Dodd-Frank 30 Day Countdown: Day 29

Concerns Facing the OTC Derivatives Market in the Absence of a Workable Regulatory Structure

The delay of Title VII rulemaking in the Dodd-Frank Act, arguably one of the largest pieces of financial legislation to come out of Congress since the Great Depression, is concerning to those involved in all aspects of the OTC market. On July 16, specific provisions of Title VII including Sections 721 (definitions), 723 (clearing requirements), 731 (registration/requirements for swap dealers), 763 (Amendments to Securities and Exchange Act of 1934), and 764 (registration/regulation requirements for security-based swap dealers) will automatically come into effect.

Of these automatic provisions, most troubling is that aspects of the Commodity Futures Modernization Act (CFMA) will no longer be in effect. The CFMA, passed in 2000, exempted OTC swaps generally from regulation. Now, the expected six month gap post July 16th leaves the legal status of these swaps unclear, leaving both the buy and sell sides confused as to which contracts will be legally binding.

Both the SEC and CFTC have stated that they expect to issue “temporary relief” from some of the automatic regulatory requirements scheduled to be effective on July 16. The relief is expected to delay measures that do not require rule-making but refer to terms such as swap, swap dealer or major swap participants that still must be further defined by regulators.  “The proposed relief would make it clear that, though the law will have changed, as a practical matter, the market will have relief during the period of the exemption,” CFTC Chairperson Gary Gensler said in the letter dated June 10 to Senators Pat Roberts, a Kansas Republican, Richard Lugar, an Indiana Republican, and Saxby Chambliss, a Georgia Republican.

It is interesting to note that at the same time the agencies are struggling to meet the requirements imposed by Dodd-Frank, The US House of Representatives today approved an agriculture spending bill that would cut CFTC funding by about 15% from current levels.  The bill includes an amendment that would force the CFTC to delay some of the swaps reform rules it is developing.  It makes one wonder whether these agencies will ever be able to handle the sheer number of requirements the bill imposes.

Tomorrow:  FIA and ISDA Publish Documentation for Cleared Swaps in an effort to add structure to OTC market pending full implementation of Dodd-Frank Act and similar regulation in foreign jurisdictions.

-Stephanie Kane contributed to this post