THE FOLLOWING ARTICLE WAS CONTRIBUTED BY MY GOOD FRIEND AND COLLEAGUE AMIT CHHABRA
The Dodd-Frank Wall Street Reform and Consumer Protection Act continues to pose uncertainty and documentation challenges for derivatives end-user with little clarity in sight. Currently, we can expect much of Dodd-Frank to become effective within 60 days of final regulatory approval, and no later than December 31, 2011.
Some of the more pressing concerns include, but are not limited to, the following:
1. Under the current plan, dealers still need to notify uncleared swaps counter-parties of their right to have collateral held in a segregated account with an independent third-party custodian. The CFTC did not issue a no-action letter with respect to certain municipal entities and individuals prior to the July 16 deadline, so that concern has already been phased in. The International Swaps Dealers Association (ISDA) did not produce a protocol to ease compliance with the notice requirement, so end-users should not rely on that happening in the future either.
2. As in the futures context, dealers will need to have a custodian relationship in place for customer funds. Collateral teams will need to work with custodians and end-users to have these functional by the time this requirement kicks in. Moreover, the industry continues to await further clarity about which party - the dealer or the end-user - has the power to decide which third-party custodian may hold funds.
3. End-users and dealers need to ensure that Credit Support Annexes are in place or amended for uncleared swaps, and Wall Street still need clarity on which of these trades (if any) would be “grandfathered” under pre-Dodd Frank rules.
4. Dealers need to determine which US entity should enter uncleared swap trades and securities-based swap (SBS) trades, in light of proposed margin and capital requirements.
5. Futures contracts require a separate customer pooled account for foreign and domestic customers. Questions abound as to whether US futures commission merchants (FCMs) should clear for foreign customers and the form such an agreement might take, as well as what role these entities should play where a non-US clearinghouse does not even mandate that the broker be registered as an FCM.
6. End-users need to work with their dealers to determine how they can fund their accounts for routine debits, whether margin financing will be offered, and what form such an agreement would take, i.e., how to link the security interest under the margin financing with the OTC and cleared exposure. Where does the futures security interest fit into this picture?
7. We can expect securities-based swaps to be regulated like securities. For cleared SBS, we should expect to see specific requirements pertaining to the handling of collateral.
8. The playing field for these undertakings will be leveled, with custom-tailored negotiation guidelines required by end-users. These must account for the customer clearing relationship, the concerns of the execution agreement that ISDA/FIA have proposed, and relationships undertaken in the name of affiliates.
9. A few recent developments: The CFTC has published final whistleblower rules, though there is concern that the SEC’s rules undermine efforts to protect employees that wish to expose fraud. The CFTC does not consider it appropriate for an employee to report misconduct internally.
Additionally, CFTC Chair Gary Gensler has indicated that in September he will look at clarifying the proposed swap phase-in rules, position limits, clearinghouse core principles, business conduct and entity definitions, trading, data reporting, and end-user exemptions.
Much more needs to be monitored and many open questions remain that only final rules can be expected to answer.
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Robert Kiggins, Esq. of McCarthy Fingar LLP, is editor of the blog, and may be reached at (914) 385-1024 or rkiggins@mccarthyfingar.com.
Nothing is this blog is intended to be or may be relied upon as specific legal advice. Securities and related laws are complex and facts are different from case to case. Competent counsel should be consulted. Views expressed by the author in this article are his own and not those of any other person.
Amit Chhabra is a Member of TCG Advisory, LLC and can be contacted at amit@tcadvisory.net.
