How three little words in a 1500-plus-page bill might save the dealers’ bacon.
There has been much whinging of late about how OTC derivatives dealers and major market participants could soon have to use clearinghouses and trade on exchanges. But despite talk of their lobbying horns being effectively sawed off the by Goldman Sachs’ multiple gaffes, it seems they’re not so impotent as to be unable to make a few innocuous-looking tweaks to the bill that could have an enormous effect on the derivatives market. Treasury personnel should take note.
Specifically, the legislation passed by the Senate Agriculture Committee on April 21 requires swaps to be traded on a “swap execution facility,” which it defines as a “trading facility.” This, according to experts quoted by Bloomberg in a recent story, would exclude phone and bilateral dealings that currently underpin the OTC market. However, the language being integrated into Senator Chris Dodd’s bill, which will be debated this week, removes the word “trading.” This could give the OTC dealers and major market participants the ability to carry on much business as usual.
Another two-word change may further roll back the legislation’s effect. The original language used the term “swaps” alone when describing what the bill covered. The new language says “securities-based swaps.” This would, presumably, be used to exclude swaps with underlyings that are not securities, most notably the massive interest rate swap market, but the logic could extend to credit default swaps if their language was tweaked to ensure they were tied to loans and not bonds, for example.
Would Wall Street have the chutzpah to dodge the bill’s intent in such a sleazy way? Perhaps not. But the language gives them the option to do so. And that would blunt regulators’ attempts to clean up the market. If the bill is really meant to enforce clearing and exchange trading, such sleights of hand must be not be tolerated.