E-ALERT Dodd-Frank Act

Transcription

1 E-ALERT Dodd-Frank Act CFTC PROPOSES TWO RULES CLARIFYING DODD-FRANK IMPLEMENTATION SCHEDULES FOR CERTAIN REQUIREMENTS AND PREVIEWS FUTURE RULEMAKING SCHEDULE September 16, 2011 At a September 8 meeting, the Commodity Futures Trading Commission ( CFTC ) approved two notices of proposed rulemaking setting forth implementation schedules for compliance with certain new requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd- Frank ). In one notice, the CFTC addressed its proposed implementation schedule for Dodd-Frank s clearing and trade execution requirements. In the other notice, the CFTC addressed Dodd-Frank s swap trading relationship documentation and margin requirements. At the same meeting, Chairman Gary Gensler released a tentative schedule of final rules that the CFTC may consider during the remainder of 2011 and the first quarter of DODD-FRANK CLEARING, TRADE EXECUTION, DOCUMENTATION, AND MARGIN REQUIREMENTS Title VII of Dodd-Frank sets forth a comprehensive new regulatory framework for derivatives. Key components of this new regulatory framework include requirements for clearing and trade execution. Specifically, Dodd-Frank requires all swaps that the CFTC determines must be cleared to be submitted to a derivatives clearing organization for clearing. Dodd-Frank further requires all swaps subject to this clearing requirement to be executed on a designated contract market ( DCM ) or a swap execution facility ( SEF ) if the swap is available for trading. Another key component of the new regulatory framework is the regulation of swap dealers and major swap participants. Among other things, Dodd-Frank requires these entities to comply with standards relating to the timely and accurate confirmation, processing, netting, documentation, and valuation of all swaps. Dodd-Frank further requires the CFTC to adopt rules for non-bank swap dealers and major swap participants imposing initial and variation margin requirements on all uncleared swaps. 1 Part of the CFTC s proposed margin rules would require credit support arrangements that comply with new rules for swap trading relationship documentation. CFTC S PROPOSED IMPLEMENTATION SCHEDULES The CFTC proposed several rules related to these new key requirements, but has not yet approved final versions. Pursuant to Dodd-Frank Section 712(f), the CFTC is authorized to promulgate rules to prepare for the effective date of its new regulations. To afford market participants time to comply with new requirements and to ensure representation of various market interests at the outset of the new regulatory regime, the two new CFTC notices propose a phased implementation plan providing 1 Dodd-Frank requires the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the Federal Housing Finance Agency (collectively referred to as the prudential regulators ) to set margin requirements for bank swap dealers and major swap participants subject to their jurisdiction. BEIJING BRUSSELS LONDON NEW YORK SAN DIEGO SAN FRANCISCO SILICON VALLEY WASHINGTON

2 deadlines by which parties must comply with the new rules related to clearing and trade execution and swap trading documentation and margin requirements. Need for Phased Implementation The two notices followed a two-day roundtable held jointly by the CFTC and the Securities and Exchange Commission in May concerning implementation phasing. In connection with that roundtable, the CFTC proposed concepts regarding phased implementation of Dodd-Frank and received numerous public comments. Some comments requested a meaningful period of time after Dodd-Frank rules became final before compliance would be required. Other comments focused on the need to give some entities, such as commercial end users or entities that have many managed subaccounts, more time to comply with the final Dodd-Frank requirements. Finally, some comments stated that the CFTC should ensure that many different market participants are meaningfully represented in the first phase of compliance, when industry practices are being developed. The obligation to comply with the requirements that are the subject of the proposed implementation schedule will not become effective until the CFTC or other entities take certain actions. Specifically, the clearing requirement is not triggered until the CFTC determines that a swap must be cleared and will be subject to the CFTC s final rules concerning the end-user clearing exception. The exchange trading requirement is not triggered until a DCM or SEF makes a swap available for trading. The swap trading documentation and the margin requirements will similarly not be effective until the CFTC issues final rules. Three Phases by Category of Entity The proposed rules identify three broad categories of market participants and impose corresponding phased deadlines for compliance by category. Because the proposed swap trading documentation and margin rules will apply to swap dealers and major swap participants, the implementation category will vary by counterparty type. The clearing and trading execution rules, on the other hand, will apply to all market participants (not exempt under the rules) so the implementation category will vary by party entering the swap. As proposed, swap dealers and major swap participants will be required to comply soonest, in the first phase of implementation, followed in the second phase by most financial entities, and finally followed by all other entities (including commercial end users) in the third phase of implementation. Newly-Defined Entities To address concerns about early representation of buy-side interests and the time needed to renegotiate managed accounts, the CFTC has defined two new categories of entities: Active Funds. This new category will be treated like swap dealers or major swap participants for purposes of implementation phasing. An active fund is defined as any private fund, as defined in Section 202(a) of the Investment Advisors Act of 1940, that is not a third-party subaccount and that executes 20 or more swaps per month based on a monthly average over the 12 preceding months. Third-Party Subaccounts. This category will be given more time to comply with new regulations. A third-party subaccount is defined as a managed account that requires specific approval by the beneficial owner of the account to execute documentation necessary for executing, confirming, margining, or clearing swaps. The CFTC explained that these entities will likely need the most time to bring their swaps into compliance because they are likely to require the most time for documentation, coordination, and management. 2

