The U.S. futures regulator urged Congress to require thousands of non-major financial firms and funds to use clearinghouses to reduce the risk of another market collapse as part of its reform of the $450 trillion swaps market.
Bills approved by two House committees this month to regulate over-the-counter derivatives would require swaps dealers and major market participants to send standardized contracts through clearinghouses, which assure payment.
I believe we can improve upon this, said Chairman Gary Gensler of the Commodity Futures Trading Commission, by applying the clearing requirement to transactions with financial firms, hedge funds and other investment funds.
To be clear, these are transactions with entities that are not major swap participants, he said at a symposium sponsored by the George Washington University law school.
Afterward, Gensler declined to estimate how many firms would be covered by his approach. There are thousands of hedge funds and a far narrower number of major swap participants, he said.
We think that it is important to bring those non-major participants' transactions into the system, Gensler told reporters. He said he would not require the those firms to comply with the capital and margin requirements that dealers and the major players would face.
A bill approved by the House Agriculture Committee on Wednesday defines major swap participants as those who are not swaps dealers and who maintain a substantial net position in outstanding swaps aside from hedging commercial risk and whose positions create a substantial risk to financial markets or the banking system.
Four large U.S. banks control over 90 percent of the U.S. derivatives market: JPMorgan Chase
A swaps bill approved on October 15 by the House Financial Services Committee would bar swaps dealers of major market participants from owning more than 20 percent of a clearinghouse or trading facility.
Gensler said the language addresses a major governance issue. He said clearinghouses should have open membership, clear derivatives from nonmembers and operate under robust oversight by federal regulators.
The Agriculture Committee bill has no ownership limits. It would require swaps that are cleared to be traded on regulated exchanges. The Financial Services bill calls for regulators to remove impediments to on-exchange trading of swaps.
Besides clearing, margin and capital requirements, dealers and major swap participants would be required by the bills to register with U.S. regulators and follow business conduct, record keeping and reporting rules.
We must ensure that last year's crisis is the last, Gensler said during his speech.
(Reporting by Charles Abbott; Editing by Lisa Shumaker)