Dodd-Frank: Highlights & Implications

When Dodd-Frank was signed into law on July 21, 2010, it was the just the beginning of a very long process.  The Act came in at over 2,000 pages, but left the majority of the work – roughly 400 rules or studies – to 30 different federal agencies. Only 49 of the mandated rules have been finalized, and the deadline has passed for finalizing another 131.  An additional 200 rules have deadlines approaching. On Tuesday, the Commodity Futures Trading Commission (CFTC) unanimously approved three new derivatives rules, bringing the number of final rules it is required to implement under Dodd-Frank law to 10, out of over 50 proposed rules assigned to that agency.

SEC and CFTC officials are straining to write the dozens of rules required by Dodd-Frank. Some employees are being pulled away from their enforcement and oversight roles to take on rule writing responsibilities; tighter than expected budgets for the coming year will not ease the work load in either of these agencies. At the same time, there are at least 2 dozen bills in Congress that seek to dismantle parts of the new regulatory regime. This ongoing debate and tension is creating uncertainty about when and how much of Dodd-Frank will eventually be implemented.

Dodd-Frank’s July 16 implementation date came and went, and the financial sector has not gone into a state of meltdown. We continue to watch the various rules debated, agency heads speak before Congress, and different market sector lobby for exemptions, but thus far, Dodd-Frank has had a stronger bark than bite.

As the U.S. struggles with Dodd-Frank, similar efforts are being undertaken worldwide. But while derivatives are largely global in nature and operate under multi-jurisdictional accepted standards and documentation, international coordination is always tricky. Regulators from different countries with locally focused objectives and priorities are being asked to agree to a common set of rules to achieve a result that is appropriate for all markets, and to take into account all of the financial institutions and investors will be affected by the intended and unintended consequences of the global coordination effort.   And of course, the complexity of the issues involved creates the potential for regulatory arbitrage. Ultimately, though, it seems that global coordination for derivatives regulation will come down to the same set of issues, and the same delays that U.S. regulators are facing.

Are the global delays in implementing financial reform going to undermine the goals of Dodd-Frank?  Or will the extra time allow for more effective and appropriate rules?

Over the past month we have tracked the news relating to Dodd-Frank and highlighted some issues of import to the markets and to our clients.  We will continue to update you as more Dodd-Frank news is released.

Highlights from our 30 Day Countdown:

1. Day 29: Concerns facing the OTC derivatives market in the absence of a workable regulatory structure
Aspects of the Commodities Futures Modernization Act, which was passed in 2000 and exempted OTC swaps generally from regulation, will no longer be in effect.

2. Day 28: FIA and ISDA Publishes Documentation for Cleared Swaps
The FIA and ISDA gathered a group of buy and sell side firms to create a standard template for the swaps market known as the FIA-ISDA Cleared Derivatives Execution Agreement. These agencies hope that this template can be universally used by those in the cleared swaps market. 

3. Day 26: Investment Advisor Registration Deadline Causing Confusion
As a result of confusion regarding date guidelines, investment advisors are relying on the SEC extending the deadline for registration.

4. Day 25: Testimony by Mary Schapiro on Financial Regulatory Reform: The International Context
Dodd-Frank requires agencies such as the SEC, CFTC to consult with foreign regulators regarding the G20 agreement to implement OTC derivatives global regulation.

5. Day 24: The Status of Regulation in the EU
The E.U. appears to be waiting to see the impact that Dodd-Frank has on U.S. financial markets before implementing regulations of its own, leaving some U.S. market experts with concerns that financial transactions will migrate to Europe.

6. Day 20: Australia Contemplates New (but Limited) Derivative Market Reforms
Australia’s Council of Financial Regulators suggest that Australian lawmakers should take a more judicious approach to financial reform than American lawmakers did with Dodd-Frank.

7. Day 19: Asia On Par with U.S. OTC Derivatives Reform
Japan amended its regulations under the Financial Instruments and Exchange Act (FIEA) and tightened the rules relating to the marketing of derivatives transactions and structured products by the financial services sector.

8. Day 17: Smaller Funds May Have Trouble Finding Clearing Member
Experts warn that smaller funds should secure a clearing member to ensure they are able to trade when Dodd-Frank comes into full effect.

9. Day 15: Definition of “Commodity Pool” Expanded July 16
The expanded definition of “commodity pool” under Dodd-Frank any pooled investment vehicle that invests in commodities derivatives, interest rate derivates, and most currency derivatives (just to name a few).

10. Day 13: SEC Re-defines Family Office
SEC re-defines family offices and determines they are no longer immune from registration under the Investment Advisers Act of 1940.

11. Day 11: Will SEC, CFTC Budget Cuts Impede Dodd-Frank?
The SEC and CFTC face budget cuts of up to 15% despite increased rule making burdens on their agencies.

12. Day 9: Firms Oppose FDIC Claw Back Provision
The FDIC OK’s a claw back provision, in which executives may be required to give back up to two years of salary if deemed responsible for a financial firm’s failure.

13. Day 7: Britain and EU Differ over Derivatives Reform Rules
EU announces that it will push back all decisions on derivatives regulation until September 2011.

14. Day 5: Banks Ask for Margin Relief
The largest U.S. banks appealed to the CFTC to exempt overseas swap transactions from U.S. margin requirements.

15.  Day 3: ISDA Calls for Coordination Amongst Global Regulators
ISDA called on global regulators to enact the G20-agreed upon reforms prior to other rules to ensure consistency amongst market participants.