CalSTRS, Others Give Nod of Approval to CFTC Vote on Wall Street Swap Abuse

(January 12, 2012) — Regulators in the United States have approved new rules aimed at scrutinizing Wall Street swap abuse as part of Dodd-Frank regulation, attracting nods of approval by the California State Teachers’ Retirement System (CalSTRS) and others in the industry that depend on the derivatives market. 

In a 4-1 vote for revised regulations, the Commodity Futures Trading Commission (CFTC) approved rules to protect customer money in certain derivatives markets, softening responsibilities initially proposed for Wall Street banks. The new rules would require firms to segregate customers’ swaps money from the firms’ money. However, the rules permit a firm to pool all its customer money together in one account to lower administrative costs. Furthermore, the changes soften requirements relieving dealers of a fiduciary duty while also limiting the obligation of banks to act in the best interest of public agencies — as long as they don’t suggest specific swaps.

“I was encouraged to hear the CFTC is looking at collateral, paying more attention to protect collateral. So we’re encouraged by the direction of the Dodd-Frank rules,” David Castillo, CalSTRS’ Portfolio Manager of Global Equity, told aiCIO. “I think all this stuff is still in the interim stages here, but to the extent there’s more clarity and a level playing field — we’re supportive of the new rules…We remain cautiously optimistic with the new changes you’re seeing. We have always insisted on segregation of collateral, and we’re optimistic this will be a better marketplace in the future. Derivatives remain a big tool for us.”

Highlighting the fact that the commission is considering additional protections for the swaps market while broadening those protections to the futures markets, CFTC Chairman Gary Gensler said: “We are continuing to gather thoughtful input as to how we might build upon today’s segregation rule to further protect customers.” 

The regulation follows the collapse of futures firm MF Global Holdings Ltd., which has spurred debate on how brokers can invest customer funds.

Referring to the CFTC’s latest move, Sean Owens, director of fixed-income and OTC derivatives at consulting and research firm Woodbine Associates, told aiCIO: “I think its a good decision that overall is good for the markets. Dealers are not responsible to be fiduciaries in trades that they enter into with special entities, such as pension funds and fund-of-funds. As a dealer — when they’re functioning as a market-maker rather than an advisor,” he said, noting that it would be extremely burdensome for dealers to have to function under the level of a fiduciary with a counterparty. “It would impose risk and burden to understand that level of detail to satisfy that requirement. Ultimately, the person executing the trade is responsible for that fiduciary duty,” Owens said. “In their role as an advisor, making trade recommendations, they have to act in their counterparty’s ‘best interests’.”