Banks and major swaps users would be limited to owning no more than 20% of derivatives clearing houses, exchanges and trading systems under a preliminary proposal approved by the Commodity Futures Trading Commission.
The CFTC voted to issue the initial rules at a hearing in Washington Friday, its first effort to govern the $615 trillion over-the-counter derivatives market. The vote triggered a public comment period that may produce changes in the plan. For clearing houses only, the commission called for capping collective stakes of bank holding companies, nonbank financial firms, major swaps users or dealers at 40%. Those entities are known as restricted owners.
The CFTC is addressing potential conflicts of interest involving how banks and major swaps users might favor a clearing house they own over competitors. An ownership cap "limits the influence that certain shareholders may exert over" clearing houses, exchanges and trading systems, the commission said.
The commissioners voted four-to-one to adopt the ownership caps. Jill Sommers opposed them.
"This is the one that has had the most debate amongst the five of us," CFTC Chairman Gary Gensler said at the hearing.
Limiting ownership is "not appropriate" and "may do more harm than good," Sommers said. The proposal "may stifle competition" by making it more difficult for new clearing houses, exchanges or swap-execution facilities to be created, she said.
U.S. lawmakers sought to regulate swaps through the Dodd-Frank bill enacted in July after swaps trades complicated efforts to end the financial crisis. In most cases regulators have until July 2011 to write guidelines for the law's mandate that most interest rate, credit-default and other swaps be processed by clearing houses after being traded on exchanges or swap-execution facilities.
A second ownership option approved by the CFTC for clearing houses would not limit the combined stake of restricted owners if none of their individual holdings exceeded 5%. The proposed rules do not exempt existing clearing houses from the caps, though they would let companies apply to the CFTC for a rule waiver.
The ownership caps only apply to stakes that come with the right to vote on corporate matters.
Rep. Stephen Lynch, D-Mass., proposed a similar plan last year. The effort was opposed by the Securities Industry and Financial Markets Association and the International Swaps and Derivatives Association, two trade groups, as well as by the Futures Industry Association, Wall Street's industry group for exchange-traded derivatives.
The new regulations would include specific requirements for the composition of boards of directors, risk management committees and regulatory oversight committees, the CFTC said.
Swap-execution facilities must have a regulatory oversight committee entirely composed of public directors under the proposed rules, said Nancy Schnabel, an attorney-adviser in the CFTC's division of clearing and intermediary oversight.
Commissioner Michael Dunn said he was concerned that there may not be enough qualified people to act as public directors but have no ties to the company on whose board they sit. "Will there be a large enough pool out there to ensure we get the people with the experience needed to make the recommendations to the boards?" he asked.
The CFTC passed initial rules for the financial resources of clearing houses designated by the Financial Stability Oversight Council as systemically important to the U.S. economy.
Such a clearing house would have to have enough capital to withstand the default of its two largest members, the CFTC proposed.
A clearing house not deemed systemically important would have to have enough reserves to meet its obligations if its largest member defaulted, the commission said.
