REGULATION OF OTC DERIVATIVES Professor Jasmin Sethi. SEC University Spring 2014 Wednesday 5:45 PM 8:00 PM

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1 REGULATION OF OTC DERIVATIVES Professor Jasmin Sethi SEC University Spring 2014 Wednesday 5:45 PM 8:00 PM Professor Contact Information: Contact Information for Teaching Assistant: Mark Roszak can be reached at Office Hours: After class or by appointment Seminar Description: This course examines the role of OTC derivatives, particularly swaps and security-based swaps, in the 2008 financial crisis and the resulting Dodd-Frank Title VII regime for regulating OTC derivatives. The course will examine regulations both proposed and final to date by both the SEC and the CFTC under Title VII. Specifically, this course will discuss both the economic and legal definitions of products, the regulatory and policy goals and concerns underlying regulations, the existence of differing legal standards for derivatives regulation because of the divided jurisdiction, how these differences affect the legal landscape, and anticipated challenges for regulators in enforcing the implementation of the Title VII regime. Course Materials: The topics and reading assignments for the course are listed below. You can access the reading materials on the TWEN site, the log-in information for which should have already been ed to you. Gordon F. Peery, The Post-Reform Guide to Derivatives and Futures, John Wiley & Sons, Inc. (2012) is not available on TWEN. This text will be on reserve at the library. Grading: There will be a multiple-choice exam and it will account for 100% of the grade. The exam will be administered over a 2-week period between Friday, April 11 and Friday, April 25. Disclaimer: Given my position as special counsel in the division of trading and markets at the SEC, I must note the following disclaimer. The SEC, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed during the course are my own personal views, and they do not necessarily reflect the views of the SEC, its Commissioners, or any of my colleagues on the staff of the SEC. Course Schedule and Reading Assignments Class 1. January 22. INTRODUCTION: CAUSES OF THE FINANCIAL CRISIS AND HISTORY OF DERIVATIVES REGULATION Adam J. Krippel, Regulatory Overhaul of the OTC Derivatives Market: The Costs, Risks, and Politics (2011)

2 Chairman Gary Gensler, Testimony Before the Financial Crisis Inquiry Commission (July 1, 2010) 63 FR (May 1998) (CFTC Concept Release re: Over-the-Counter Derivatives) Kai Kramer, Aren't We Still in the Garden of the Forking Paths: A Comment on Consolidation of the SEC and CFTC (2004) Class 2. January 29. FINANCIAL STRUCTURE OF DERIVATIVE PRODUCTS International Energy Association, The Mechanics of the Derivatives Markets: What They are and How They Function, Special Supplement to the April 2011 Oil Market Report (April 2011): pp Gordon F. Peery, The Post-Reform Guide to Derivatives and Futures: Chapter 10 Class 3. February 5. PRODUCT DESCRIPTIONS: LEGAL DEFINITIONS Securities Exchange Act Release No (July 2012) (Joint Final Rule re: Further Definition of Swap, Security-Based Swap, and Security-Based Swap Agreement ; Mixed Swaps; Security-Based Swap Agreement Recordkeeping): pp. 8-15, 73-74, , , , , , , Class 4. February 12. LEGAL DEFINITIONS OF MARKET PARTICIPANTS Securities Exchange Act Release No (April 2012) (Joint Final Rule re: Further definition of Swap dealer, security-based swap dealer, major swap participant, major security-based swap participant, and Eligible contract participant. ): pp. 9-11, 14-21, 50-65, 83-92, , , , 270, 293, , 309 Class 5. February 19. LIFE CYCLE OF A DERIVATIVES TRADE, MADE AVAILABLE TO TRADE, & END-USER EXCEPTION Life Cycle of a Derivatives Trade Gordon F. Peery, The Post-Reform Guide to Derivatives and Futures: Chapters 6 and 7 Made Available to Trade & End-User Exception CFTC Final Rule, End-User Exception to the Clearing Requirement for Swaps, 77 FR (Jul. 19, 2012): (read Reporting Requirements and Hedging or Mitigating Commercial Risk); ( 39.6) CFTC Final Rule, Process for a Designated Contract Market or Swap Execution Facility To Make a Swap Available to Trade, 78 FR (Jun. 4, 2013): pp (read Sections and of the Commission s Regulations); Securities Exchange Act Release No (Dec. 15, 2010) (SEC Proposed Rule re: End- User Exception to Mandatory Clearing of SB swaps): pp (read Notification to the Commission); (read Hedging or Mitigating Commercial Risk); Regulation SB SEF): pp (read Swap Review Committee)

