[ by Howard Haykin ]

CFTC Chairman Gary Gensler said his agency aims to complete margin rules by early next year - including amounts of margin or collateral required to back uncleared swaps trades.  Gensler said the rules, initially proposed in April 2011, would be finalized with consideration given to insights offered by other international regulators.  Margin rules are mandated by the 2010 Dodd-Frank Reform Act.

"I would anticipate that the CFTC, in consultation with Europe, would take up the final margin rules toward the beginning of next year with the benefit of this international work." -- Mr. Gensler, in a speech at the Bank of England, London. 

A swap is a financial contract ...  in which 2 parties exchange cash flows on debt, currencies, or other assets, to hedge risk or make a profit. Margin is the amount of collateral that traders post to back a trade.  Risky swaps trading at overseas affiliates of firms like insurer AIG helped fuel the 2007-2009 financial crisis, which led to multi-billion dollar taxpayer bailouts. 

Currently, the size of the OTC swaps market is approximately $648 trillion.

Prior Regulatory Actions as Reference. In 2009, G-20 leaders came to a consensus about working together to impose new rules on this rather opaque market.  In 2011, they agreed specifically on the need to impose margin on uncleared swaps, although the rules have been tricky to implement.  Margin rules could prove to be unworkable if participating countries set different margin levels.  

For example, big banks - which are the most active players in the swaps markets - would conduct their business/trading in those countries that offers the most lenient or lightest  margin requirements.  As a result, the regulating country to such trades is the one where the trades were executed.  If the regulatory oversight in one country proves to be more lax than, say, in the United States, the CFTC, and/or SEC and other federal regulators might have little say over the transactions.

Despite Mr. Gensler's nod to international coordination on issues like margin, the Chairman took a tough stance on the reach of U.S. swaps rules abroad - i.e., he expects the transactions will be regulated in the same manner as swaps transactions within the U.S. 

Thus even though Mr. Genler recognizes that "We need to recognize there will be times when we're unable to have exactly the same approach," the CFTC doesn't plan to back down from ensuring that regulatory oversight of swaps transactions outside the U.S. conform to U.S. standards. 

"Our laws tell us that when financial institutions operating outside the United States transmit risks directly into the United States through swap transactions with U.S. persons, such transactions should be regulated in the same manner as swap transactions within the United States."

For further details, go to:  [Reuters, 10/1/12].