United States

CFTC Approves DCM Core Principles Rules and Swaps Relief Order

The Commodity Futures Trading Commission (CFTC) held an open meeting on May 10 to consider a final rulemaking on core principles for designated contract markets (DCMs). The Commissioners unanimously approved the rule and, prior to the meeting, approved a proposed amendment to a previous order that provides temporary relief from certain swaps regulation. The order extends the temporary relief from the last extension date (July 16, 2012) to December 31, 2012.

In his opening remarks, Chairman Gary Gensler provided a preview of future Commission activity, noting that the Commission will “turn shortly” to the products definition final rule and will “soon complete” a final rule establishing data recordkeeping and reporting requirements for pre-enactment and transition swaps or “historical swaps.” Gensler also said he anticipates “seeking public comment in the near term on an exemptive order regarding certain contracts traded on regional transmission organizations as well as an interpretative guidance on the cross-border application of the swaps provisions of Dodd-Frank.” Final rules regarding swap execution facilities (SEFs) may be taken up in July. In addition, Gensler announced that the CFTC will be holding a roundtable on the Volcker Rule in late May.

Commissioner Scott O’Malia voiced his support for the final DCM rule and the exemptive order. He noted that market participants continue to seek guidance regarding the timing of the CFTC’s rules and referenced a timetable he created of when he understands the Commission expects to vote on the remaining Dodd-Frank-related rules, orders and guidance. “I have developed this list and timetable based on my knowledge and through conversation with Commission staff,” O’Malia said. He urged the public to comment on the list, specifically asking interested parties to answer whether: the Commission’s 2012 year-end deadline of completing Dodd-Frank rulemaking is achievable; and the sequencing of these rules, order and guidance is appropriate.

Final Rule on Core Principles and Other Requirements for Designated Contact Markets (DCMs) – Vote (5-0)

The final rule implements Section 735 of the Dodd-Frank Act which codifies rules, guidance and acceptable practices applicable to DCMs and DCM applicants. Among other things, the final rule eliminates the accelerated approval procedures for DCM applications and instead requires that all applications be reviewed under the 180 day statutory review period.

With regard to Core Principle 9, which requires that DCMs provide a competitive open market and mechanism for executing transactions, the final rule states that more time is needed before finalizing this provision and recommends the Commission take it up when it considers the final SEF rulemaking. According to staff, the additional time would “allow the Commission to consider the available alternatives for contracts that may not comply with the proposed centralized market trading requirements as well as any related implementation of the rules pertaining to off exchange transactions including exchange of derivatives for related position transactions.”  The original proposal for Core Principle 9 would have required that 85 percent of total trading volume of contracts on DCMs must consist of centralized trading or be mandatorily de-listed.

During staff presentations of the rule, O’Malia asked what DCMs must do to comply with Core Principle 9 before the SEF rules are finalized. Staff noted that DCMs today are currently complying with each of the core principles and that they should use their “reasonable discretion” in determining the method in doing that. Staff said that “we anticipate DCMs would continue to do that for Core Principle 9 in the way they have complied over the last eleven months until final rules are adopted.”

Commissioner Chilton asked whether the Commission could propose an alternative to the “85% requirement” of Core Principle 9, and then finalize the rule without soliciting further comment. Staff noted that only where a variation to a proposed rule is found to be a “logical outgrowth” would that be possible; otherwise, the opportunity for public comment would be necessary.

DCM Core Principles Fact Sheet

DCM Core Principles Q&A

Swap Regulation Effective Date Order Release

Opening Remarks and Meeting Webcast

Europe

EU Releases Analysis on FTT

Late last week, the European Commission released a series of explanatory notes that discuss how a financial transactions tax (FTT) would work in practice. The papers address the following issues: the tax contributions from the financial sector; the territoriality of the tax; relocation and substitution concerns; total revenue estimates; the macroeconomic effects of the tax; tax collection methodology; and the FTT’s impact on pension funds. The notes still project revenue estimates at €57 billion with “more than half of all revenue expected to stem from taxing interest rate linked derivatives such as interest-rate swaps.”

