U.S. Commodity and Futures Trading Commission (CFTC) Chairman Gary Gensler has confirmed that swaps users will have a grace period before trades are required to be cleared. The statement ended confusion about whether current swaps trades with U.S. entities would count toward an $8 billion registration threshold.
The confusion over swaps clearing was foregrounded by an October 5 e-mail sent by representatives of the Securities Industry and Financial Markets Association (SIFMA). The e-mail suggested that swaps would not need to be cleared in the current “phase-in” period. The firm, however, misread a single line of regulation, which prompted widespread confusion over outstanding swaps contracts.
Yesterday, CFTC Chairman Gary Gensler shed light on the situation by asserting that a grace period was intended all along, even though the regulation seems to suggest otherwise.
“I know what I believed when I voted on it, it was prospective,” he said at SIFMA’s annual conference. Gensler added that the $640 trillion swaps market needs time to adjust to a rapidly changing regulatory framework. “This was an easy one for me,” he said.
Confusion Stems from Wording in CFTC Regulation
Gensler also accepted blame for the confusion, citing one ambiguous line amid 17,000 words of regulation. “The language could be read in two different ways,” he said. Apparently, SIFMA’s interpretation of the rule gave market participants 270 days before swaps trades would require clearing.
In fact, the CFTC had allowed two distinct deadlines. One deadline set an effective date on which the mandate to clear swaps begins. The other deadline marked the date by which market participants must comply.
Swaps users will be distributed between three categories: 90 days, 180 days, and 270 days.
“Market participants will be required only to clear swaps executed on and after their applicable compliance date, thus providing time to comply with the clearing requirement,” Gensler said.