Futures Agency Denies Intention Of Regulating OTC Derivatives

The Commodity Futures Trading Commission does not want to regulate the over-the-counter derivatives market, its chairman said.

In a letter sent Friday to two House committee chairmen, CFTC Chairman Mary L. Schapiro said the commission's July enforcement order against Metallgesellschaft AG was not a shot across the bow of banks and other swaps dealers.

"There is nothing in the commission's order to suggest that the settlement comprehended swap agreements," Ms. Schapiro wrote.

Ms. Schapiro did assert that the commission will continue to decide for itself whether a contract constitutes a future, which is subject to CFTC regulation, or a swap, which is not. But that didn't appear to bother derivatives dealers.

"The commission's letter will help clear away the uncertainty left by the Metallgesellschaft order," said Mark Brickell, a managing director at J.P. Morgan & Co. and a board member of the International Swaps and Derivatives Association. "That should make it easier for companies to hedge risk confident that their contracts will be enforceable."

Futures are standardized, exchange-traded contracts in which one party agrees to buy a commodity or financial instrument at a set price at a set time in the future. Swaps are similar to futures, but are privately negotiated between derivatives dealers and customers. J.P. Morgan and Chemical Banking Corp. are two of the biggest dealers.

In July, the CFTC hit two U.S. subsidiaries of Metallgesellschaft, a German conglomerate, with a $2.25 million fine for selling off-exchange contracts for the future delivery of oil that ended up costing the company $1.2 billion in 1994.

In its enforcement order, the commission said the Metallgesellschaft contracts "contain all the essential elements of a futures contract," then listed three attributes of futures contracts that also happen to be characteristic of most forwards and swaps.

Many over-the-counter derivatives dealers interpreted this as an attempt by the CFTC to move into their territory. More immediately, it called into question whether swaps based on the value of securities - which unlike interest rate and foreign-exchange swaps are not explicitly exempted from CFTC regulation - might be unenforceable.

On Dec. 15, House Agriculture Committee Chairman Pat Roberts and House Commerce Committee Chairman Thomas J. Bliley Jr. wrote to the CFTC asking it to clarify its intent."

Ms. Schapiro's response: Securities-based swaps are exempt from CFTC regulation and "the commission will continue to bring to bear its exemptive and other authority to provide the level of legal certainty necessary to foster the continued success of these markets."

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