The reports also look at how current business models will be impacted by such a tax. Specifically, the analysis assumes the volume of certain high frequency, low-margin transactions will be reduced because a levy of 0.1 percent or 0.01 percent will make such trades unattractive. The analysis assumes that this decrease in transactions will potentially help reduce risk as well as change the activity of high frequency traders: “it is assumed that in some market segments the tax will create a structural break in the sense that business models change (e.g. in the field of automated High Frequency Trading) which leads to fewer transactions and potentially other ways of trading assets and risks.”

Even as elections across Europe continue to change the political landscape, reaching consensus among Member States on an EU-wide FTT will still likely prove difficult. French President-elect Francois Hollande is expected to carry on Sarkozy’s support for implementing the FTT and called out UK officials on their staunch opposition to the levy. “The British have been particularly shy about the issues of financial regulation, and attentive only to the interests of the City-hence their reluctance to see the introduction of a tax on financial transactions and tax harmonization in Europe.” Hollande believes revenue generated from the FTT can be used to help grow Member State economies while British lawmakers warned that over 70 percent of this revenue would come from the UK.

However, continued budgetary pressures may facilitate efforts to implement an FTT on a country-specific basis as Member States look for additional measures to generate revenue. Already, Hungary approved a 0.1 percent tax on financial transactions that is slated to take effect next year and is expected to generate over $500 million in 2013. The tax provides for a number of exemptions, including when private individuals transfer funds to different accounts of their own within the same bank.  With regard to the European Commission’s FTT proposal, a plenary vote on the tax is scheduled to be held on June 12.

Inside the Beltway

SEEN AND HEARD

Dudley Discusses Cross-Border Coordination, CCPs – Speaking before the International Monetary Fund conference this week, New York Federal Reserve President and CEO William Dudley, discussed the challenges of identifying which regulatory initiatives require global coordination while ensuring countries have the flexibility to effectively implement such rules in a manner suitable to that jurisdiction. Specifically, Dudley noted that national regulators must be comfortable with establishing a global system of central counterparty clearinghouses (CCPs) to clear standardized OTC derivatives trades around the world. Dudley said CCPs hold out the “potential for the greatest amount of risk reductions and, thus, improvement in financial stability.” To ensure this happens, Dudley said a global framework must be established to ensure CCPs are held to global standards “not just in theory, but also in practice.”

Press Express

Bloomberg: Bank Foreign Branches Said to Face Tougher U.S. Swaps Rules, Matthew Leising and Silla Brush, 5/10/12

WSJ: CFTC Taps Help for Cost Analysis on New Rules, Jamila Trindle, 5/10/12

Financial Times: US Swaps Regulator Delays Block Trading Rule, Telis Demos, 5/10/12

Bloomberg: Exchanges Face Increased Libor Due Diligence Under CFTC Guidance, Silla Brush, 5/10/12

Dodd-Frank Corner

Recent Regulatory Action

On May 10, the SEC and CFTC published in the Federal Register its charter renewal for the Joint Advisory Committee on Emerging Regulatory Issues. The Committee will continue to operate for an additional two years from the renewal date and will “work to develop clear and specific goals toward identifying and addressing emerging regulatory risks, protecting investors and customers, and furthering regulatory harmonization, and to recommend processes and procedures for achieving and reporting on those goals.”

The Federal Deposit Insurance Corporation (FDIC), Federal Reserve, and Office of the Comptroller of the Currency (OCC) published in the Federal Register its guidance on the effective date for Section 716 of the Dodd-Frank Act, otherwise known as the “swaps push out” provision. The section takes effect July 16, 2013.

The CFTC unanimously approved a Proposed Interpretive Statement on the applicability of confidentiality and indemnification provisions added to the Commodity Exchange Act under Section 728 of Dodd-Frank on May 1.  Comments will be due 30 days after publication in the Federal Register.

On May 1, the CFTC released a compliance date tracker for the Commission’s final rulemakings. The tracker provides an overview of the rules’ effective dates as well as provides links to the open meetings where such rules were considered.

The Financial Stability Oversight Council’s (FSOC) final rule on its authority to require supervision of certain nonbank financial companies took effect on May 11. The FSOC’s final rule on implementing the Freedom of Information Act also took effect on May 11. 

