The Commodity Futures Trading Commission and the Securities and Exchange Commission finalized more stringent rules Wednesday on dealers and firms that handle $8 billion in swap derivatives. The mutual fund and exchange traded fund industries have challenged the new ruling, contending that the regulation will have a redundant impact on an already heavily regulated industry.
The new ruling will require companies that deal with $8 billion a year in swap transactions to register as a dealer, encompassing more than 100 firms, according to a Wall Street Journal report.
Swaps are financial instruments used to protect companies, or allow speculators to capitalize on, potential changes in value of a stock, bond, currency or commodity. The new ruling will directly affect mutual funds and ETFs that invest in futures contracts and other derivatives, notably those in commodities or registered as Commodity Pool Operators.
Fox Business reports that the rules will take effect in 60 days and will be gradually eased in over several years.
The CFTC argues that by requiring a fund company to register with the agency, it would better access threats to derivatives markets. Essentially, regulators want to prevent another financial crisis or large taxpayer buyout due to problems in the swaps market.
According to an Investment Company Institute press release, the ICI filed a legal challenge to the CFTC final ruling that imposes redundant and unjustly burdensome regulation on registered investment companies.
“The CFTC in its rulemaking process did not remotely justify such regulatory excess,” ICI president and CEO Paul Schott Stevens, said in the press release. “The rule will impose significant compliance costs on mutual fund advisers and, ultimately, these costs will come out of shareholders’ pockets. Additional cost for no benefit to investors – that’s the wrong outcome.”
“The new rule creates confusion, not clarity, by subjecting mutual funds to redundant, overlapping, and unnecessary regulatory requirements,”David Hirschmann, president and CEO of the U.S. Chamber’s Center for Capital Markets Competitiveness, added in the press release. “The CFTC completely ignored its statutory duty to evaluate the costs this unnecessary regulation will undoubtedly impose on the economy.”
“The agency imposed burdensome new requirements without showing that they are necessary, or even that they will be helpful to investors,” Eugene Scalia, partner at Gibson, Dunn & Crutcher, LLP, who is representing ICI and the Chamber, said. “What’s more, just a few years ago the CFTC determined that similar requirements had adverse effects on the markets.”
For more information on the mutual fund industry, visit our mutual funds category.
Max Chen contributed to this article.