Wall Street traders making big bets on derivatives would receive relief from regulation only if they met certain standards under a rule proposed on Monday.
The Commodity Futures Trading Commission voted to introduce a draft rule that limits how firms can qualify for exemptions through so-called block trades. Banks and brokerage firms place the trades, large private transactions typically negotiated outside the scope of an exchange, as a service to investors that want to purchase a big bulk of derivatives.
Block trades will receive certain exemptions from new derivatives rules, including requirements that the positions are traded on open platforms and that the price and size of the positions are immediately reported to the public. The requirements, which apply to derivatives contracts known as swaps, stem from the Dodd-Frank regulatory overhaul law.
Wall Street firms say that block trades are so large that they need time to hedge their risk and take other steps before reporting to regulators. Otherwise, they contend, liquidity will disappear from the system.
But the rule proposed on Monday limits the scope of the exemption, preventing traders from pooling together smaller orders from different accounts to meet the block-trade threshold. The rule, which is open for public comment before the commission takes a final vote, would also force traders to receive written permission from customers before placing the trades on their behalf.
The commission initially proposed the rule in December 2010 as part of a broader package of regulations. The agency then decided to propose the rule again, through a private vote, as a stand-alone issue.
Separately, the commission is considering a rule to set the minimum size of a block trade, a significant element of the Dodd-Frank law.