Courtesy of WSJ Reporter Scott Patterson

WASHINGTON—Swaps trading is one the last bastions of Wall Street where brokers arrange deals over the phone.

That clubby way of doing business could go the way of the rest of Wall Street, where trading takes place on computers, under a roughly 500-page draft set of rules designed to push the market away from the opaque world of over-the-counter, phone-based trading, into more transparent electronic venues.

The thinking: Open markets are safer, cheaper and less prone to manipulation.

The rules, circulated Thursday at the Commodity Futures Trading Commission, lay out guidelines for so-called swaps execution facilities, or SEFs, the electronic trading venues for swaps mandated by the Dodd-Frank financial overhaul of 2010.

Originally proposed in early 2011, the final version of the rules have been widely anticipated by bankers, brokers and traders who dominate the multitrillion dollar market for swaps, complex contracts in which firms “swap” the returns on assets such as currencies, energy products and interest rates.

Among the most contentious parts: the so-called 15-second rule, which requires firms that have negotiated a trade between two parties to post the trade on a SEF for 15 seconds before executing it and giving other market players the chance to offer a potentially better deal.

That could keep brokers from doing many trades over the phone, which is how much swaps trading is done today, without exposing the deals to the rest of the market.

As it stands, the rules are certain to meet opposition from swaps-trading firms whose business could be threatened. Industry players, from giant banks to global brokerage firms, have lobbied heavily to water down the SEF rules for more than two years.

The original SEF proposal sparked a firestorm of industry complaints. The final rules will be reviewed by CFTC board members, who could potentially vote on it at a Nov. 15 meeting. The rules are subject to negotiation and the final version could be different from what the agency proposed this week.

Several commissioners have expressed concerns about how the 15-second rule works and whether it is fair to investors. The rules aren’t set to take effect until 2013.

Backers of the 15-second rule say it gives other trading firms the ability to post more competitive bids and offers, making the swaps cheaper to trade and prices more transparent. Continue reading →