The CFTC proposes new rules that would require large derivatives trading firms to bolster their capital cushions - the latest attempt to reduce risk in the $600 trillion swaps market.  Swap dealers are the targets of the rules - including broker-dealers, big energy trading shops and Wall Street bank subsidiaries that arrange derivatives deals.  The plan also would target so-called major swaps participants - companies that are highly leveraged or have huge positions in swaps contracts.  CFTC Commissioners voted 4 to 1 on the rules mandated by Dodd-Frank.   There's a 60-day comment period.

The CFTC had previously proposed rules to require many swaps to be traded on regulated exchanges, but until now had not said which types of swaps would be affected.  Today, the Commission said its swaps definition would include forex options and forex swaps and forwards.  Insurance products and consumer transactions - e.g., contracts to purchase home heating oil - would be excluded from the definition.  The commission also voted to reopen or extend the public comment period 30 days on its earlier rule proposals.

        As proposed, affected firms ... would have to put aside enough cash to cover unforeseen calamities.  “Capital rules help protect commercial end-users and other market participants by requiring that dealers have sufficient capital to stand behind their obligations,” CFTC Chairman Gary Gensler said.  Still, there's no guarantee that enhanced capital levels will avert future disasters, and there's no magic capital number that regulators see as a cure-all.  This is not a "one-size-fits-all" requirement.

Swaps dealers and major trading firms that are already registered with the commission as futures brokers would have to hold at least $20 million of adjusted net capital, on top of existing requirements.  Other firms that are subsidiaries of big banks would have to meet the same capital standards as the parent company, while storing away at least $20 million of Tier 1 capital.  Yet another set of firms would have to keep tangible net equity equal to $20 million, in addition to putting aside funds to cover market and credit risk.

All told, the CFTC proposal covers more than 200 firms expected to register as swaps dealers and major swaps participants.   [NYTimes, 4/27/11]  

For further details, go to:   [Speech by CFTC Chairman Gensler, 4/27/11]