On April 27, the CFTC and SEC released text for their joint final/interim final rules on entity definitions. The rulemakings will generally become effective 60 days after publication in the Federal Register, while compliance will be contingent upon the effective date for product definition final rules. Comments on the interim final rule are due 60 days after publication in the Federal Register.

The CFTC published in the Federal Register its final and interim final rule on commodity options on April 27.  The rule is effective June 26, 2012; comments on the interim final rule are due on this date as well.  Compliance dates vary.

A complete overview of upcoming legal and regulatory deadlines can be found here.

International Updates

On May 10, the Financial Stability Board (FSB) announced the formation of the Enhanced Disclosure Task Force (EDTF) that will be represented by 25 senior officials and experts representing financial institutions, investors and analysts, credit rating agencies, and external auditors. The primary objectives of the EDTF are (i) to develop principles for enhanced disclosures, based on current market conditions and risks, including ways to enhance the comparability of disclosures, and (ii) to identify leading practice risk disclosures presented in annual reports for end-year 2011 based on broad risk areas such as those identified in the summary of the first FSB roundtable on risk disclosures held in December 2011.

On May 7, the European Securities and Markets Authority (ESMA) launched a call for evidence on its guidelines on harmonized transaction reporting as well as opinions on what areas of the OTC derivatives guidelines need to be updated. After reviewing the responses received to the call for evidence, ESMA will define its work on guidelines on harmonized transaction reporting and launch a full public consultation. The deadline for comment is June 4.

On May 4, international regulators released a joint statement affirming their commitment to aligning financial regulatory reform requirements “where possible.” The regulators held a meeting to discuss implementation issues related to derivatives regulation, including pre- and post-trade transparency, margin for uncleared derivatives, and the coordination of clearing mandates.

On May 3, the Basel Committee on Banking Supervision issued a consultative document on the fundamental review of trading book capital requirements. The document includes proposals for improving trading book capital requirements, including calibrating the revised framework to be consistent with the stressed value-at-risk approach adopted in Basel 2.5.

On May 2, the Reserve Bank of India issued guidelines on the implementation of Basel III capital regulations. These guidelines would become effective from January 1, 2013 in a phased manner. The Basel III capital ratios will be fully implemented on March 31, 2018.

The High Level Expert Working Group established by the European Commissioner Michel Barnier to examine reforms to the EU’s banking sector released a consultation seeking comment on questions related to bank structural reform. Comments are due by June 1, 2012.

On April 27, the Technical Committee of the International Organization of Securities Commissions (IOSCO) published a report on Money Market Fund Systemic Risk Analysis and Reform Options, which provides an analysis of the possible risks of money market funds (MMFs) and policy options to address those risks.

On April 23, the Reserve Bank of India issued guidelines related to the use of credit default swaps (CDS) by covered India Financial Institutions. All such institutions are permitted to participate in the CDS market to hedge credit risk in corporate bonds in their portfolio.

On April 23, the Hong Kong Securities and Futures Commission (SFC) released guidance for determining whether an SFC-authorized fund is a derivative product for due diligence purposes.

SIFMA Comment Letters

On May 3, SIFMA’s Asset Management Group (AMG) submitted comments to the CFTC requesting an extension of time to comply with the CFTC’s recent amendments to CFTC Rules 4.5 and 4.13 and to clarify implementation issues raised by these rules.  Specifically, the AMG asks that Commodity Pool Operators (CPOs) of private pools have until at least December 31, 2012 to comply with the Rule 4.13 amendments.

On May 2, SIFMA and the Financial Services Roundtable submitted comments to the SEC and CFTC on Identity Theft Red Flags Rules. The groups urge the SEC and the CFTC to modify several key definitions to provide greater clarity and certainty concerning the Rule’s intended scope and application, and to reflect more realistic estimates of the costs of the proposed Rules in the rulemaking.

On April 24, SIFMA’s Asset Management Group (AMG) submitted comments to the CFTC on its proposed amendments to its rules that would harmonize compliance obligations between the CFTC and SEC for investment companies registered under the Investment Company Act of 1940, whose investment advisers will be subject to registration as commodity pool operators (CPOs) due to recent amendments to CFTC Rule 4.5.2. 

