UPDATE 1-CFTC handling of swaps rules a 'train wreck' -O'Malia

* Energy swaps industry got last-minute reprieve on Oct. 12

* CFTC approval of swaps trading venues could be train wreck

(Adds more comments, background)

CHICAGO, Oct 31 (Reuters) - The U.S. Commodity Futures Trading Commission created major confusion earlier this month when it imposed, and then suspended, a key rule governing energy derivatives, a CFTC policymaker said on Wednesday.

``It was just a train wreck,'' Scott O'Malia, one of five CFTC commissioners, told the Futures Industry Association's annual meeting in Chicago on Wednesday.

O'Malia is a frequent critic of the commission's implementation of Wall Street reform legislation steered by its Chairman Gary Gensler.

The U.S. futures regulator waited until about 3 p.m. on Oct. 12, a Friday, before granting a reprieve to CME Group Inc and big energy traders on new rules that could have meant sharply higher costs had they taken effect as planned, on the following Monday.

Don Wilson, who heads Chicago-based trading firm DRW, said the ``complete lack of certainty'' roiled markets. Clearport, as CME's energy clearing business is known, accepts natural gas and oil swaps, converts them into futures, and clears them.

Energy traders were not sure if the CFTC viewed the Clearport contracts as swaps or futures, so they stayed away and Clearport business plummeted.

In the end, the CFTC decided to give market participants until the end of the year before counting Clearport energy swaps toward an $8 billion yearly trading threshold that would trigger higher capital requirements.

U.S. futures legislators have been scrambling to implement Dodd Frank legislation for more than a year, churning out thousands of pages of proposed and final rules, many of which will push large sections of the vast over-the-counter derivatives industry onto regulated venues.

The industry has fought to stay ahead. By early October CME and IntercontinentalExchange Inc had given their users conflicting guidance on energy swaps, with ICE opting to transform its energy swaps to futures and CME telling its users their Clearport trades would not be counted as swaps until the end of year.

Despite repeated requests, the CFTC had not clarified its view.

The last-minute regulatory reprieve gave CME the breathing room to adjust its rules and systems to allow for traders to switch to futures from swaps.

Many have now done so. Wilson said his firm last week did not run a single natural gas contract through CME's Clearport. CME still clears as many energy contracts as it did before the rules changed - more than 400,000 a day - but now many are futures from start to finish.

ICE, which dominates U.S. energy-swaps clearing, converted all its contracts to futures on Oct. 15 and has reported no decline in demand.


O'Malia said he worried the CFTC would deliver another ``train wreck'' next year, when it is expected to start taking applications for a new type of swaps trading venue mandated under the Dodd-Frank Act.

The rules for those venues have yet to be published, although O'Malia said the commission would likely make some headway at a Nov. 15 meeting, especially on defining what swaps will be required to be cleared and therefore traded on the new venues.

Regulators should swiftly approve venues once they are defined, O'Malia said, but he expressed skepticism. The commission has dragged its feet on approving another new group of swaps-related businesses called swap data repositories, approving only two applications in eight months.

``The track record is not good,'' he said.

CFTC Chairman Gensler had been scheduled to address the same group earlier on Wednesday, but monster storm Sandy kept him from attending.

(Reporting by Ann Saphir; Editing by David Gregorio and Andre Grenon)