SEC & CFTC clarify Swap Definitions, but FX still fuzzy!

The SEC yesterday released full definitions of Swaps here.

The CFTC also released a summary Q&A paper to clarify the SEC definitions for SWAPS which is available here. For the avoidance of doubt, the CFTC goes out of its way in the paper to clarify that amongst others, the following transactions are Swaps:

Foreign Exchange Swaps and Forwards, Foreign currency Options (not exchange traded), Non-Deliverable Forwards in FX (NDF), Commodity options, Cross -Currency Swaps, Forward Rate Agreements, Contracts for Difference, Swaptions, Forward Swaps.

The US Treasury Secretary still has until July to make a determination to exempt FX Swaps from Dodd Frank (see determination of Foreign Exchange swaps and forwards). If exempted, FX Swaps will not be required to trade on a SEF, although they may be required to clear via a recognised Central Clearing Counterparty (CCP), and will still be subject to the CFTC reporting rules as below.

Reporting Swaps in: However, the CFTC makes it clear that even if FX Swaps and FX fwds were exempt, they would still be subject to Swaps reporting requirements (to a swap data repository, or to the CFTC), and swaps dealers and major swaps participants would be subject to business conduct standards.

Plus all other FX products that meet the Swap definition, remain subject to the Commodity Exchange Act (CEA), even if FX Swaps and Fwds are exempt, this would include Foreign Currency Options (other than traded on exchange) and Non-Deliverable Forwards.

Good news! Beer not subject to swaps ‘margin requirements’

Garry Gensler, Chairman of the CFTC said yesterday that margin requirements for cleared swaps, would apply to transactions by ‘financial entities’ rather than those that involve ‘nonfinancial companies’.

Gary is clearly a caring man, with his heart in the right place, as he reassured markets that ‘beer’ would not be subject to margin calls!

“We’re aware and focused on the cost of a six pack because we also oversee agricultural markets,” Gensler said. “I would say our intention is not to have margin requirements applied to an end user such as MillerCoors,” he said.

more here and here

Key SEC Proposal on Swap Trading Differs from CFTC’s


NEW YORK -(Dow Jones)- The Securities and Exchange Commission laid out a series of rule proposals for new swap trading venues Wednesday, including one that was markedly different from one put forward by the Commodity Futures Trading Commission. Click here for the full story.

CFTC want swaps to be as transparent as stock markets!

Gary Gensler, Head of the Commodity Futures Trading Commission (CFTC) proposed today that:

swaps could be traded on venues as transparent as stock markets

Also, that

Swap venues also could have a “request for quote” system, as long as the request for a quote to buy or sell a swap was sent to at least five market players in the trading system.

Reuters cover the story here

Great insight (as always) is provided by the StreetWise Professor (here)

The debate about SEFs continued

Last week I posted a short summary of a Blog I found which dealt with the issues surrounding the new OTC legislation and the question of what is a Swaps Execution Facility (SEF).

I was amazed to see that my brief summary, was in the top three most watched blogs on FinExtra! Clearly, lots of us out there are seeking more information on what’s going on.

So, to continue with the same theme, I have just finished reading another excellent blog post by the same ‘StreetWise Professor’. This time he looks at a recent speech given by Jill Sommers, from the US CFTC (Commodities Futures Trading Commission) the regulator who will be charged by Congress with overseeing the new legislation covering SEFs.

The blog post is quite long, but it’s an excellent read, and again, I highly recommend it.

The StreetWise Professor argues that Congress deliberately chose NOT to define a SEF as a ‘Trading Facility’ (the term used in other legislation to define a “Designated Contract Market”, or what we would call an exchange). BUT, rather Congress defined a SEF as “a trading system or platform”. So, he argues that a Trading Facility could be a SEF, but a SEF does NOT have to be a trading facility.

So, the prof’s view is that Congress has in effect defined what a SEF is NOT, ie it’s not an exchange, but have left open exactly what it is!

Confused? Join the club

More to follow…