Under Dodd Frank, which was enacted July 21, 2010, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) each have rule making responsibilities for derivatives products. In some cases, such as retail foreign exchange transactions, the regulators had 90 days after passage of Dodd Frank to complete the rules. In most cases the rules are to be completed within one year after enactment, i.e. by July 21, 2011.
So far there has been a flurry of rule making activity in 2010. The following is a summary of the major derivatives-related rule making proposals this year.
2010
09/10 Final: Regulation of off-exchange retail foreign exchange transactions and intermediaries
09/10 Final: Performance of registration functions by National Futures Association with respect to retail foreign exchange dealers and associated persons
10/14 Interim final rule on reporting of pre-enactment swaps transactions
10/14 Financial resources requirements for Derivatives Clearing Organizations (“DCO’s)
10/18 Requirements for DCO's, Designated Contract Makers (“DCM’s”) and Swap Execution Facilities (“ SEFs”) regarding mitigation of conflicts of interest
10/26 Agricultural commodity definitions
10/27 Privacy of consumer financial information
10/27 Business affiliate marketing and disposal of consumer information rules
11/02 Provisions common to registered entities
11/02 Anti disruptive practices authority contained in the Dodd Frank Act
11/02 Process for review of swaps for mandatory clearing
11/02 Position reports for physical commodity swaps
11/02 Removing any reference to or reliance on credit ratings in Commission regulations; proposing alternatives to the use of credit ratings
11/03 Prohibition of market manipulation
11/03 Investment of customer funds and funds held in an account for foreign futures and foreign options transactions
11/07 Implementation of conflicts of interest policies and procedures by Futures Commission Merchants (“FCM's”) and Introducing Brokers (“IB’s”)
11/19 Registration of foreign boards of trade
11/19 Designation of a chief compliance officer: required compliance policies and annual report of a FCM, swap dealer, or major swap participant
11/23 Registration of swap dealers and major swap participants
11/23 Implementation of conflicts of interest policies and procedures by swap dealers and major swap participants
11/23 Regulations establishing and governing the duties of swap dealers and major swap participants
11/26 Public input for study regarding oversight of existing and prospective carbon markets
12/03 Proposed defintions of swaps related legal terms
12/16 Swaps Trading Facilities and Platforms
Some of the rules are in areas the regulators have already been studying. However, Dodd Frank also requires the regulators to write rules for a host of hithertofore unregulated products largely traded on an over the counter (OTC) bespoke (i.e. customized) basis. This will include the need to grapple with issues of which products are to be cleared, which are to be traded on exchanges, what form new types of exchange trading will take and trade execution methodologies.
An attempt is being made to keep the public involved. However, given the technical nature of the rules and the pace at which they are being proposed it may well be that the public isn't really effectively being kept up. Moreover, under the timetable mandated by Dodd-Frank, it would seem that the breakneck pace will continue and accelerate in 2011. Unless the media gets involved in an educational public service fashion (e.g. a CNN at least or, perhaps better yet, a PBS) it seems unlikely that the public will have much of a clue as to what is transpiring.
While an incredible amount of technical considerations is involved it would seem that the two chief balls that need to be watched are proper curbs over systemic risks and transparency in derivatives products and pricing. Perhaps a third should be added - creating a level playing field so that a relatively few large organizations do not have undue pricing power over the derivatives markets.
The derivatives rule-making undertaking is, in my opinion, really the 21st Century cognate of the 20th Century securities reforms made in the 1930’s following the Great Depression and may be the most important single bit of financial regulation of the lifetime of many of us. In this context, it behooves all of us to get as good a grasp as we can on the rules both proposed and final for the regulation of derivatives.
This will be the last article on the blog for 2010. A Happy, Healthy and Prosperous 2011 to all!!!
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Robert Kiggins, Esq. of McCarthy Fingar LLP, is author of the blog, and may be reached at (914) 385-1024 or rkiggins@mccarthyfingar.com.
Nothing is this blog is intended to or may be relied upon as specific legal advice. Securities and related laws are complex and competent counsel should be consulted. Views expressed by the author in this article are his own and not those of any other person.
