futuresfrom swaps is a normal progression, “if the delivery-does-not-countrule is not changed, I would add this to the negative column onfuturization,” Duffie said.

The settlement mechanism embedded in the futures contractphysically delivers an interest-rate swap if held to expiration. Itwas designed and patented by an executive at Goldman Sachs GroupInc., according to two people familiar with the matter who askednot to be named because the details are private.

Goldman receives 12.5 percent of all revenue generated from theCME Group contract because of the patent by managing directorOliver Frankel, one the people said.

Michael Shore, a CME Group spokesman, and Michael DuVally ofGoldman Sachs declined to comment.

Futures can be used to acquire the physical assets they arebased upon, such as gold, Treasury bills, or barrels of oil. Whilefew futures contracts are held until the delivery date, thepossibility of delivery effectively ties the underlying commodityto the derivative, which is used to set wholesale prices.

The CME Group interest-rate swap futures trade in increments of$100,000 and are based on two-, five-, 10- and 30- year swaps.Total volume has exceeded $6 billion since they began trading inDecember, with more than $1 billion of active contracts, accordingto CME Group's Shore.

The first contracts expire next month, at which point investorscould take delivery of the cleared swaps.

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