US Regulators To Testify On Swaps Rules

A senior U.S. Treasury official said the Treasury wants to "move expeditiously" to determine whether to exempt foreign exchange swaps and forwards from new regulations governing over-the-counter derivatives transactions.

"Regardless of the decision the secretary pursues, market participants need to know what the regulatory regime will look like and to be able to plan and prepare for that regime," Assistant Treasury Secretary Mary J. Miller will say in prepared remarks before the U.S. Senate Banking Committee on Tuesday.

Last year's Dodd-Frank law aims to push over-the-counter derivatives transactions onto trading platforms and route them through clearinghouses, which guarantee trades. Today, swaps are mostly customized transactions between two counterparties conducted away from regulatory scrutiny. The law gives the Treasury secretary authority to exempt all foreign exchange swaps and forwards from the new regulations.

Miller, in her prepared testimony, will argue U.S. regulators charged with implementing the new law, including the derivatives provisions, must ensure the new rules don't undermine the competitiveness of U.S. financial markets and can't be "evaded or rendered ineffective by lax standards elsewhere."

Federal Reserve Governor Daniel K. Tarullo will echo those remarks in his prepared testimony. "Our aim is to promote both financial stability and fair competitive conditions to the fullest extent possible," he will say.

Tarullo argues that a provision of the Dodd-Frank law requiring banks to transfer certain types of swaps out of their subsidiaries and into separate legal entities could cause unintended consequences. The law provides an exemption from the so-called "push-out provisions" for U.S. banks engaging in traditional derivatives activities, including hedging. But Tarullo notes in his testimony that the exemption doesn't cover U.S. branches of foreign banks.

The provision may "require some foreign firms to reorganize their existing U.S. derivatives activities to a greater extent than U.S. firms," Tarullo will argue.

Securities and Exchange Commission Chairman Mary Schapiro will discuss the challenges of meeting the Dodd-Frank law's deadlines for issuing derivatives regulations in her prepared testimony. "The OTC derivatives markets are large and interconnected. The issues are complex and do not lend themselves to easy solutions," she will say.

The SEC is looking closely at how the rules affect contracts that existed before the Dodd-Frank law and will work to ensure that final rules are issued in the proper sequence to give market participants time to comply, Schapiro will say.

"We understand that getting the rules right and implementing them in the right order is important, and this will guide our efforts in coming months," she will say.

Industry representatives, in a second panel, will weigh in on regulators' work so far in implementing the new rules.

CME Group Inc. (CME) Executive Chairman Terrence Duffy, in prepared remarks, blasts the Commodity Futures Trading Commission for what he calls the regulator's "almost complete reversion to a prescriptive regulatory approach." Duffy argues the CFTC has wrongly applied the Dodd-Frank law to propose specific requirements for futures regulations that are rooted in core principles.

The regulator has become a "front-line decision maker that imposes its business judgments on the operational aspects of derivatives trading and clearing," Duffy will say.

-By Jessica Holzer and Jamila Trindle, Dow Jones Newswires; 202-862-9228; jessica.holzer@dowjones.com

CME (NASDAQ:CME)
Historical Stock Chart
From May 2024 to Jun 2024