09/13/2011 10:44:00 AM EST
The Slow Rulemaking on Swaps and Derivatives
One of the strange splits in US financial regulation is
that many swap and derivatives are regulated by the Commodities Futures Trading
Commission instead of the Securities and Exchange Commission. I think of the
CFTC, I think of Trading
Places and with the SEC I think of Wall
The Commodity Futures Trading Commission has delayed its
rollout of regulations under the Dodd-Frank Wall Street Reform and Protection
Act has been pushed back until at least early 2012. This delay is the second
time the CFTC has put the brakes on its new rules that will govern the over-the-counter
derivatives market. In my view, taking longer to get the rules right is better
than pushing through bad rules just to meet some arbitrary deadline. The
question will be whether the CFTC will succeed in creating rules that will make
the derivatives market one that is more transparent and easier to oversee for
lines of trouble.
As for trouble, take a look at Greek bonds as an example.
The Credit Default Swaps cost a record $5.8 million upfront and $100,000
insure $10 million of Greece's debt for five years using credit-default
swaps. That means the market is saying it's about a 58% chance that Greece will
default in the next five years. But how extensive is that exposure in the US?
How many people are on the hook for payouts if Greece defaults?
If your firm uses derivatives or swaps for dealing with
debt risks or foreign exchange risks, you should pay attention to the CFTC
rulemaking. They are likely to change the process and the cost of dealing
with these risks.
Gary Gensler, Chairman of the CFTC, says
that "until the CFTC completes its rule-writing process and implements and
enforces these new rules, the public remains unprotected. That's why the CFTC
is working so hard to ensure that swaps-market reforms promote more open and
transparent markets, lower costs for companies and their customers, and protect
additional commentary on developments in compliance and ethics, visit Compliance Building,
a blog hosted by Doug Cornelius.
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