CFTC Chief: House Bills Should Require Hedge Funds To Clear Swaps

The bills, however, allow a broad swath of companies to avoid having to process their swaps through clearinghouses, which guarantee trades, and trade them on regulated platforms. The exemptions are designed to ease fears primarily by commercial swap traders, such as energy companies, which rely on swaps to hedge risks and fear they cannot afford to post margin to a clearinghouse.

But Gensler expressed concerns Friday that hedge funds and other financial firms may not be subject to some of the clearing requirements because they won't be considered to be major market players in the two U.S. House bills.

"If Congress decides ... to exempt transactions with some end-users from a clearing requirement, that exception should be explicit and narrow," Gensler said. "I believe that it is most critical that transactions with financial firms, hedge funds and other investment funds benefit from a clearing requirement. To be clear, these are transactions with entities that are not major swap participants."

Speaking to reporters after his speech, Gensler said the two bills create a somewhat narrow definition of major swap participant which may not capture the " thousands of hedge funds" that use these markets.

He said he hopes to work with Congress to ensure that trades between dealers and financial firms like hedge funds are cleared and executed on trading platforms "even if the individual transaction might seem less significant," he said. "Then the swap dealer is less inter-connected with the entire financial system," he added.

He stressed that he does not think hedge funds or financial firms should be subject to the business conduct standards or capital charges that derivative dealers and major swap traders would be required to follow under the House proposals.

"We recognize that Congress may exempt the commercials because of the margin requirements, but for the financials who have the liquidity [and] have the ability to post margin, we think it is important to bring those non-major participants' transactions into the system," he said.

As for addressing the concerns of commercial users of swaps, he reiterated again Friday that he thinks their products should still be cleared.

To ease their worries about the cost, he said, they should be permitted to " enter into individualized credit arrangements with the clearing members that transact on their behalf, including posting noncash collateral."

-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; sarah.lynch@ dowjones.com

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