On April 20, SIFMA and ISDA submitted comments to the SEC on interim final rules that exempt uncleared SBS transactions involving eligible contract participants. SIFMA requests that the SEC provide permanent relief for uncleared SBS between eligible contract participants from certain provisions of the Securities Act of 1933, Section 12(g) of the Securities Exchange Act of 1934, and the Trust Indenture Act of 1939.

For a full list of SIFMA comment letters, please click here.

Status of Derivatives-Related Bills

House

H.R. 1838, Swaps Bailout Prevention Act: Repeals Section 716 of the Dodd-Frank Act, also known as the “swap desk push out” provision.

Action: Approved by voice vote as amended (HFSC 2/16/12); House Ag legislative hearing held on 3/28/12.

H.R. 1840: Amends the Commodity Exchange Act to require the CFTC to consider the cost and benefits of proposed rulemakings before promulgating any rule.

Action: Approved by voice vote (House Ag 1/25/12).

H.R. 2586, Swap Execution Facility Clarification Act: Requires the CFTC and SEC to promulgate SEF regulations that allow swaps markets to naturally evolve toward the best form of execution.

Action: Approved by voice vote as amended (HFSC 11/30/11 and House Ag 1/25/12).

H.R. 2682, Business Risk Mitigation and Price Stabilization Act: Clarifies that language under Title VII of the Dodd-Frank Act does not give regulators the authority to impose margin requirements on non-financial end users.

Action: Approved by a vote of 370 to 24 and sent to Senate (Full House 3/26/12).

H.R. 2779: Exempts inter-affiliate transactions from the definition of “swap” under the Dodd-Frank Act. Inter-affiliate trades would not be subject to margin and clearing requirements under Title VII of the Act.

Action: Approved by a vote of 357 to 36 and sent to Senate (Full House 3/26/12).

H.R. 3283, Swap Jurisdiction Certainty Act: Clarifies provisions under the Dodd-Frank Act to ensure equal treatment between U.S. firms conducting transactions outside of the U.S. and foreign firms conducting similar activities. The bill also clarifies that non-U.S. firms that are registered swap dealers would be subject to the capital regime of their home country as long as that country is a Basel signatory.

Action: Approved by vote of 41-18 as amended (HFSC 3/27/12); House Ag legislative hearing held on 3/28/12.

H.R. 3336, Small Business Credit Availability Act: Exempts any bank, thrift, credit union or farm credit institution from being considered a “financial entity” if it has $30 billion or less in total assets or its aggregate swaps exposure is less than $1 billion.

Action: Approved by a vote of 312-111 and sent to Senate (Full House 4/25/12).

H.R. 3527, Protecting Main Street End-Users from Excessive Regulation: Amends the Commodity Exchange Act to clarify the definition of “swap dealer” by clarifying that banks could not be considered a “swap dealer” with regard to entering into a swap with a customer in connection with originating a loan to that customer or for a person who enters into swaps for their own account.

Action: Approved by voice as amended (House Ag 1/25/12).

H.R. 4235, Swap Data Repository and Clearinghouse Indemnification Correction Act of 2012: Repeals the Dodd-Frank Act indemnification requirements for regulators to obtain data from SDRs. The bill requires U.S. or foreign regulators seeking access to swap data from an SDR to provide assurances that the regulator will abide by certain confidentially requirements.

Action: Approved by voice vote as amended (HFSC 3/27/12); House Ag legislative hearing held on 3/28/12.

Senate

s. 947: Exempts from specified margin requirements: 1). swaps in which one of the counterparties is neither a swap dealer nor a major swap participant; 2). certain investment funds; 3). specified regulated entities; and 4). a commodity pool.

Action: Referred to Senate Banking Committee (5/11/11).

S. 1615, Financial Regulatory Responsibility Act: Requires financial regulators to conduct comprehensive analysis in advance of promulgating rules. The bill also creates a Chief Economist Council which will consist of the chief economist of each agency.

Action: Referred to Senate Banking Committee (9/22/11).

