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Misinterpretation of rules may cost Wall Street dearly

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Over on FierceFinanceIT, I've kept up with the long battle to implement the new Dodd-Frank rules to create a brand new over-the-counter derivatives market, one built on modern clearinghouses.

I've suggested that the laudable effort amounts to a Big Bang, one that would rival in significance the end of fixed commissions in the early 1970s. The transition will be hard no doubt -- it already has been. But after a lot of fits and starts, the clocking is finally ticking, which makes the story of how Wall Street misinterpreted a single sentence in the rules all the more noteworthy.

Bloomberg explains that, "Firms dealing in $648 trillion of outstanding swaps contracts expected that trading during a phase-in period wouldn't need to be processed by central clearinghouses, according to an Oct. 5 e-mail sent to clients by Davis Polk & Wardwell LLP, which represents the Securities Industry and Financial Markets Association. They were wrong, misreading one sentence in 17,000 words of regulation."

So now there's a dual scramble underway. Lobbyists for financial dealers are pressing the CFTC to soften their deadline, even as dealers work to line up the capital they need to back trades with the clearinghouses in accord with the new rules. Celent has estimated that banks are looking at coming up with $50 billion worth of acceptable collateral.

So how could this happen? How could Sifma have gotten this so wrong? Was it really a case of a snafu at the law firm?

There are no answers as of now, but it may be that this whole episode amounts to a kind of lobbying technique, as way to pressure the CFTC to extend its deadlines. -Jim