For friends and foes of the 2010 Dodd-Frank financial reform law, tomorrow is a big day. Regulations covering the $648 trillion swaps market finally start to take effect. In historical terms, that’s as important as when the 1930s securities laws went into force.
Banks and other trading outfits must begin tallying their trades to determine whether they will be deemed “swaps dealers” subject to the strict capital and collateral standards Dodd-Frank allows. The rules will bring a new era of transparency to a business that thrives off opacity.
They have been in the making for more than two years at the U.S. Commodity Futures Trading Commission. Banks and other corners of the financial industry that make billions in profit off derivatives are, um, less enthused. They are seeking all kinds of exclusions and exemptions.
Many derivatives trades are done over the phone and aren’t reported to a central clearinghouse, giving dealers an advantage in determining prices. The new transparency could mean lower profits at the dominant banks: JPMorgan Chase, Goldman Sachs, Citigroup, Morgan Stanley and Bank of America.
The CFTC is deluged with requests from lobbying groups to ease or delay portions of the rules. Agribusiness firms hope to stall provisions aimed at non-bank traders. Banks and asset managers want to exempt currency derivatives, as does the U.S. Treasury. Auto companies and banks that securitize consumer credit want to exempt their financial entities.
Gary Gensler, the CFTC chairman, said in a speech yesterday that he may fine-tune the rules before tomorrow. Expect additional guidance, no-action letters and interpretations from the agency, but don’t expect Gensler, a former Goldman Sachs executive, to back down on anything major.
(Paula Dwyer is a member of the Bloomberg View editorial board. Follow her on Twitter.)