The Justice Department wants swaps markets regulators to be a lot tougher in their proposals to limit banks from controlling swaps trading platforms, weighing in on rules that could be finalized as early as next month.
Wall Street traditionally has dominated the over-the-counter swaps market, worth about $600 trillion, but U.S. regulators have been required by the Dodd-Frank financial reform law to broaden access.
Christine Varney, the head of the Justice Department's antitrust division, said the Commodity Futures Trading Commission and Securities and Exchange Commission should limit banks and other major swaps players to a collective minority stake in exchanges and swap execution facilities.
A collective ownership cap of 40 percent would spur the creation of more exchanges and SEFs, the department said.
The agencies issued companion proposals on ownership and governance of swaps trading and clearing infrastructure in October. The Dodd-Frank law requires most swaps to trade on exchanges or swap execution facilities, or SEFs, and pass through clearinghouses.
The comment period for the governance and ownership rules closed in November, and the law gave the agencies a mid-January deadline to finalize their plans. The Justice Department issued its comments to the regulators in letters sent this week.
The CFTC and SEC each proposed a 20 percent cap on voting stakes for individual members of swaps exchanges and SEFs, but the Justice Department said they should also collectively limit stakes held by members.
In the CFTC's rule, this collective cap should apply to banks, non-bank financial firms, swap dealers and major swap participants, the Justice Department said.
The players share very similar incentives to limit access and to otherwise insulate themselves from competition and could work together to limit transparency of trades or even try to evade exchange-trading requirements, the department said in its comment letters to the agencies.
Allowing three to five major players to control a platform would greatly increase the risk that those entities will use their control to block or limit rival dealers' or buy-side firms' access to the platform, to choose not to support trading of instruments sponsored by other market participants, to impose undue burdens on rivals, or otherwise to limit competition in this sector, the department said.
MORE STRINGENT GOVERNANCE RESTRICTIONS
The Justice Department also said the CFTC should adopt the SEC's more stringent approach to composition of boards and committees of exchanges, SEFs and clearinghouses.
The CFTC had proposed that at least 35 percent of boards be independent, with public directors comprising a majority of the nominating committee, while the SEC said boards and committees have a majority of independent directors, with the nominating committee consisting solely of independents.
Clearinghouses that do not face a collective cap on ownership by banks and other big players also should be required to have a majority of independent directors on their boards and committees, the department said.
(Editing by Lisa Shumaker)