S. 1650, Dodd-Frank Improvement Act: Establishes the SEC Office of Derivatives to coordinate oversight and administer derivatives-related rules; extends the Title VII deadline to July 16, 2012; clarifies the commercial end-user exemption from margin requirements under Title VII; and requires regulators to publish a joint schedule outlining Title VII rulemaking activity.

Action: Referred to Senate Banking Committee (10/4/11).

S.2222: Requires the CFTC to utilize its authority to “curb the role of excessive speculation in any contract market within the jurisdiction of the Commission” within 14 days of the enactment of the bill.

Action: Referred to Senate Agriculture Committee (3/21/12).

What to Watch

Tuesday, May 15

EU Economic and Financial Affairs Council Meeting

Agenda

CRD 4, EU 2013 Budget

Wednesday, May 16

10 a.m. ET

House Financial Services Subcommittee on Financial Institutions and Consumer Credit

The Impact of the Dodd-Frank Act: What It Means to be a Systemically Important Financial Institution

2128 Rayburn House Office Building

Thursday, May 17

3 p.m. ET

House Agriculture Committee

Markup: H.R. 4235, the “Swap Data Repository & Clearinghouse Indemnification Correction Act of 2012”; H.R. 1838, the “Swaps Bailout Prevention Act;” H.R. 3283, the “Swap Jurisdiction Certainty Act.”

1300 Longworth House Office Building

Friday, May 18

9:30 a.m. ET

House Financial Services Subcommittee on Financial Institutions and Consumer Credit

Hearing on the Dodd-Frank Act’s Collins amendment regarding bank capital requirements.

2128 Rayburn House Office Building

SIFMA Events:

Wednesday, May 16

External Business Conduct Workshop

Details

Wednesday, May 23

Derivatives Conference: Practical Implications of the Changing Derivatives Landscape and Key Issues for Asset Managers

Details

Wall Street Journal Letter to the Editor:

 Appearing in the May 10th Wall Street Journal, SIFMA President & CEO Tim Ryan responded to Cass Sunstein’s May 1 Op-Ed: "The White House vs. Red Tape".  In the letter, Ryan argues the Obama administration's recent executive order, trumpeted as an effort to harmonize U.S. and foreign regulations, effectively excludes the Dodd-Frank reforms and most other financial-services-related regulations and outlines the risk to jobs, economic growth and U.S. competitiveness of this  apparently political move.

Highlights from the SIFMA Operations Conference + Exhibit 2012

Last week, operations experts from the public and private sector converged on Scottsdale, AZ for the SIFMA Operations Conference + Exhibit 2012. The three-day program featured top regulators and industry experts, including Cyrus Amir-Mokri, Department of Treasury and Grace Vogel, FINRA, William Rutledge, Promontory Financial Group and Robert L.D. Colby, Davis Polk. Speakers offered insights into the impact of changes to market infrastructure, how to manage risk and improve processing efficiencies, and other critical operational issues facing broker-dealers, asset managers, custodians and CCPs. The buzz from participants: “I’m glad I went and I’m definitely heading back next year!”

Prepared Remarks

Presentations

Video

Photos

Useful Links

SIFMA Offers Management Liability Insurance through Arthur J. Gallagher

SIFMA is pleased to announce that it has signed an exclusive affinity partnership agreement with Arthur J. Gallagher & Co. to provide management liability insurance coverage for SIFMA members.  Types of policies included in the program are:

Key features of the program include free audits of members’ current policies to identify coverage gaps, and the potential for savings on these types of policies.  Cal Reno, Managing Director of Gallagher’s Management Liability Practices Group said, “Our partnership with SIFMA is designed to provide SIFMA‘s members with the best management liability solutions from the industry’s best insurers. We look forward to a long and mutually rewarding relationship with SIFMA and its members.”  Rob Gannon, Managing Director, Member Engagement, added, “This affinity agreement will provide a one-stop shopping solution for our members’ management liability needs. It also fits perfectly with our recruiting and retention strategy to promote membership in SIFMA as a sound business investment.”

As one of the industry’s largest insurance brokers, Gallagher has over 12,000 employees and through the Gallagher Global Alliance and its international operations, offers client-service capabilities in more than 120 countries around the world.  Gallagher has been public since 1984 (NYSE: AJG).