3 Timing The three phases provide a 90-, 180-, or 270-day period for compliance that starts to run at different times for the clearing, trade-execution, swap trading documentation, and margin requirements. Clearing. The period of time to comply with the clearing requirement runs from the effective date of the CFTC s determination that the swap must be cleared. Trade Execution. The period of time to comply with the trade execution requirement is the same as that for the clearing requirement, or 30 days after the swap is first made available for trading on a DCM or SEF, whichever is later. Swap Trading Documentation. The period of time to comply with the swap trading documentation requirements runs from the date that final rules setting forth these requirements are published in the Federal Register. Margin. The period of time to comply with margin requirements runs from the date that final rules setting forth these requirements are published in the Federal Register. In addition, the CFTC must finalize several other related rulemakings, such as those further defining swap, swap dealer, and major swap participant, before requiring compliance with these rules. Proposed Implementation Schedules The following table summarizes the proposed implementation schedules: Phase Entities Time to Comply Phase 1 Phase 2 Phase 3 Phase 1 would apply to Category 1 entities, including: Swap dealers or security-based swap dealers Major swap participants or major security-based swap participants Active funds (as defined above) Phase 2 would apply to Category 2 entities, including: Commodity pools Private funds as defined in Section 202(a) of the Investment Advisors Act of 1940, other than active funds Employee benefit plans as defined in paragraphs (3) and (32) of Section 3 of the Employee Retirement Income Security Act of 1974 Persons predominantly engaged in activities that are in the business of banking, or activities that are financial in nature, as defined in Section 4(k) of the Bank Holding Company Act of 1956 (but not third-party subaccounts (as defined below)) Phase 3 would apply to all other entities, including thirdparty subaccounts and end users 2 90 days 180 days 270 days 2 The swap trading documentation and margin notice distinguishes between Category 3 entities that are third-party subaccounts and Category 4 entities that include all other entities. The proposed rules would give both Category 3 and Category 4 entities 270 days to comply. 3

4 CFTC RELEASES TENTATIVE RULEMAKING SCHEDULE The proposed implementation schedules address only a few of Dodd-Frank s new requirements, and there are many more requirements that are still awaiting final rulemaking. At last week s meeting, the CFTC also released a tentative schedule of the outstanding final rulemakings it intends to consider during the remainder of this year and during the first quarter of Remainder of 2011 The CFTC stated that it may consider the following rulemakings during the remainder of this year: Clearinghouse Rules Data Recordkeeping and Reporting End-User Exception Entity Definitions/Registration External Business Conduct Internal Business Conduct (Duties, Recordkeeping, and Chief Compliance Officers) Position Limits Product Definitions/Commodity Options Real-Time Reporting Segregation for Cleared Swaps Trading Designated Contract Markets and Foreign Boards of Trade First Quarter 2012 The CFTC stated that it may consider the following rulemakings during the first quarter of 2012: Capital and Margin Client Clearing Documentation and Risk Management Conforming Rules Disruptive Trading Practices Governance and Conflict of Interest Internal Business Conduct (Documentation) Investment of Customer Funds Swap Execution Facilities Segregation for Uncleared Swaps Straight-Through Trade Processing 4

5 The CFTC s proposed implementation schedule for the clearing and trade execution requirements is available here. The CFTC s proposed implementation schedule for the swap trading documentation and margin requirements is available here. Comments on both notices of proposed rulemaking will be due 45 days after the notices are published in the Federal Register, which publication has not yet occurred. If you have any questions about the proposed implementation schedules or their impact on your business, or if you would like to submit comments on the proposed rules, please contact the following members of our firm: Allison Lurton alurton@cov.com Bruce Bennett bbennett@cov.com Robert Fleishman rfleishman@cov.com William Massey wmassey@cov.com This information is not intended as legal advice. Readers should seek specific legal advice before acting with regard to the subjects mentioned herein. Covington & Burling LLP, an international law firm, provides corporate, litigation and regulatory expertise to enable clients to achieve their goals. This communication is intended to bring relevant developments to our clients and other interested colleagues. Please send an to unsubscribe@cov.com if you do not wish to receive future s or electronic alerts Covington & Burling LLP, 1201 Pennsylvania Avenue, NW, Washington, DC All rights reserved. 5