JPMorgan Chase & Co., Goldman Sachs Group Inc. and the world's largest banks won rollbacks in final Dodd-Frank Act rules that promise to transform the private swaps market by increasing competition.
The Commodity Futures Trading Commission voted 4-1 in Washington today on rules determining how buyers and sellers must trade credit-default, interest-rate and commodity swaps in a $633 trillion global market. The rule weakened a proposal by reducing the number of price quotes buyers must seek on swap- execution facilities after banks said a five-quote requirement was onerous and would impair trading.
The vote on the rules represents "the start of a process that could eventually lead to a seismic change in trading of over-the-counter derivatives," Richard Repetto, an analyst with Sandler O'Neill & Partners LP in New York, said in a telephone interview yesterday before the meeting. "It is a switch from an opaque, bilateral market to something where there is some price transparency and a more open and automated market."
The trading regulations are the latest step in efforts by the CFTC and Securities and Exchange Commission to curb risk and increase transparency in the swap market. Largely unregulated trades helped fuel the 2008 credit crisis that led to the collapse of Lehman Brothers Holdings Inc. and a U.S. rescue of New York-based American International Group Inc.
CFTC Chairman Gary Gensler has pushed for rules to improve competition by shifting the "information advantage" away from Wall Street banks.
The final rule "will lower costs to the American economy and also lower risks," Gensler told reporters on a telephone news conference yesterday. "It lowers risk because when assets and derivatives are priced real-time in competitive marketplaces, it's easier to know what's happening inside your company and inside those large financial institutions."
Five Wall Street banks dominate the U.S. swaps business with JPMorgan, Goldman Sachs, Bank of America Corp., Citigroup Inc. and Morgan Stanley controlling 95 percent of cash and derivatives trading for U.S. bank holding companies as of Dec. 31, according to the Office of the Comptroller of the Currency.
The rules may erode bank profits by reducing their current ability to trade directly with other banks or clients in the bilateral market. The trading, clearing and other rules may cost JPMorgan $1 billion to $2 billion in revenue, according to a Feb. 26 presentation by the bank.
The rules represent the final definition of a new type of trading platform set up under Dodd-Frank that is intended to serve as an alternative to exchanges operated by CME Group Inc. and Atlanta-based Intercontinental Exchange Inc. Bloomberg LP, the parent company of Bloomberg News, has filed a lawsuit challenging a separate CFTC rule that the company said will harm its planned swap-execution facility. Tradeweb LLC, Icap Plc and GFI Group Inc. have said they plan to set up so-called SEFs.
Dodd-Frank would have most swaps traded on SEFs or exchanges that let buyers and sellers interact with multiple participants. About 80 percent of interest-rate swaps will be guaranteed at clearinghouses and traded on SEFs, Credit Suisse AG analysts Ira Jersey and Michael Chang estimated in a May 2 note.
"The ground has been plowed and turned. Now it's up to market participants to see what we can grow here," Shawn Dorsch, president of Charlotte-based Clear Markets Inc., an electronic swap-trading company.
CFTC commissioners changed the proposed quote requirement after talks faltered late last year over the plan to mandate five quotes. JPMorgan, Deutsche Bank AG and other swap dealers lobbied against the five-quote requirement, telling regulators that it is unnecessary, will increase trading costs and reduce liquidity on facilities using request-for-quote systems.
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