Wall Street banks and Chicago commodity traders on Thursday will each try to sway the top U.S. derivatives regulator their way at a public hearing on whether new rules unduly favor one of the two rivals.
The Commodity Futures Trading Commission (CFTC) is drawing up rules for swaps, speculative financial instruments that were unregulated at the time of the 2007-09 financial crisis, and were widely blamed for exacerbating it.
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Investment banks, which dominate the $650 trillion swaps market, are now worrying that clients will stop using swaps and turn to futures instead because while similar, the new rules have made futures cheaper.
Swaps are often traded over the phone in bilateral deals, with a small group of so-called "dealers" including Citigroup, Bank of America and JPMorgan holding the vast majority of the market.
These banks often trade with each other through brokers such as ICAP and Tullett Prebon, who are outspoken critics of the CFTC's rules.
Under the CFTC's new rules - part of the Dodd-Frank overhaul of Wall Street - trading needs to move to exchange-like platforms, with clearing houses standing between buyers and sellers, and data publicly reported.
Half of the respondents in a recent study by UBS said they were more likely to use futures instead of swaps because of the new rules, up from just 18 percent in the previous study in March 2011.
In October, the IntercontinentalExchange changed its energy swaps products to futures to avoid the increased regulatory burden.
Futures exchanges such as the CME Group and much-smaller rival Eris Exchange have launched products that promise the same features as swaps at a far lower cost, stepping into the opportunity created by the new rules.
Still, volumes at these two groups have dawdled, and are negligible when compared with the vast swaps market, which comprises interest rate swaps, credit default swaps, foreign exchange swaps and commodity swaps.
The meeting is timely because the CFTC is finalizing rules for exchange-like trading platforms for swaps - known as Swap Execution Facilities (SEFs) - the details of which will determine how costly swaps trading is.
CFTC Commissioner Scott O'Malia, on whose initiative the Thursday meeting was called - said he expected the SEF rules to come out in the middle of February.
(Reporting by Douwe Miedema; editing by Sofina Mirza-Reid)