09.06.2011
By Terry Flanagan

Countdown to Dodd-Frank

Clock is ticking on CFTC’s Dec. 31 moratorium for FinReg compliance.

With the clock ticking on the Commodity Futures Trading Commission’s self-imposed deadline of Dec. 31 for compliance with the Dodd-Frank Act, market participants worry that the rulemaking process won’t be completed by then, leaving them in a bind.

Participants are weighing in on the crucial “definitional phase” of rulemaking under Dodd-Frank, upon which hinges all the other rules for regulating the OTC swaps market.

There are many self-effectuating provisions that, although they technically became effective on July 16, nevertheless reference other provisions or definitions within Dodd-Frank for which further rulemaking is required.

The CTFC has temporarily exempted entities from complying with self-effectuating provisions that reference terms that require further definition, such as “swap,” “swap dealer,” “major swap participant,” or “eligible contract participant, until Dec. 31, 2011 or the effective date of the definitional rulemaking for such terms, whichever is earlier.

The definitions of swap dealer and major swap participant are of particular concern to the derivatives industry because it believes that certain types of highly-regulated entities should not be regulated as dealers or MSPs.

“The term ‘swap dealer’ as currently proposed has the potential to include utilities and other energy companies that involve swaps,” Sean Carnahan, global director of commodities and energy at SuperDerivatives, told Markets Media.  “This would result in a large amount of cash flow problems and a change in the way they conduct operations and trading or discontinue to operate entirely, putting the power of many energy or commodity transactions in the hands of a few banks.”

The CFTC to date has issued 15 final rules and 60 proposed rules under Dodd-Frank. The regulatory requirements present a “substantially complete mosaic” of the Commission’s proposed Dodd-Frank regulatory framework, according to the CFTC.

The Dodd-Frank Act gave regulators flexibility as to setting implementation or effective dates of rules. “Even if we finish finalizing rules in a particular order, that doesn’t mean that the rules will be required to become effective in that order,” CFTC chairman Gary Gensler told Congress earlier this year.

Effective dates and implementation schedules for certain rules may be conditioned upon other rules being finalized, their effective dates and the associated implementation schedules. For instance, the effective dates of some final rules may come only after the CFTC and SEC jointly finalize the entity or product definitions rules, Gensler said.

The industry is concerned about the potential for regulatory gaps. For example, although the relief provided by the CFTC will expire on Dec. 31, 2011, if a final rule is adopted at the end of November 2011, it cannot go into effect before the end of Jan. 2012 (or 60 days after the final rule is issued) creating a one-month gap period during which time market participants arguably would be required to comply with the applicable provision of the Dodd-Frank Act addressed in the rule, even though the final rule has not gone into effect.

So even though some provisions are theoretically self-effectuating, the reality is that those provisions cannot be implemented until the rulemaking for the related definitions have been completed.

The National Futures Association, in a letter sent Wednesday, noted that given that the order of the phased implementation of the CFTC’s rulemaking may have significantly changed, the CFTC “should carefully consider how this new implementation order may impact current business and minimize any disruption in the context of the [swap] registration process.”

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