By Alexandra Alper
WASHINGTON, July 24 (Reuters) - The U.S. derivatives regulator proposed a key rule on Tuesday that would set the clock for firms to start clearing certain types of swaps, in a bid to reduce risk in the $650 trillion market.
The Commodity Futures Trading Commission also finalized a timeline that lays out when different types of firms will have to route their trades through clearinghouses.
“The rule provides greater clarity to market participants regarding the time frame for bringing their swaps into compliance with the clearing requirement,” CFTC Chairman Gary Gensler said in a statement.
The 2010 Dodd-Frank Act tasked the agency with drafting a raft of new rules to boost transparency and limit risk in the swaps market.
One of the key changes is the requirement that standardized swaps be cleared by regulated clearinghouses, which stand in between counterparties and help to protect them in the event one defaults.
The CFTC’s proposal would require credit default swaps and interest rate swaps to be the first categories to face the clearing mandate.
The agency said it chose the categories in part because a significant percentage of credit default swaps and interest rate swaps are already being cleared.
The public will have 30 days to comment on the rule after it is published.
The agency’s finalized timeline puts the burden of clearing first on the largest players.
Major swaps players - such as Goldman Sachs and Morgan Stanley - will face the clearing mandate 90 days after the agency designates a category of swaps for clearing.
Commodity pools and private funds will have 180 days to comply, and all other firms will have 270 days to route trades through clearing houses.
Will Rhode, director of fixed income research at TABB Group in New York, called the clearings rules “a very big deal.”
“Now it looks like we have the major piece of clearing regulation out of the way.”
The agency also signed off on Tuesday to an interim plan to allow t he Depository Trust and Clearing Corp and SWIFT t o pr ovide th e identifiers for over-the-counter derivatives traders. [ I D: nL2 E8IOATJ]
The rules are a response to the 2007-2009 financial crisis, when risky derivatives trading at firms such as insurer American International Group and investment bank Lehman Brothers nearly toppled the financial system and led to taxpayer bailouts.