Regulators approved new rules for the $600 trillion derivatives market on Tuesday, aiming to raise competition and impose more rigorous risk management on an industry that played a central role in the financial crisis. In a 4-1 vote, the CFTC adopted the rules - its latest move to usher in broad new changes in response to the crisis.  While the rules are among the most arcane provisions to come from the Dodd-Frank financial regulatory crackdown, officials say that the changes will impose crucial new oversight to the derivatives industry.

"Though it is quite technical, and some might say it’s sort of into the plumbing of the derivatives marketplace, these rules today are critical to promote access, lower risk, and ultimately help in transparency in the market.

Our country will benefit from financial reform, and in fact, in addition the financial side of the economy will also benefit from greater transparency and competition in the derivatives markets." -- Gary Gensler, CFTC Chairman, at Tuesday's public meeting in Washington.

In his remarks, Mr. Gensler highlighted how the rules will mandate broader competition in the derivatives industry, which is currently dominated by a few select big banks - JPMorgan Chase, Citigroup, Bank of America and Goldman Sachs currently hold about 95% of the banking industry’s total exposure to derivatives contracts.  Now, banks will be unable to restrict customers from trading with other players in the derivatives market. Clearinghouse Processing. The CFTC’s overhaul also attempts to streamline the processing of trades, setting a standard that clearinghouses must accept or reject trades "as quickly as would be technologically practicable," or a matter of "milliseconds or seconds."  Gensler explained, "This lowers risk to the markets by minimizing the time between submission and acceptance or rejection of trades for clearing." Some Terms of New Rules. The new rules impose a battery of risk management rules on banks and other firms that trade derivatives. Under the regime, firms must conduct "stress tests" of all potentially risky customer positions, evaluate their ability to meet margin requirements every week and test all lines of credit yearly. Commissioner Scott O’Malia, a Republican, cast the lone vote against the rule, saying the agency is failing to evaluate the economic costs of the overhaul. "We still suffer from the lack of quantitative analysis," he said. Proponents of financial regulation cheered the crackdown.  Dennis Kelleher, head of Better Markets, a nonprofit advocacy group, had this to say: "The commission sent a loud message to Wall Street: no more dark markets and no more predatory behavior." [Dealbook, 3/20/12]