Bloomberg News

Dodd-Frank Swap Rules Delayed as Agency Eases Transition

December 07, 2012

CFTC Said to Consider Six-Month Delay in Cross-Border Rules

Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, said the CFTC is working with databases operated by the Depository Trust & Clearing Corp., CME Group Inc. and Intercontinental Exchange Inc. to have trade price and volume information begin to be reported at the end of the year. Photographer: Peter Foley/Bloomberg

The U.S. Commodity Futures Trading Commission may delay some Dodd-Frank Act overseas swaps rules for about six months, part of a wave of last-minute exemptions and postponements to ease transition to new regulations.

The derivatives regulator may put off compliance for overseas-based operations of banks including JPMorgan Chase & Co. (JPM:US) and Goldman Sachs Group Inc. (GS:US) for some risk-management rules that begin to take effect at the end of the month, according to two people who asked not to be identified because the delay hasn’t been made public. The agency has already released more than 40 no-action letters postponing other Dodd-Frank rules, and officials have signaled that more are coming.

“We have and will continue to grant requests for phased compliance,” CFTC chairman Gary Gensler said in a telephone interview yesterday. The delays are designed to “smooth the transition” to new oversight rules, he said.

Dodd-Frank derivatives rules, originally intended to be in place in July 2011, have been delayed as the government seeks feedback on how to bring swaps under its oversight. The regulations will for the first time lead Wall Street’s largest banks to register as swap dealers with the CFTC at the end of the year and will require them to use clearinghouses to settle interest-rate and credit-default trades by mid-March.

The CFTC’s rulemaking process will face scrutiny next week from U.S. House lawmakers. A House Financial Services subcommittee hearing on derivatives has been scheduled for Dec. 12, and the House Agriculture Committee has planned a hearing for Dec. 13 on the international scope of the CFTC’s rules.

‘Swiss Cheese’

The five-member commission has released more than 40 letters since January saying it won’t enforce some of the rules for months -- and in some cases never.

The no-action letters have made the agency’s rulemaking process “resemble swiss cheese,” Scott O’Malia , one of two Republicans on the five-member commission, said in a Nov. 30 speech. “In addition to the rulemaking process, we have in effect been forced to set up a parallel exemptive process to provide relief from these rules,” he said.

The letters give relief to entire industries or specific companies, including JPMorgan, the largest U.S. swaps dealer, and LCH.Clearnet Group Ltd., the world’s largest clearinghouse for interest-rate swaps. Sometimes the letters aren’t released to the public for weeks.

‘Teeth Out’

“Maybe four years from now someone will ask why they issued all these no-action letters taking all the teeth out of the law,” Jeffrey Harris, a Syracuse University finance professor and former CFTC chief economist, said in a Dec. 4 telephone interview. “There needs to be some method and mechanism to go back and revisit these once final rules are in place.”

On the international scope of the rules,Gensler said the agency is debating a phase-in of the regulations to be announced before Jan. 1.

“We’re anticipating that a significant part of the financial reforms will come into place as of Dec. 31 as dealers begin to register and their transactions become known and transparent to the regulators,” he said. “That’s true here in the U.S. and for foreign dealers doing business here more than a de minimis.”

The CFTC is working with overseas regulators on how to reduce the potential for gaps in the rules, Gensler said.

Letters’ Impact

The agency was criticized by non-U.S. regulators after it proposed guidance in June on the international scope of Dodd- Frank rules intended to reduce risk in the $639 trillion global swaps market. The guidance indicates when CFTC regulations apply to foreign-based companies trading with U.S. clients and to branches of U.S. companies trading overseas.

The reach of the rules has prompted opposition from JPMorgan, Goldman Sachs, Bank of America Corp. (BAC:US) and Societe Generale SA. (GLE) Gensler said the cross-border guidance is needed to protect U.S. taxpayers from having to rescue companies whose overseas trades lead to their collapse.

Since mid-October, when new regulations for swap dealers began taking effect, the letters and other guidance have provided a series of changes for clearinghouses, funds and banks. On Nov. 1, the CFTC granted a two-month delay for rules governing segregation of collateral at Chicago-based CME Group Inc. (CME:US), owner of the world’s largest futures exchange, and Atlanta-based Intercontinental Exchange Inc.

Unanswered Questions

Between Oct. 26 and Nov. 29, the CFTC gave 10 banks, including JPMorgan, Goldman Sachs and Barclays Plc. (BARC), delays in how quickly they must decide to accept or reject trades for clearing. The letters weren’t immediately posted on the CFTC’s website when they were released to banks. The rule was originally supposed to take effect Oct. 1; the banks now have until Jan. 1. Meanwhile, LCH received a delay on a related rule and won’t need to meet CFTC requirements until March 31.

The CFTC has also used the letter process to resolve policy questions that were unanswered in final regulations. In February, when the agency completed rules requiring funds to register by the end of the year, it said it could not determine if the requirements had to be met by so-called family offices that manage investments sometimes tied to commodities. The agency said Feb. 24 that it needed to develop a “comprehensive view” of family offices before granting an exemption.

Family Offices

On Nov. 29, the CFTC released a four-page letter exempting the family offices after dozens of letters from law firms including Skadden, Arps, Slate, Meagher & Flom LLP and the Private Investor Coalition Inc., a lobbying group of family offices. The coalition urged the exemption on behalf of 65 such offices. Instead of a new analysis of the offices, the CFTC relied on conclusions drawn by the SEC, which issued an exemption.

“Placing both agencies on equal footing with respect to the application of investor protections relevant to this issue will facilitate compliance with both regulatory regimes,” Gary Barnett, the CFTC’s director of the division of swap dealer and intermediary oversight, said in the no-action letter.

The agency’s reliance on guidance documents was also at the center of a lawsuit filed and later withdrawn by CME against the CFTC. The CME alleged Nov. 8 that rules on data-reporting for cleared swaps would harm the company. The lawsuit cited a CFTC document answering frequently asked questions that was released subsequent to final rules.

Section Withdrawn

Last week, the CFTC withdrew the section of the document that was referenced by CME in the lawsuit. And the agency sought comment on CME’s proposed policy of having data on swaps at its clearinghouse routed to its own swap-data repository.

Gensler told reporters Nov. 30 that the release on data- questions was a “staff document and not a commission document.”

The Depository Trust & Clearing Corp. faulted the agency Nov. 29 for amending its policies after spending more than a year writing rules for data reporting.

“The commission’s action late yesterday was an unexplained and an abrupt reversal of course,” New York-based DTCC, which operates a swap-database, said in a Nov. 29 statement asking the CFTC to change its decision. “This action is inconsistent with the commission’s previous actions, and will cause market participants to question the finality of any commission rule or interpretation.”

To contact the reporter on this story: Silla Brush in Washington at sbrush@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net


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