WASHINGTON — The Commodity Futures Trading Commission will meet on Jan. 11 to consider some final derivatives rules, amid concerns the agency may have bowed to industry pressure and weakened the rules it had proposed to protect unsophisticated governments in swap and other muni-related derivatives transactions.
The CFTC’s announcement of the meeting Wednesday comes a month after consumer groups warned that dealer and derivatives groups had tried to drastically weaken the proposed rules containing business conduct standards, which were mandated by the Dodd-Frank Act. Without tough new rules, the groups said, the market would see more cases like Alabama’s Jefferson County, which filed for bankruptcy protection last year after terminating more than $3 billion in interest-rate swaps.
First proposed in late 2010, the CFTC’s business-conduct standards contained heightened obligations for swap dealers that provide advice to “special entities” such as state and local governments or pension funds, which must have independent advisors for derivatives transactions. A swap dealer acting as an advisor to a state or local government or pension fund, for example, would have to have a reasonable basis for believing that what it was recommending was in the best interest of the special entity.
But the proposed rules sparked criticism from industry and derivatives groups, who warned they would cause swap dealers to refuse to engage in swaps with special entities. The Securities and Exchange Commission, which shares jurisdiction over interest-rate swaps with the CFTC, proposed its business conduct standards in June, diluting some of the protections for special entities,” according to consumer groups.
Market participants and observers said they will be watching to see whether the CFTC’s final rule mirrors the SEC’s approach.
“If they do a reasonably strong rule here, I think that bodes well,” said Barbara Roper, director of investor protection for the Consumer Federation of America. “It’s going to tell us a lot about what to expect, and if they hang tough here, that’s good news for everybody. Everybody but swap dealers.”
But a swap dealer noted Dodd-Frank requires the CFTC and the SEC to “harmonize” their rules.
“I’ll be interested to see what they come out with,” said Peter Shapiro, managing director of Swap Financial Group LLC in South Orange, N.J.
An industry group echoed that view.
“We do feel the SEC’s approach to this issue is more workable than the version the CFTC proposed,” said Michael Decker, managing director and co-head of the municipal securities division of the Securities Industry and Financial Markets Association.
Another swap dealer expressed relief that, almost 18 months after Dodd-Frank’s enactment, the CFTC will weigh in with a final rule.
“It’s good that they’re going to bring some clarity,” said Samuel Gruer, managing director of Cityview Capital Solutions LLC in Millburn, N.J. “It’s been hanging over the market for two years, particularly on the dealer side.”
