CFTC Open Meeting, April 18, 2012

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Gavel.png FINAL RULES: CFTC/SEC Joint Final Rule on Swap Entity Definitions & CFTC Final Rule: Commodity Options
Dodd-Frank Timeline, Further Defining “Swap Dealer,” “Major Swap Participant” and “Eligible Contract Participant”
Final Rule Issue Effective Date Compliance Date
May 23, 2012 July 23/Dec. 31, 2012 October 12, 2012
Dodd-Frank Timeline, Commodity Options and Agricultural Swaps
Final Rule-Swaps Effective Date - Swaps Effective Date-Options
August 10, 2011 December 31, 2011 June 26, 2012

The Commodity Futures Trading Commission (CFTC) approved two final rules related to the Dodd-Frank Act at an open meeting April 18, 2012:

View Webcast

Meeting Summary and Links to Related Documents

The commodity options final rule and interim final rule passed by a vote of 5-0.

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The entity definitions rulemaking passed by a vote of 4-1, with Commissioner O'Malia voting against (see Commissioners' statements below).

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While the Commission did not announce when its next open meeting would take place, Chairman Gensler did discuss the status of several rulemakings and offered speculation as to which rulemakings may be considered at its next meeting:

Speakers

Chairman Gary Gensler; whose statements include:
"The final rule gives market participants guidance on the Dodd-Frank Act definition of swap dealer:

  • First, it does so by allowing market participants to draw on useful precedents developed by the SEC to help distinguish between dealing and trading.
  • Second, it does so by providing further clarity on the Dodd-Frank act term “makes a market in swaps” by focusing on entities that routinely seek to profit by accommodating other market participants’ demand for swaps.
  • Third, it does so by clarifying another key term “regular business,” focusing on whether a person has an identifiable swap dealing business.
  • Fourth, it does so by fulfilling Congress's mandate that swaps entered into by an insured depository institution in connection with originating a loan are not to be considered dealing activity.
  • Fifth, it does so by providing direction on the distinction between hedging and dealing and within this provides a specific rule for swaps that hedge price risk associated with a physical commodity.
  • Sixth, it does so by clarifying that swaps between an agricultural cooperative or cooperative financial institution and its members does not constitute dealing.
  • Seventh, it does so by setting a de minimis threshold for swap dealing, as directed by Congress. The threshold is $3 billion total, across all asset classes, subject to a phase in level of $8 billion. As we proposed, the final rule would define as a swap dealer any entity with more than $25 million of dealing activity with pension funds and municipals – so-called “special entities.”"

"Though many of these large swap dealers are financial entities, Congress anticipated that some non-banks would be registered as swap dealers. Congress provided in Dodd-Frank that capital and margin for bank swap dealers be set by the bank regulators, but for non-bank swap dealers, by the CFTC. Instructive in this regard is the list of primary dealers on the International Swaps and Derivatives Association’s (ISDA) website, which includes a number of non-bank dealers."

Commissioner Jill Sommers, whose statements include:

  • "When compared with the December 2010 proposed rules, the final rules we consider today reflect substantial progress toward crafting sensible and reasonable rules that have built-in flexibility where appropriate, while at the same time providing much-needed certainty to market participants without being unnecessarily heavy-handed. Are these the rules I would have drafted if I held the pen from the beginning of this process? No. Nonetheless, I recognize that the final rules are much better than the proposed rules, and I am pleased that we have worked hard to try to build a consensus around these critical, foundational rules."
  • "Embedded in the final entities rules is an interim final rule that excludes from swap dealing activity those swaps used for hedging. The definition of hedging in this interim final rule is consistent with, although not identical to, the definition of bona fide hedging in the position limits rule, and is not consistent with the definition in the end user exemption proposed rules and the MSP final rules. So we will have at least three different meanings for hedging in our new rules. It is still not clear to me why the hedging definition for swap dealers should be different than the hedging definition for MSPs and end users, or diverge from the SEC’s hedging definition for major security based swap participant."
  • "Two other important issues addressed in the swap dealer definition are allowing insured depository institutions to exclude from swap dealing activity commodity swaps entered into in connection with loan origination, and the ability of proprietary traders who meet specific criteria to register as floor traders pursuant to CFTC Regulation 3.11 instead of registering as swap dealers."
  • "I am also very supportive of the phase-in period for the de minimis level which will initially be set at $8 billion dollars. I think it is important for the Commissions to review the relevant data, issue the study, receive public feedback and then analyze the information before setting a final level."
  • "The commodity options final rule permits market participants to trade commodity options, which are now statutorily defined as swaps, subject to the same rules applicable to every other swap. This rule serves to clarify any inconsistency in the treatment of options in the pre Dodd-Frank commodity option rules and current Dodd-Frank Act provisions."

