Swaps regulation is part of the Dodd-Frank Act (also known as the Dodd-Frank Wall Street Reform and Consumer Protection Act) and has fallen under the jurisdiction of various regulatory agencies such as the Commodity Futures Trading Commission and the Securities and Exchange Commission. Other agencies are also addressing swaps execution facilities such as the Financial Services Authority (FSA) and European Commission.
In the aftermath of the 2008 Financial Crisis, U.S. legislators in the House of Representatives and Senate began addressing the need for regulating the over-the-counter swaps market. House Agriculture Committee Chairman Collin Peterson and Senate Financial Services Committee Chairman Barney Frank pushed for new restrictions on swaps trading in December 2009.
The key issues at the time were: 1) whether to limit ownership stakes in swaps clearinghouses and 2) whether regulators should be able to set margin and capital requirements on swaps traded by non-financial participants in the market.
Swaps Regulation History
- December 1987 - the Commodities Futures Trading Commission (CFTC) proposed taking no action on certain types of swaps. As such, swap markets were allowed to trade on OTC markets, outside the jurisdiction of the CFTC.
- August 1992 - Some bank regulators warn that swaps and other specialized derivative financial instruments may be growing too rapidly without proper supervision. The governor of the bank of England, Robin Leigh-Pemberton, warned that "We must be alert to the possibility that through increasing the links between different financial markets, heavy use of derivatives could in some circumstances actually increase systemic risk." However, other regulators and swaps practitioners claimed that the risks were overstated, feared that over-zealous regulation would damage the market.
- October 1992 - The Futures Trading Practices Act of 1992 (FTPA) is signed into law by George Bush. The FTPA was supposed to give the CFTC "exemptive authority to remove the cloud of legal uncertainty over the financial instruments known as swap agreements".
- 1993 - In January, the CFTC published new rules pertaining to the swap market, including the "Exemption for Certain Swaps Agreements", which allowed the market to exempt swap transactions as long as they met certain criteria, and later in April, the CFTC released the "Exemption for Certain Contracts Involving Energy Products", which provided further exemptions for energy swap transactions.
- 1998 to 2000 - The CFTC pushed to regulate over-the-counter markets, including credit default swaps, which triggered a massive debate over regulation of such markets. CFTC Chair Brooksley Born was at the center of the storm when the agency issued its so-called "concept release" which raised the question about which types of regulation might be appropriate. Congress decided on the matter in 2000, with the passage of the Commodity Futures Modernization Act, which ultimately barred the agency from regulating the credit default market.
- 2002 - Senator Dianne Feinstein attempts to pass a bill that would enforce regulation of energy derivatives first in April, and then later in September. Both attempts failed, due to a coalition of energy traders, as well as financial institutions and regulators.
- 2008 - The derivatives market, and especially credit-default swaps, are blamed as contributing to the financial crisis. Many begin to call for greater regulation of the derivatives market, and in September of 2008, the collapse of Lehman Brothers put considerable strain on the market for credit default swaps.
- September 2008 - The New York state government began making announcements that they would enact laws in January of 2009 for the regulation of swaps and the derivatives market, although they backed off such claims in later months, saying they preferred a broader, federal regulatory plan.
- November 2008 - The Federal Reserve, Securities and Exchange Commission (SEC), and CFTC agreed to exchange information on credit default swaps from private groups that would be set up to act as central clearinghouses for such transactions. This was done in an attempt to provide more information in the unregulated derivatives market.
- October 2009 - The House Agriculture Committee approved a bill for federal regulation of over-the-counter derivatives that would require many swaps to go through clearinghouses, and would therefore be required to move onto regulated exchanges or electronic platforms.
- July 2010 - The US Senate approved the Dodd-Frank Wall Street Reform and Consumer Protection Act; provisions in the bill included redirecting OTC derivatives trading through more accountable channels, as well as many other policies designed to increase government regulation of banks and financial institutions.
- September 2010 - CTFC Chairman Gary Gensler says that over-the-counter (OTC) derivatives trading systems that allow one-on-one swap trading between a single bank and investor are unlikely to be allowed under the new Dodd-Frank act regulations. The Dodd-Frank Act defines trading on a swap-execution facility (SEF) as being done between multiple users, and the "single-dealer derivatives trading tools" or one-on-one trading is unlikely to meet the 'multiple party' guidelines.
- October 2010 - On October 1, 2010, the commission held the first of a series of open meetings to consider rulemakings related to the Dodd-Frank Act. Links to each meeting can be found below.
- January 2012, a joint CFTC/SEC committee released its report on international swap regulation, as prescribed by Section 719 of the Dodd-Frank Act. The report contains a 20-page "snapshot of the swap clearing and regulatory environment in all global jurisdictions. Though approved by both commissions, some commissioners, including CFTC Commissioner Scott O'Malia, dissented, stating the report "fails to properly capture the entirety of the regulatory landscape."
- February 2012 The CFTC issued its first set of final rulemakings on Business Conduct Standards for swap entities. These rules cover issues such as compliance, duties, and conflicts of interest. For more information, click HERE.
- April 2012 The CFTC and SEC issued a joint final rule on swap entity definitions including "swap dealer," security-based swap dealer," "major swap participant," major security-based swap participant," and "eligible contract participant." Under the final rulemaking, the de minimis thresholds will be phased in over two years. For more information, click HERE.
- July 2012 The SEC and CFTC approved a joint final rule on product definitions.
For more information on the regulatory timeline for swaps, see the topics and regulator meeting headings below.
