14 February 2011

New York Times: SEC proposes rules on derivative prices

The SEC’s proposed rules for swap execution facilities somewhat track those proposed by the Commodity Futures Trading Commission. The proposals, while affording investors much greater insight into the markets, do not require full transparency.

Under the SEC’s proposal, investors who buy derivative contracts from banks would be armed with the trading prices. This information will empower investors to do some comparison shopping among banks. “Making the information available is the most important part of creating the swap execution facilities,” said Walter Dolde, a finance professor at the University of Connecticut-Stamford and a former executive at Lehman Brothers and Citibank. “The Wall Street banks have evidently been making extremely large profits at the expense of their customers.”

The SEC’s five commissioners unanimously agreed to propose the new rules for execution facilities. They are now open for comment during a 60-day period, after which the agency must vote on a final version of the rules. Banks and securities firms have been lobbying regulators, encouraging them to remain flexible when drafting rules for the execution facilities. The SEC appears to have heeded the message. The agency’s proposal would invite a range of trading platforms to become swap execution facilities.

The chairman of the Commodity Futures Trading Commission, Gary Gensler, had to tread lightly too, after some commissioners complained his original plan was too rigid. At first, Mr. Gensler wanted complete price transparency, which would have limited the number of companies that could become execution facilities. The current plan expands the number of players that can jump into the business but reduces transparency.

© New York Times