U.S. regulators yesterday defined which companies will face new oversight in the $708 trillion global swaps market, where largely unregulated trades helped fuel the 2008 financial crisis.
A rule approved on a 4-1 vote by the Commodity Futures Trading Commission will initially define a regulated dealer as one that conducts swaps with a notional value of at least $8 billion in a 12-month period. The Securities and Exchange Commission approved a similar rule by a unanimous vote. Republican Scott O’Malia was the CFTC’s lone dissenting vote.
Companies defined as swap dealers will ultimately be subject to the highest capital and collateral requirements for market participants.
The $8 billion threshold will fall to $3 billion within five years unless new market data persuade regulators to use a different level. While a lower threshold will capture more dealers, it still exceeds the $100 million level that was initially proposed.
CFTC Chairman Gary Gensler said he was confident the rule would impose new requirements on the dominant players in the swaps market even though the threshold is higher than initially proposed.
The SEC and CFTC met separately yesterday to weigh parallel versions of the rule. The rule was mandated by the Dodd-Frank Act of 2010 to govern clearing, trading, capital, collateral and internal compliance standards, as well as swap dealers’ relationships with clients including pension funds and cities. Dodd-Frank calls for most swaps to be guaranteed by central clearinghouses and traded on exchanges or other platforms.
A CFTC staff member who briefed reporters April 17 didn’t provide details on how many companies would be subject to the heightened oversight.
The rule also defines a smaller group of “major swap participants” that hold large positions in categories such as currency exchange rates or commodity swaps. One threshold for “substantial position” would be daily uncollateralized exposure of $1 billion in any major swaps category except for rate swaps, where $3 billion will be the mark.
CFTC Votes to Treat Commodity Options the Same as Other Swaps
The U.S. Commodity Futures Trading Commission adopted rules yesterday that will treat commodity options the same as all other swaps.
In a 5-0 vote, the five-member commission removed regulations that for more than a decade have treated agricultural swaps and commodity options differently than other transactions in the swaps market. Those products will now be subject to the same rules as interest rate, credit and other types of swaps.
The rule takes effect 60 days after it is published in the Federal Register.
The CFTC and Securities and Exchange Commission are implementing rules for the swaps market after unregulated trades helped fuel the 2008 credit crisis.
Banks Urged by FSB to Probe Mortgage Insurance’s Impact on Risk
Banks should carry out “prudent and independent” assessments of the protection offered by mortgage insurance policies to avoid making irresponsible loans, the Financial Stability Board said yesterday in a statement on its website.
Mortgage insurance, which gives holders protection if they can’t make payments on their home loans, “should not be considered as an alternative” to due diligence by a bank into whether borrowers will be able to meet their obligations, the FSB said. Mortgage insurers should also be subject to oversight by regulators, it said.
The FSB, which brings together financial ministry officials, central bankers, and regulators from the Group of 20 nations, made the recommendation as part of a set of guidelines on responsible mortgage lending.
While national regulators are free to “consider imposing” limits on the size of mortgage a bank can offer in relation to the value of the property, such curbs may not be needed if banks follow “sufficiently prudent” lending policies, the FSB said.
Colleges Could Be Banned From Using U.S. Tax Money for Ads
U.S. colleges would be barred from spending federal taxpayer money on advertising, marketing and recruiting under a Senate bill targeting for-profit institutions.
The 15 largest for-profit colleges, including Apollo Group Inc. (APOL)’s University of Phoenix, spent a combined $3.7 billion, or 23 percent of their fiscal 2009 budgets, on advertising, marketing and recruiting, according to a summary of the bill proposed yesterday by senate Democrats. Nonprofit colleges spend an average of half a percent of revenue on marketing, the lawmakers said.
Congress, the U.S. Justice Department and state attorneys general are scrutinizing the marketing practices of for-profit colleges, which have higher student-loan default rates than traditional institutions and can rely on federal financial aid for as much as 90 percent of their revenue.
For-profit colleges cater to working adults and other non- traditional students who can’t be reached through a high school guidance counselor, said Steve Gunderson, president of the Washington-based Association of Private Sector Colleges and Universities, which represents in the industry.
The bill “is clearly another attempt by some policy makers to try and put private-sector colleges and universities out of business,” Gunderson said in a statement. “It also reflects a fundamental misunderstanding of the students we serve and the public service we provide.”
The legislation is unlikely to pass this year because of the approaching presidential election season.