Two of the main rules relating to the US’ comprehensive OTC derivatives regulatory overhaul have come into force, with the Commodity Futures Trading Commission (CFTC) stating that 65 firms are now provisionally registered as swap dealers.
The reforms, enacted under the Dodd Frank Act, seek to improve transparency and reduce the systemic risk associated with the swaps market by requiring trades to be conducted on exchange, subject to central clearing and reported to newly created data repositories. The CFTC has oversight for index-based derivatives, interest rates, commodities and currency products, while the Securities and Exchange Commission covers regulated security-based derivatives.
As of 31 December, 65 domestic and international financial institutions that deal in OTC derivatives with US persons became registered as swap dealers, subjecting them to capital and margin obligations, record keeping requirements and business conduct standards.
In addition to the largest banks, the list of swap dealers includes Asian and European banks – such as Commerzbank, Macquarie, Société Générale and Bank of Tokyo Mitsubishi – despite the CFTC issuing a no-action letter that allows foreign-owned banks operating in the US a temporary exemption from the registration requirements.
The initial list of swap dealers exceeded the de minimis level of swap dealing activity that triggers the swap dealing requirement in October.
Swap dealers and designated contract markets are also now required to begin reporting trades in interest rate and credit index swap instruments to swap data repositories (SDRs). So far, three entities – CME Group, the Depository Trust and Clearing Corporation and the IntercontinentalExchange – have obtained approval to operate SDRs. Clearing houses began reporting trades on 12 October last year and further reporting of swaps trades will be phased in over the coming months.
“With these historic reforms, the public, for the first time, can see the price and volume of swap transactions, just as it has benefitted from transparency for decades in the securities and futures markets,” said CFTC chairman Gary Gensler. “The public also will benefit as swap dealers now will be subject to common-sense standards for sales practices, recordkeeping and business conduct rules that will help lower risk to the rest of the economy.”