* Investors embrace clearing in boon for CME, LCH, ICE* CFTC inundated with thousands of industry lettersBy Jonathan Spicer and Ann SaphirCHICAGO, Oct 12 (Reuters) - Europe’s debt problems are
increasing anxiety about the vulnerability of global markets
because too many new U.S. derivatives rules intended to prevent
a repeat of the 2008 crisis have yet to be defined.Investors have responded in recent months by embracing the
clearing of swaps, essentially beating regulators to the punch,
to protect themselves in volatile markets.Clearing allows investors to avoid the credit risk of
trading with banks that appear newly vulnerable amid Europe’s
debt crisis. In 2008-2009 banks’ worries about the health of
their trading partners resulted in a widespread freezing of
credit, which nearly sank the global economy.Executives at a futures industry conference here urged
regulators to speedily adopt rules for trading and clearing in
the over-the-counter swaps market. The longer we wait, they
said, the more dangerous it becomes.”If we were the five senior staff on the Titanic, I’d like
to think we wouldn’t be standing back, looking at the safety
boats and thinking about whether we can design them better,”
CME Group Inc chief executive Craig Donohue said at the
Futures Industry Association.”We’d be thinking about how to get people on the boats and
get them to safety, and maybe we can improve on that in the
future,” he said.It has been three years since a U.S. financial crisis sent
the global economy into a tailspin, and more than a year since
lawmakers passed a bill designed to prevent a new crisis from
taking down the financial system in similar fashion. Regulators
are scrambling to finish writing the rules.Now, with Europe’s debt crisis showing some of the same
signs as the United States’ meltdown, investors have rushed
into clearing credit and interest rate swaps, a boon in
volatile markets for companies like CME and Europe’s
LCH.Clearnet.The Commodity Futures Trading Commission, which must make
final about 50 new rules under the Dodd-Frank law, has
struggled to keep up with the rule-making process, having
finished only about a dozen of the rules.Several key rules, including capital and margin
requirements, will be pushed into the first quarter of 2012,
putting the agency well behind a July 2011 deadline Congress
had set.Regulators have benefited from public meetings that
provided input for the rules-writing, said CFTC Chairman Gary
Gensler. “But the American public needs us to move forward and
get the job done and finish these rules,” he told reporters.”The crisis emanating from Europe reminds us that the
public is still unprotected.“‘FISH OR CUT BAIT’Investor appetite for CME’s cleared swaps soared last
month, with trading in credit default and interest rate swaps
rising to $42 billion in September, from less than $1 billion
about a month earlier.CME’s futures business has also benefited, as swaps users
seek safer alternatives to their bilateral dealings with banks.
Asset managers are increasingly shifting their trades to CME,
doubling their use of CME’s short-term interest rate futures in
the past year for instance, and trading in currency futures
rose to records in September as investors sought safety through
clearing.”The trend is there,” said Jeffrey Sprecher, chief
executive of IntercontinentalExchange Inc , which began
clearing CDS in early 2009 and saw an 11 percent jump in
credit-related revenues from the second to the third quarter of
this year.”It’s obviously a very complicated global environment right
now for global exchange risk, and you are seeing a migration
towards futures more than the OTC market.”Despite delays by the CFTC and other agencies in defining
the Dodd-Frank rules, the expectation that they will eventually
come into force has allowed investors to begin clearing
products they never had before.In a global market of some $480 trillion in clearable
interest rate swaps, an estimated $180 trillion has yet to be
cleared.Yet some, including Donohue and Sprecher, cautioned in
interviews that it was important the CFTC takes the time to
sift through the thousands of comment letters and get the rules
right. “I think it’s well intentioned,” Sprecher said.There is also the real threat of lawsuits from the industry
once the rules — from limits on excessive speculation to
real-time reporting of trades to end-user exemptions — are
formally adopted.But based on interviews with several traders and industry
executives, the euro zone crisis is giving a new urgency to the
need to define how exactly regulators want to safeguard the
market.”Let’s fish or cut bait,” said Chris Hehmeyer, chief
executive of Chicago-based proprietary trading firm HTG Capital
Partners. “It’s time for them to go ahead and get the
definitions out there so that we can get on with it.”
