Derivatives contracts that currently go though central clearing houses could be pushed into less-regulated over-the-counter (OTC) markets because of proposed rules for overhauling US financial regulation, futures industry leaders have warned.
The so-called “85-15” rule proposed by the Commodity Futures Trading Commission would require all listed derivatives to have at least 85 per cent of their markets traded via a central limit order book and no more than 15 per cent by block trades. Markets that do not meet the rule would have to be delisted.
The proposal – one of the rules stemming from the Dodd-Frank Act – is aimed at encouraging markets to become more exchange-traded, but critics argue it will have the perverse effect of forcing trading away from listed markets into OTC venues, where trading will be more expensive because margin costs will be higher.
Scott O’Malia, a CFTC commissioner who opposes the rule, told the FT the 85 per cent figure was arbitrary, and showed how the agency was proposing to intervene unnecessarily into markets that were functioning in an orderly way and removing risk from the system.
Mr O’Malia said there were 628 contracts listed to be cleared on Clearport, the clearing house owned by CME Group, the US’s biggest futures exchange, which did not meet the 85-15 requirement. Such contracts are traded OTC but are turned into futures contracts in the clearing process.
“These are the endangered species of the futures world,” he said on the sidelines of the Futures Industry Association Expo in Chicago.
“Clearing OTC contracts was a great solution post-Enron, and now we’re saying: ‘you can be a swap’,” Mr O’Malia said. “The result is not only that trading will be more expensive, but that they might not clear them at all.”
Anthony Belchambers, head of the Futures and Options Association, the European industry body, suggested on a FIA panel that the proposal could stifle innovation, since the OTC markets were “often the birthplace” of listed futures products.
Edward Rosen, partner at Cleary Gottlieb Steen and Hamilton, said the rule could inadvertently turn futures traders into swap dealers, but argued that it could also put pressure on financial exchanges to develop new futures products that replicate swap contracts.
Mr O’Malia said the rule is still in the deliberation phase, with no conclusion expected soon.
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