Swaps Regulation Faces Questions That Should Have Been Addressed 3 Years Ago
Sober Look | Apr 23, 2012 01:27AM ET
People often ask why it is taking this long to implement the new US derivatives regulation (part of the Dodd-Frank legislation). Well, it starts with zealous politicians who know all about the province of Kandahar in Afghanistan (because they are all about the "war on terror"), but know little about the global banking system or what a swap is for that matter. Then the implementation gets turned over to domestic regulators such as the SEC and the CFTC who themselves don't fully understand international banking.
The CFTC had enough trouble regulating MF Global - and now they are asked to deal with Deutsche Bank's London subsidiary? The SEC has hundreds of hedge funds to register and audit while they can't even implement Reuters : The CFTC originally said in December 2010 that firms would be counted as swap dealers if they traded more than $100 million in swaps over a 12-month period [numerous hedge funds trade 10 times that in a year].
That threshold set off a desperate push by energy companies and big commodity traders, who argued that they are using trades to hedge against market risks, and that their exposure does not endanger the broader financial system.
The final version released on Wednesday bumps the threshold up to $8 billion for most asset classes as an initial phase-in. Eventually, that threshold drops to $3 billion, unless regulators decide a different threshold is appropriate.
It was easy in 2009 to "regulate it all, ask questions later." Now the questions are being asked and the answers are not easy to come by. Some of this regulation will be so convoluted and confusing, it may create more risks than it originally intended to address. And as before, the dealers will find some loopholes because they can always afford better lawyers and structurers than the CFTC.
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