Swaps Rule Sends Wall Street Into Clearing Limbo: Credit Markets

The securities industry misinterpreted rules it assumed allowed as many as nine months to start moving swaps into clearinghouses that are meant to limit risks to the financial system.
Firms dealing in $648 trillion of outstanding swaps contracts expected that trading during a phase-in period wouldn’t need to be processed by central clearinghouses, according to an Oct. 5 e-mail sent to clients by Davis Polk & Wardwell LLP, which represents the Securities Industry and Financial Markets Association. They were wrong, misreading one sentence in 17,000 words of regulation.
Unless lobbyists convince the Commodity Futures Trading Commission to soften the deadlines, derivatives users that speculate on or hedge against losses on everything from changes in interest rates to corporate bankruptcies may need to find cash and Treasuries to back the trades sooner than they anticipated. The 2010 Dodd-Frank Act is requiring trades be moved to the central counterparties to limit the kinds of risks that fueled panic during the 2008 credit crisis.
“Customers are scrambling to get arrangements with clearing brokers, so this is going to increase the operational complexity and challenge,” said Craig Pirrong, a finance professor at the University of Houston. Customers will have to find so-called margin that clearinghouses require to cushion against losses on swaps “that are all of a sudden going to be cleared,” he said, “so there’s the liquidity demand that’s also going to be fairly acute.”.......

Swaps Rule Sends Wall Street Into Clearing Limbo: Credit Markets - Bloomberg