UPDATE 2-U.S. plans tough rules for swap dealers

* SEC, CFTC plans to regulate swaps largely the same

* Major banks expected to fall under definition of dealer

* SEC estimates 50 security-based swap dealers

* Security-based swap market estimated at $25-$60 trillion
(Adds details on proposals, comment)

By Rachelle Younglai

WASHINGTON, Dec 3 (BestGrowthStock) – U.S. regulators unveiled
plans on Friday that will determine which companies and funds
will be forced to hold more cash to trade in the lucrative
over-the-counter derivatives market.

The proposals, which will subject Wall Street firms to even
more regulatory scrutiny, are designed to mitigate risk to
markets and avoid a repeat of what happened when AIG’s (AIG.N: )
unsecured derivatives threatened the global financial system.

On Friday, the Securities and Exchange Commission followed
the Commodity Futures Trading Commission and began efforts to
define who would be classified as a swap dealer and major swaps
market participant.

Under the regulators’ proposal, an entity would be deemed a
major swap participant if it held a “substantial position” in
any of the major swap categories such as credit derivatives,
foreign exchange swaps or interest rate swaps.

The regulators also targeted those whose outstanding swaps
positions created “substantial counterparty exposure that could
have serious adverse effects” on the U.S. financial system.

A financial entity holding a substantial swaps position
that is highly leveraged and not already subject to a federal
banking regulator’s capital requirements would also fall under
that category.

SEC Commissioner Troy Paredes said he was concerned that
the thresholds to determine a major swap participant were too
high.

SEC staff estimated that only about 10 entities would have
to start going through tests to determine whether they were
major security-based swap participants. Those entities would
most likely include AIG and hedge funds holding large
speculative swap positions.

Wall Street firms dominate the derivatives market. JPMorgan
Chase (JPM.N: ), Bank of America (BAC.N: ), Goldman Sachs (GS.N: ),
Citigroup (C.N: ) and Morgan Stanley (MS.N: ) (Read more about the money market today. ) together held about
$171 trillion in over-the-counter swaps at midyear.

TURF BATTLES

Under the Dodd-Frank financial reform legislation, the CFTC
and the SEC won power to police the roughly $600 trillion
off-exchange derivatives market. But long-standing oversight
turf battles between the agriculture and financial committees
in Congress prevented the merger of the two market regulators.

As a result, the SEC only has authority over the
security-based swaps market, which represents 5-10 percent, or
$25 trillion-$60 trillion, of the overall swaps market.

The CFTC has authority over all other swaps including
commodities, foreign exchange and interest rate swaps.

The SEC estimated that about 50 entities would be labeled
security-based swap dealers and be required to register with
the agency.

The proposals, other derivatives rules and sweeping
requirements under the Dodd-Frank legislation are designed to
plug regulatory gaps exposed by the 2007-09 financial crisis.

At the same time, the SEC and CFTC are trying ensure that
companies, municipalities and others that use swaps to hedge
fluctuating commodity prices and other risks will not be
labeled as swap dealers or major swap participants.

The proposals would exclude those holding a swap position
for hedging or mitigating commercial risk.

The SEC proposal is open for a 60-day comment period.

The SEC has already proposed rules for the centers that
will store the swaps trading data, as well as plans to mitigate
conflicts of interests at venues that will handle the swaps.
(Editing by Dave Zimmerman, Lisa Von Ahn and Ted Kerr)

UPDATE 2-U.S. plans tough rules for swap dealers