WASHINGTON - Federal regulators hope to write rules by the end of the year to carry out legislation that would fortify swaps trading in the United States, the Commodity Futures Trading Commission's top lawyer said Friday.
"It's a brave new world," said Joanne Medero, the commission's general counsel, who said the group will move "expeditiously" to propose a rule allowing it, for the first time, to exempt swaps and other derivative products from agency rules.
Medero said that hinges on President Bush signing the bill, which was given final approval by Congress Thursday. Lawyers following the issue said the President's signature is expected.
The swaps provisions are part of a larger package that reauthorizes the Commodity Exchange Ace through fiscal year 1994 and strengthens the power of the commission to regulate futures.
Currently, the commission has authority to declare that a particular swap, forward, or other similar derivative product is a future and, therefore, must be traded on futures exchanges. But the agency does not have clear authority to do the reverse: exempt a product from its regulation as a futures product.
The commission did issue a policy in 1989 stating that such products generally should not be regulated as futures and that it would not act against a swap product that met a handful of criteria.
However, that process has not provided the legal foundation for swap trading that dealers have sought. Products have been challenged in court cases that allege they are trading illegally outside of futures exchanges.
Congress' granting of exemptive authority to the futures commission is expected to help considerably in providing that foundation, Capitol Hill aides and lawyers in the field say.
"The idea is that there would be a class exemption of some sort," said Medero. "If you are not sure, we provide [you with] informal advice. If you are confident you don't fit, you could ask on a case-by-case basis for a separate exemption."
But swap dealers may face new competition as a result of the bill, which would give the green light to futures exchanges to enter the swaps trading market for the first time.
The bill grants the new authority to the futures commission for only two years and authorizes several studies in the rapidly growing swaps area.
The legislation would apply to municipal swaps, forwards, and other products as well as to their corporate counterparts.
"It made it under the wire," said Mark Mitchell, a partner and head of the futures department at Chapman and Cutler in Chicago. "it couldn't be any closer. It's the culmination of a four-year process. We have now a greater certainty for a wide range of off-exchange instruments, including swaps.
"The industry looks forward to prompt action," Mitchell said.
Futures Commission Chairman Wendy Gramm said, "The bill gives needed legal certainty for swaps and other new derivatives. It gives our regulators flexibility to respond promptly and appropriately to changes in the marketplace.
"That flexibility - leaving enterprises free to excel and to innovate - is at the heart of good government. This bill will help America keep its status as the world leader in financial engineering."
Senate approval of the swaps bill Thursday night came at the end of a volatile week that began with filibusters and other delaying tactics that tied up the Senate for nearly 20 hours until the beginning of Yom Kippur late Tuesday.
The Senate had intended to adjourn for the Jewish holiday, but instead remained in session and voted Wednesday on over 100 bills.
A vote on the swaps bill reportedly was delayed, however, in part, because of a skirmish among a handful of senators over several pending finance bills. Those differences were eventually settled and the bill affecting swaps was approved just before the Senate completed its work and adjourned Thursday night.
The swaps provisions are part of a larger package that reauthorizes the Commodity Exchange Act through fiscal year 1994 and strengthens the authority of the futures commission to regulate futures.
To be eligible for an exemption under the bill, an applicant would have to show that trading in the product was limited to sophisticated participants that meet minimum financial strength criteria.
"This is an important step to reduce risk in the financial system," said Mark Brickell, vice president at J.P. Morgan & Co. in New York and a director of the International Swap Dealers Association. "It gives the CFTC power to eliminate legal risk associated with swaps in the U.S. It makes the financial system safer and increases the prospects for financial innovation. And it boosts the competitiveness of American participants in swap activity."