3 Class 6. February 26. CORE PRINCIPLES OF SWAP EXECUTION FACILITIES & SECURITY- BASED SWAP EXECUTION FACILITIES Definitions of SEF and SB SEF 15 U.S.C. 78c(a)(77), Section 3(a)(77) of the Exchange Act (statutory definition of Security- Based Swap Execution Facility) CFTC Final Rule, Core Principles and Other Requirements for SEFs, 78 FR (Jun. 4, 2013): pp (read 37.9 Permitted Execution Methods) Regulation SB SEF): pp Position Limits ISDA v. CFTC, 2012 WL (D.D.C.): pp (stop at Appendix A) CFTC Proposed Rule, Position Limits for Derivatives, 78 FR (Dec. 12, 2013): pp (read The Commission Construes CEA Section 4a(a) To Mandate That the Commission Impose Position Limits and Necessity Findings); (read Part 150 Limits on Positions) CFTC Proposed Rule, Aggregation of Positions, 78 FR (Nov. 15, 2013): pp (read Background); ( 150.4) Chevron U.S.A. v. NRDC (1984), 467 U.S. 837, Class 7. March 5. ACCESS & CONFLICTS OF INTEREST Access CFTC Final Rule, Core Principles and Other Requirements for SEFs, 78 FR (Jun. 4, 2013): pp ( Access requirements) Regulation SB SEF): pp ; CFTC Final Rule, DCO General Provisions and Core Principles, 76 FR (Nov. 8, 2011): pp ; ; Securities Exchange Act Release No (Oct. 22, 2012) (SEC Final Rule re: Clearing Agency Standards): 72 91; ; Conflicts of Interest 15 U.S.C. 8323, Dodd-Frank Wall Street Reform and Consumer Protection Act Section 726 (conflicts of interest in SEFs) 15 U.S.C. 8343, Dodd-Frank Wall Street Reform and Consumer Protection Act Section 765 (conflicts of interest in SB SEFs) Securities Exchange Act Release No (Oct. 14, 2010) (SEC Proposed Rule re. Regulation MC): pp (read SB SEFs and National Securities Exchanges); (read Discussion of Proposed Regulation MC); ( and ) CFTC Proposed Rule, Mitigation of Conflicts for DCOs, DCMs and SEFs, 75 FR (Oct. 17, 2010): pp (read the Background section), (stop at Mitigation of Conflicts of Interests); (read Part 37 Swap Execution Facilities); ( 39.25) Comment Letters

4 Stephen Merkel, Wholesale Markets Brokers Association Americas Comment Letter in response to Proposed Regulation RIN 3038 AD18: Core Principles and Other Requirements for Swap Execution Facilities (Mar. 8, 2011) Ben MacDonald, Bloomberg Comment Letter in response to Proposed Regulation MC (Nov. 24, 2010) Ben MacDonald, Bloomberg Comment Letter in response to Proposed Regulation MC (August 16, 2011) Class 8. March 12. CLEARING, MARGIN AND CAPITAL Capital 76 FR (May 12, 2011) (CFTC Proposed Rule re: Capital Requirements for SDs and MSPs): pp (section I.A. Background, Legislation Requiring Rulemaking), (stop at section II.B. Proposed Minimum Capital Requirements for SDs and MSPs that are FCMs) Securities Exchange Act Release No (Oct. 2012) (SEC Proposed Rule re: Capital, Margin and Segregation Requirements): pp. 5 13, 14 22, Margin 76 FR (Apr. 28, 2011) (CFTC Proposed Rule re: Margin Requirements for Uncleared Swaps): pp (section I.A. Background, Legislation Requiring Rulemaking), (stop at Custodial Arrangements) Securities Exchange Act Release No (Oct. 2012) (SEC Proposed Rule re: Capital, Margin and Segregation Requirements): pp Comment Letters SIFMA Comment Letter to SEC on Margin, Capital and Segregation (Feb. 22, 2013): pp. ii ix (Executive Summary) PIMCO Comment Letter to SEC on Margin, Capital and Segregation (Feb. 21, 2013): pp. 1 2 Class 9. March 19. POST-TRADE REPORTING 77 FR 1182 (Jan. 9, 2012) (CFTC Final Rule re: Real-Time Public Reporting of Swap Transaction Data): pp Securities Exchange Act Release No (Nov. 19, 2010) (SEC Proposed Rule re: Regulation SBSR: Reporting and Dissemination of Security-Based Swap Information): pp. 3 5, 7 12, 18 19, 31 34, 44 46, 64 71, 73 94, Larry E. Thompson, The Depository Trust and Clearing Corporation Comment Letter in response to Regulation SBSR (Jun. 3, 2011) ISDA & SIFMA, Comment Letter in response to Regulation SBSR, (Jan. 18, 2011) 77 FR 2236 (Jan. 13, 2012) (CFTC Proposed Rule re: Swap Data Recordkeeping and Reporting Requirements): pp , , , CFTC Proposed Rule (March. 15, 2012) (Procedures To Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades): pp , 29-31, 71, 72-73, 74-80, Class 10. March 26. VOLCKER RULE

5 Office of the Comptroller of the Currency, Treasury, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Securities and Exchange Commission, Prohibitions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds. See 1.pdf Class 11. April 2. REGULATION OF CROSS-BORDER TRANSACTIONS 77 FR (July 12, 2012) (CFTC Proposed Interpretive Guidance re: Cross-Border Application of Certain Swaps Provisions of the Commodity Exchange Act): pp (the subsections titled Request for Comment are optional) 17 CFR Parts 240, 242, and 249; SEC Release No ; File Nos.S ; S ; S ; RIN 3235-AL25 (SEC Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security- Based Swap Dealers and Major Security-Based Swap Participants) Morgan (Aug. 13, 2012): pdf pages 5 (Annex page 2) to 8 (Annex 5) Complaint, Securities Industry and Financial Markets Association, International Swaps and Derivatives Association, and Institute of International Bankers v. United States Commodity Futures Trading Commission, 2013 WL (D.D.C.) (Trial Pleading) (No. 1:13CVO1916) Class 12. April 9. COMPLETION & REVIEW