US Congress’s House Financial Services Committee has approved bills in the Dodd-Frank Act that clarify swap execution facilities (SEFs) and exempt some buy-siders from risk mitigation measures concerning OTC derivatives.
The clarified rules dictate SEFs can serve as a platform for executing swaps and security-based swaps by requiring immediate execution of matched trades and allowing market participants to receive and respond to a single quote.
The committee has removed regulatory requirements for SEFs to have a minimum number of participants receiving bids or offers and ensured trading platforms executing swap transactions include voice-based and hybrid trading models. Under previous rules laid out by the Commodity Futures Trading Commission, which will have oversight for index-based derivatives products, traders were required to source quotes from a minimum of five dealers.
Endorsed by the G-20, Dodd-Frank aims to move as large a proportion of OTC trading activity as possible onto the newly-defined SEFs.
The Committee approval clears the way for floor consideration of the derivatives bills in the House of Representatives.
The Financial Services Committee has also reconfirmed an end-user exemption from margin and capital requirements. End-users are defined as firms which use derivatives to manage their risks, rather than speculate.
“Legislators made their intent clear that the derivatives title was not meant to impose margin requirements on end-users,” the committee said. “Yet, regulators have interpreted the derivatives title to give them authority to impose margin requirements on end-users.”
The committee’s amendments also exempt swaps traded in firms under the same parent company from Dodd-Frank margin, clearing and reporting requirements.
Presently, Dodd-Frank treats “inter-affiliate” swaps the same as swaps between unrelated counterparties. Without correction, the committee said companies could have faced double the costs associated with hedging “legitimate business risks”.
The committee’s amendments ensure entities under a common corporate ownership can appropriately manage risks without unnecessary costs.
“The three derivatives bills approved today will bring much needed certainty to the over-the-counter derivatives market,” said committee chairman Spencer Bachus, a Republican congressman for Alabama. “They will help ensure that the US is not placed at a competitive disadvantage with the rest of the world; that markets develop based on the needs of the participants and not on what Washington bureaucrats think a market should resemble; and that end-users are able to efficiently hedge their risks.”
The House Financial Services Committee has jurisdiction over issues pertaining to the economy, the banking system and securities and exchanges. Agencies under oversight by the committee include the Federal Reserve, Treasury, the Federal Deposit Insurance Corporation and the Securities and Exchange Commission.
“We believe these and other derivatives-related pieces of legislation are important for regulators and the industry to have certainty as the rulemaking process moves forward,” said Kenneth E. Bentsen Jr, executive vice president for public policy and advocacy at the Securities Industry and Financial Markets Association. “We urge the full House and Senate to pass these important pieces of legislation without delay.”
The Dodd-Frank Act has been delayed from its original July target date, following the announcement by CFTC chairman Gary Gensler in September that some of the key rules will not be implemented until 2012, including the final rules for SEFs. The regulation had also come under attack from Craig Donohue, head of Chicago-based derivatives exchange CME Group, on the basis that it does not take sufficient account of the costs and benefits of the proposed new rules.