WASHINGTON -- Top representatives from the swaps industry fear that some of the Commodity Futures Trading Commission's proposals under review are unnecessary and may harm what legal certainty the over-the-counter derivatives industry has.
The International Swaps and Derivatives Association sounded its warning in written comments submitted to the commission this month.
"The CFTC should not at this time take steps that could have a profound and adverse effect on participants in these transactions, effectively eliminating the legal certainty that has been achieved by the CFTC with the support of Congress," the association said.
The futures commission put out for comment this fall proposals that would revisit some parts of its swap exemption rules. Top agency officials have said the efforts are in response to recent losses reported by state and local governments and others from making derivatives investments.
Last year, the commission used new powers granted by Congress to exempt from its oversight swaps and other over-the-counter derivatives. The exemption was intended to remove any legal clouds surrounding the over-the-counter instruments, which have some futures-like elements.
Now the agency has decided to reexamine some parts of the exemption in light of recent losses reported by state and local governments, pensions, and others, top agency officials have said.
Specifically, the agency is considering whether or not to adopt tailored "stand-alone" antifraud and price manipulation rules that would better aid the agency in enforcement actions.
In addition, the agency is considering whether or not to narrow the parameters for eligible participants in over-the-counter derivatives transactions, given the losses by less sophisticated investors.
The association said that while it supports effective measures to guard against fraud and price manipulation, creating more specific rules would do more harm than good.
"No reasons have been advanced to suggest that modifications are needed now," the association said. "Instead, the imposition of new and different rules could, as described above, result in unnecessary market disruption by creating unnecessary uncertainty."
Adopting a stand-alone fraud rule would not only be redundant, the association said, but it would suggest to participants that the CFTC plans to regulate swaps through enforcement actions. The group called the proposal "a signal that would have an immediate, chilling effect on swap activity, regardless of the merits of the jurisdictional issue."
With respect to the agency's proposals to redefine qualified eligible participants in over-the-counter derivative transactions, the association said there isn't a need.
"There is no evidence that a change in the definition of 'eligible swap participant' is warranted at this time," the association said. "In the nearly two years since the swap exemption was adopted, there has been no evidence of practices that would warrant narrowing its scope."
Publicly reported losses by municipalities and pension funds have been in transactions involving securities, not swaps, the association maintains. "At the same time, recently publicized disputes regarding swaps transactions have involved large corporations and banks that are 'eligible participants' under any definition," the association said.
Since 1987, the association has worked with the futures commission and Congress to promote legal certainty for those who use swaps.
In large part, the businesses of banks and other financial institutions, government-sponsored entities, and corporations that provide and use swaps and other similar over-the-counter transactions are based on the legal conclusion that these transactions are not futures contracts subject to federal futures trading laws, the association said.
"ISDA believes that the CFTC should avoid steps that will reverse a seven-year effort to provide legal certainty for swaps transactions, create new confusions as to the legal standards applicable to swaps, potentially render a large number of transactions void and unenforceable and undermine the continued growth of swap activity."
