The decision last week by the Commodity Futures Trading Commission to allow six more months before implementing key regulations spawned by the Dodd-Frank Act is a necessity. It will give the industry the time needed for a sweeping overhaul of the $600 trillion derivatives market. Yet it would be a mistake to think that regulators have lost their resolve to complete the reforms.
To recap, many of the rules and regulations were just not ready for prime time as Andrea Kramer, a partner with the Chicago law firm of McDermott Will & Emery, pointed out at FTF’s 3rd Annual Chicago OTC & Exchange Traded Derivatives Ops conference in early May. Kramer provided insight into the scope of Dodd-Frank by comparing it to the Sarbanes-Oxley Act (SOX). For instance, the printed version of SOX had 66 pages, 16 rules-making efforts and six studies. Dodd-Frank has 849 pages, 240 rules-making efforts underway, and 70 studies.
In addition, regulators have finalized about 5% of the new rules but missed approximately 30 statutory deadlines. Most of the new regulations have not been formally proposed even though more than 25% of the new regulations were due during the third quarter of this year.
The missed deadlines should serve as “a danger signal,” Kramer said, adding that regulators are asking too much, too soon. The initial timetable for the new regulations threatened to adversely affect the quality and viability of the markets, she said.
But the CFTC has not missed its marks entirely, argues Mike Hisler, co-founder of the Swaps and Derivatives Market Association (SDMA), which has played a key role in pushing for reforms in over-the-counter (OTC) clearing via Dodd-Frank. (FTF News profiled the SDMA in May.) The CFTC has decided to stagger the implementation of its regulations, said Hisler, who is also senior MD—CDS, Javelin Capital Markets.
The CFTC and SEC have solicited opinions from a variety of sources, drafted and voted on proposed rules, and solicited opinions on the official proposed rules in the Federal Register, Hisler said. In fact, regulators extended the comment period by 30 days, which ended June 3, for the “significant majority of the proposed rules,” he said. The process for accepting, rejecting or amending public comments and the setting of final dates for rules to become effective is underway, he added.
Hisler said that there are other key points of Dodd-Frank to keep in mind:
- No rule can be finalized before July 16, 2011, which is 360 days after Dodd-Frank’s passage on July 21, 2010.
- While the goal was to have all the new rules written by July 16, the CFTC publicly acknowledged that some rules will take effect by July 16, other rules after that date and all new rules by Dec. 31, 2011.
- The regulators do not have to change anything in their proposed rules to effectively finalize them between July 16 and the end of this year as long as they have followed the proper procedures.
- The regulators have gone beyond the requirements of the Administrative Procedure Act of 1946 as far as the public comment and time period specifications.
In retrospect, though, the Dodd-Frank deadlines for new regulations appear to have been dictated by political expediency rather than careful consideration of the sometimes delicate interrelationships of the markets, particularly derivatives.
The delay will allow firms, especially those on the buy side, the extra time they need to get a better understanding of the business changes they need to make such as the new margining for OTC clearing. They will also have to review their IT infrastructures—either internally or hosted—to make certain they can accommodate the new rules of the road, which include OTC instrument execution and clearing processes.
The delay may also buy time for the regulators to develop a closer alignment with their international counterparts in an effort to avoid the much-feared regulatory arbitrage that may be created by different regulatory time-lines.
With so many issues yet to be resolved, it’s going to be a long, hot summer and possibly difficult fall in Washington, DC as all sides prepare for more battles.
For the moment, we should be glad that the extension is likely to calm the nerves of many firms worried about violating the new rules for derivatives trading. They will welcome any development that brings relief from stressful markets.
Ultimately, my hope is that the living hell of the Great Recession is still fresh in the minds of regulators and all those who came close to the abyss. That alone is the strongest argument for getting the regulations right rather than just on time.
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