Swaps Dealers must follow requirement for new disclosures, Books-and Records, and Real-Time Trade Reporting.

[ by Howard Haykin ]

Sixty-five (65) banks had registered their derivatives business with regulators and now each is fulfilling new regulatory obligations - including the need to submit real-time trading data to outside warehouses.  This new obligation took effect on Wednesday, the first day of trading in 2013.  Later that evening, a warehouse posted an early batch of data online, that shined a rare spotlight on a financial market that, until now, has been opaque, rather than transparent. 

For a business that apparently blew up in the 2008 financial crisis, the changes effectively signal a milestone in the regulators' fight over Wall Street regulation. 

Then and Now.   Then, regulators had little authority and little information to scrutinize the details that characterize derivatives trading, a market that now exceeds $600 trillion.  Seeing the new rules and regulations kick in at the start of this new year, CFTC Chairman Gary Gensler, one of the architects behind the derivatives overhaul, offered these thoughts:  "They are an historic change for the markets that will benefit the public and the economy at large."

Hail, Hail the Gang's All Here.    Big banks are among the market participants that now must abide by a new set of rules, that require registration and production of data.  European banks include Deutsche Bank and Barclays, while their Wall Street counterparts include Goldman Sachs, Citigroup, Morgan Stanley and JPMorgan Chase.  Each bank has signed up as a so-called swap dealer, the designation for firms that arrange derivative contracts tied to the value of commodities, interest rates or mortgage securities.

A major component of the Dodd-Frank Act provides the basis for the new oversight.  The law took particular aim at derivatives, which proved pernicious in the crisis.  During the crisis years, banks were buying billions of dollars in derivatives that served as "dubious" insurance on mortgage-backed investments.  When the investments soured, AIG, or the American International Group which was the counterparty to the banks' trades, lacked the capital to honor those agreements, prompting the need for a $180 billion government bailout, 

Dodd-Frank established structure to the markets in an effort to prevent a recurrence of such calamities. To make the new rules effective, legislators spelled out a plan in Dodd-Frank that required derivatives dealers to register with the CFTC.  By law, the banks and hedge funds also must open up their trading books to regulators and the broader public.

While Dodd-Frank provided the objectives and introduced the high-level requirements, it was the responsibility the CFTC - with the SEC - to write new rules what would effectively carry out the objectives of Dodd-Frank.  The CFTC worked on drafting the new rules and, more often than not, their efforts were accomplished in fits and starts. 

At one point in time, the plan was to have the new rules kick-in sometime in 2011.  That never happened, which emboldened critics of the new policies to believe that rules would never make it out.  Critic employed an aggressive lobbying campaign on to establish roadblocks wherever possible.  The approach, at time, had the appearance of a strategy known familiarly as "death by a thousand pin pricks."    The regulators were forced to make concessions and delayed implementation for several months.  One such victory for the derivatives industry, was the decision of regulators to agree to apply the swap-dealer designation only to firms that arrange more than $8 billion worth of swaps contracts annually - a figure significantly higher than the initial proposal of $100 million.   Also, some energy companies and large regional banks were exempted from having to register. 

Yet, the CFTC persevered and eventually adopted final rules that managed to capture under its wing the newly adopted final rules - which, among other things, required banks to do the following:

• register as swap dealers by 12/31/12. 
• abide by certain obligations earmarked for registered swap dealers.
• For the first time, the banks had to develop and adopt internal risk management controls;
• Banks had to bolster disclosures to trading partners.
• and, banks had to comply with specified record-keeping requirements. 
• As noted above, banks are now obligated to enter real-time the data from their trading book.
• Banks also must post certain disclosures on the Web site of DTCC, a data warehouse -information that includes the volume, time, and price of each derivative trade.  Trades covered by the new disclosure requirements involve interest rate swaps and credit indexes, including the index where JPMorgan Chase suffered its recent multi-billion dollar trading loss.

Proceeding From Here.   While it's certain that the rules will require further re-writes, the critical element of starting out has been done.  And, so long as there's "real time reporting brings transparency to the formerly opaque swaps market,"  the industry is headed in the right direction.
 

For further details, go to:   [ Dealbook, 1/3/13 ].