Topics Related to Swaps Regulation
- Comprehensive Regulation of Swap Dealers & Major Swap Participants:
- Portfolio Margining Procedures
- Final Rule: Registration
- Final Rule Definitions, such as Swap Dealer, Major Swap Participant, Security-Based Swap Dealer, and Major Security-Based Swap Participant (Jointly with SEC)
- Final Rule: Business Conduct Standards with Counterparties
- Final Rule: Internal Business Conduct Standards, including Reporting and Recordkeeping, Conflicts of Interest, Compliance, and Duties
- Capital and Margin for Non-banks
- Final Rule: Segregation & Bankruptcy for both Cleared and Uncleared Swaps
- Final Rule: Process for Review of Swaps for Mandatory Clearing
- Final Rule: SEF Registration Requirements and Core Principle Rulemaking, Interpretation & Guidance
- Final Rule Data Recordkeeping & Reporting Requirements
- Final Rule: Real Time Reporting
- Final Rule Agricultural Swaps
- Final Rules: Swap Product Definitions and Entity Definitions, such as Swap Dealer, Major Swap Participant, Security-Based Swap Dealer, and Major Security-Based Swap Participant (Jointly with SEC)
- Final Guidance: Cross-Border Application
- Final Rule: Position Limits for Futures and Swaps, including Large Trader Reporting, Bona Fide Hedging Definition & Aggregate Limits NOTE: Position Limits Rule Vacated by Court Order in September 2012. A reproposed rule was issued in November 2013
- Regulation of Security-Based Swaps
- Final Rule Definitions, such as Swap Dealer, Major Swap Participant, Security-Based Swap Dealer, and Major Security-Based Swap Participant (Jointly with CFTC)
- Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based Swap Participants, and Broker-Dealers; Capital Rule for Certain Security-Based Swap Dealers
- Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants
- Security-Based Swap Data Repositories
- Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information
- Interim Final Rule: Reporting of Security-Based Swap Transaction Data
- Prohibition Against Fraud, Manipulation, and Deception in Connection with Security-Based Swaps
- Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies
- End-User Exception to Mandatory Clearing of Security-Based Swaps
- Security-Based Swap Execution Facilities
CFTC Open Meetings Related to Swaps Regulation
- July 10, 2012
- April 18, 2012
- February 23, 2012
- January 11, 2012
- December 20, 2011
- December 5, 2011
- October 18, 2011
- September 8, 2011
- August 4, 2011
- July 19, 2011
- July 7, 2011
- April 27, 2011
- April 12, 2011
- January 20, 2011
- January 13, 2011
- December 16, 2010
- December 9, 2010
- December 1, 2010
- November 19, 2010
- November 10, 2010
- October 26, 2010
- October 19, 2010
- October 1, 2010
SEC Meetings Related to Swaps Regulation
- April 18, 2012
- October 26, 2011
- October 12, 2011
- September 19, 2011
- August 31, 2011
- August 25, 2011
- July 26, 2011
- SEC Open Meeting, June 29, 2011
- SEC Open Meeting, April 27, 2011
- SEC Open Meeting, February 2, 2011
- SEC Open Meeting, December 15, 2010
- SEC Open Meeting, December 3, 2010
- SEC Open Meeting, November 19, 2010
- SEC Open Meeting, November 3, 2010
- SEC Open Meeting, October 13, 2010
- Key U.S. lawmakers reach deal on swaps regulation. Reuters. Retrieved on December 8, 2010.
- Swap Transactions Under the Commodity Exchange Act: Is Congressional Action Needed?. Georgetown Law Journal Volume:76 Issue:6 Dated:(August 1988) Pages:1917-1947. Retrieved on December 8, 2010.
- Swaps boom worries regulators: The huge growth in derivatives poses problems for banks, says Lisa Vaughan. The Independant. Retrieved on December 16, 2010.
- Statement on Signing the Futures Trading Practices Act of 1992. The American Presidency Project. Retrieved on December 16, 2010.
- CRS Report for Congress: Regulation of Energy Derivatives. CRS. Retrieved on December 16, 2010.
- SEC seeks authority over credit-default swaps market. Dow Jones Newswires. Retrieved on December 8, 2010.
- Washington Watch. Futures Industry Magazine. Retrieved on December 16, 2010.
- Derivatives Face Regulation Amid `Calamitous' Risks. Bloomberg. Retrieved on December 16, 2010.
- Demise of Lehman puts strain on market for credit default swaps. The Independent. Retrieved on December 16, 2010.
- New York Backs Off Credit Default Swap Regulation. Insurance Networking News. Retrieved on December 16, 2010.
- Credit Swaps Move Closer to Regulation With N.Y. Plan. Bloomberg. Retrieved on December 16, 2010.
- Feds agree on oversight for credit default swaps. USA Today. Retrieved on December 16, 2010.
- Second U.S. House panel votes for swaps regulation. Reuters. Retrieved on December 16, 2010.
- Highlights of U.S. financial regulation reform bill. Reuters. Retrieved on December 16, 2010.
- Gensler Says One-to-One Swap Trading Unlikely to Meet New Rules. Bloomberg. Retrieved on December 17, 2010.
- Commodity Futures Trading Commission and Securities and Exchange Commission Release Joint Report to Congress on International Swap Regulation. CFTC. Retrieved on February 2, 2012.
- Statement Of Dissent To The CFTC-SEC Report On International Swap Regulation, CFTC Commissioner Scott D.. Mondovisione. Retrieved on February 3, 2012.