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US stock market daily report (April 18, 2012, Wednesday)

Contributed by Millennium Traders

SEC commissioners approved the 'swaps dealer definition' with an $3 billion threshold for credit-default swaps after a multi-year phase in period. Energy companies, lawmakers on Capitol Hill as well as, commodity futures and securities regulators Wednesday approved rules that would require a smaller group of derivatives traders to set aside capital than originally considered, pressured by Wall Street. Like at the CFTC, initially, the threshold would be $8 billion in notional CDS activity a year. Democratic SEC commissioner Luis Aguilar said he had concerns that the $3 billion threshold is 30 times higher than the $100 million originally proposed. Aguilar added that he is persuaded that based on the limited information currently available, the rule’s thresholds and phase-in period are reasonable. Aguilar noted that the SEC staff conducted an analysis that a $3 billion threshold is likely to capture 99.9% of 'dealing activity'. The issue pertained to rules of the Commodity Futures Trading Commission and the Securities and Exchange Commission on identifying which traders will be designated as 'swap dealers' and required to set aside more capital. The rules as required by the Dodd-Frank Act, written in response to the financial crisis of 2008 that the CFTC and SEC originally proposed that a derivatives trader would be subject to the rule if the firm’s annual notional amount of derivatives transactions exceeded $100 million. The final rule approved by the CFTC Wednesday, by a vote of 4 to 1, exempts a much larger group of firms that engage in derivatives, exempting firms whose annual notional trading of derivatives is less than $3 billion. The rule will not become effective until after a phase-in period of more than three years, and until then, only firms with more than $8 billion in annual notional derivatives trading would be subject to it. The CFTC left room to make changes to the rule after it collects two and a half years of data on the industry and completes a study on the subject. The SEC unanimously voted to approve similar, narrower thresholds for security-based swaps — credit-default swaps — along with a phase-in period. Under the proposal, major institutions like J.P. Morgan Chase & Co, Bank of America Corp, Goldman Sachs Group Inc, Citigroup Inc and Morgan Stanley will almost certainly qualify as dealers. A number of energy companies and traders, like Royal Dutch Shell, which protested the original drafts, could be excluded with the higher threshold. The CFTC voted to approve other exemptions including allowing firms to be exempted if they are hedging a commercial risk associated with their business, a provision that may also lead to fewer registered institutions. Monitoring will be in that whether institutions are complying by agencies examining the market through swap data repositories being set up. The agencies narrowed the rules after Wall Street as well as, chiefs of the Senate and House agriculture committees in March raised concerns about the original proposals in a bipartisan letter to the CFTC, arguing that the 'breadth' of the original proposal would force many companies to register, that the statute never intended to be regulated as swap dealers. CFTC Chief Gary Gensler defended the final rule, arguing that the higher threshold will still capture a lot of swap dealing activity. Gensler noted that the threshold should be considered within the context of an overall $300 trillion notional swap market, with about $500 billion notional being transacted a day in the interest rate swap market. Gensler added that the rule was necessary because while banks and securities firms were regulated, there was no comprehensive look at their derivatives business. Gensler argued that the taxpayer-funded bailout of American International Group Inc shows why the rules are needed - exhibit one is AIG. Jill Sommers, Republican CFTC commissioner, argued that the agency is not sure its regulations will result in tangible benefits and added that there is a “certainty that the costs associated with the regulations will be great.” Sommers said the data the agency is seeking to collect, which is currently not available, will be 'critical to a policy determination' of how the agency comes up with a final threshold. Mark Wetjen, a Democratic CFTC commissioner, acknowledged the difficulty of determining where activities of firms hedging commercial risks ends and swap dealers begins but said he believed that commercial firms using derivatives to hedge their positions 'should not be considered swap dealers'. “Our focus should be regulating as swap dealers those firms that pose risks to the users of our markets and those that pose systemic risk to our financial system as a whole,” Wetjen said.

News was released late Tuesday that Warren Buffett has early-stage prostate cancer. Buffett said the cancer had not spread and that his condition 'is not remotely life-threatening'.

Treasury Secretary Timothy Geithner on Wednesday said the U.S. is very supportive of a move by Europe and other countries to boost the firepower of the International Monetary Fund to help alleviate any spillover from the European crisis although the U.S. has made it clear that it does not plan to contribute to the fund. During an appearance at The Brookings Institution, Geithner said the move to bolster IMF resources is 'good' because it "will prove to the world that there is a substantial capacity that can help cushion, if necessary, the effects of any European trauma on the rest of the world". Geithner said it would be a mistake to suggest that the U.S. is 'holding back' from Europe. Through the Federal Reserve, the U.S. has provided unlimited access to dollar swap lines to Europe, Geithner said. "We have been central to the broad effort by the world to help reinforce what Europe is doing. Those swap lines have played a very important role in dampening and cushioning the effects of Europe's crisis on the rest of the world," Geithner said.

The Environmental Protection Agency said Wednesday, wells where natural gas is captured through the controversial 'fracking' technique, will have until 2015 to comply with new rules designed to reduce air pollution. The rules, first proposed in July, would compel drillers to capture the emissions resulting from drilling the wells. Environmentalists say that fracking - which involves blasting of water and chemicals underground to extract natural gas or oil - threatens groundwater near homes and schools.