By Simon Miller
The Commodity Futures Trading Commission (CFTC) has approved a range of rules for the $600trn derivatives market.
The CFTC voted 4-to-1 in favour of the new rules including a host of risk management rules on banks and other firms that trade derivatives.
Firms must conduct stress tests of all potentially risky positions, test all lines of credit yearly and evaluate their ability to meet margin requirements every week.
Although the rules are for the more obscure parts of the Dodd Frank regualtory overhaul, the CFTC insisted that the changes would impose crucial new oversight on the derivatives industry.
Speaking at a public meeting in Washington on Tuesday, CFTC chairman Gary Gensler commented: "Though it is quite technical, and some might say it’s sort of into the plumbing of the derivatives marketplace, these rules today are critical to promote access, lower risk, and ultimately help in transparency in the market. Our country will benefit from financial reform, and in fact, in addition the financial side of the economy will also benefit from greater transparency and competition in the derivatives markets.”
According to Gensler, the new provisions would stop the top four banks - JP Morgan Chase, Citigroup, Bank of America and Goldman Sachs - from restricting customers from trading with other derivative market players.
The commission’s overhaul also looks to streamline trade processes, setting a standard that clearinghouses must accept or reject trades “as quickly as would be technologically practicable,” or a matter of “milliseconds or seconds.”
Gensler added: "This lowers risk to the markets by minimizing the time between submission and acceptance or rejection of trades for clearing."