Commissioner Bart Chilton, whose statements include:

"This structural rule will bring us one step closer to the registration of swap dealers and major swap participants and the requirements that will flow from that, e.g., clearing and trade execution requirements that enhance the safety and integrity of the swaps markets; record keeping and real-time reporting requirements that enhance the Commission’s ability to oversee the swaps markets; and increasing the accountability of these entities through business conduct standards. The rule is an important step toward realizing the Dodd-Frank Act’s goal of reducing systemic risk, increasing transparency, and protecting the integrity of the financial markets.

"With regard to the Commodity Options Final Rule and Interim Final Rule, I hope we adopt the Commission’s proposal to generally permit market participants to trade commodity options, which are defined as swaps, subject to the same rules applicable to every other swap. The interim final rule being put out for comment includes a trade option exemption for physically delivered commodity options involving commercial users (“trade options”) subject to certain conditions intended to ensure the Commission has adequate visibility in these trade options markets."

Commissioner Scott O'Malia, whose statements include:

  • "The final rules that are before the Commission today will establish the cornerstones of the Commission’s rules under Title VII. For that reason, it is paramount that the Commission issues these final rules in the right way—not only in terms of the right policy, but also in terms of sound legal analysis."
  • Regarding the commodity options rule, "I support these rules because the Commission: (1) has accurately interpreted the relevant provisions of the Commodity Exchange Act, as amended by Title VII;8 (2) is issuing a rule that will improve transparency into the commodity options market; and (3) has taken the time to carefully analyze the costs and benefits of the final rule and the interim final rule."
  • "Given the weaknesses and concentrations of risk exposed by the 2008 financial crisis, it is appropriate that the Commission is adopting a final entities rule today. Unfortunately, however, I am unable to support this rule not because it fails to make positive policy choices, but because it undertakes several unnecessary and astonishing contortions to achieve those results. These contortions may lead to potentially adverse inconsistencies and instabilities in the years that follow...imply put, the Commission’s rationale in the final rule defining the term “swap dealer” has ignored basic canons of statutory construction by not simply excluding commercial end-users, as entities, from the “swap dealer” definition."
  • "In addition, the final entities rule is silent on the manner in which the hedging definition in the interim final rule interacts with the End-User Exception rulemaking, which similarly contains a hedging or mitigating commercial risk definition similar to that found in the definition of “major swap participant.” Any entity that falls within the definition of swap dealer will be unable to rely on the end-user exception to clearing. Therefore, if the Commission overreaches in defining “swap dealer,” it may narrow the end-user exception in a way that is incongruent with congressional intent."

Additionally, Commissioner O'Malia prepared a dissent to the entity definitions rulemaking. His dissent can be viewed HERE.

Commissioner Mark Wetjen, whose statements include:

I believe the Commission should be guided by the following three principles:

"First, we must provide clarity. Granted, it is not possible to come up with a bright-line test that easily addresses all circumstances and is not susceptible to abuse or evasion. But the line we draw must be bright enough. The businesses that do not come anywhere near that line must be assured they are not swap dealers. In short, compliance should not be a guessing game.

"Second, we should err on the side of caution. We cannot predict how the swap markets will evolve in a world of clearing requirements, exchange trading, and mandatory reporting. In these circumstances, and given the Commission’s limited resources, it is prudent and responsible policy-making to cast the net carefully and in a measured way.

"Third, we should keep our attention focused on those activities that were the focus of Congress’ attention. Congress acted to, among other things, protect the financial markets and to make sure that commercial firms are able to continue using those markets to manage risk and finance their businesses. But the focus of Dodd-Frank was not on regulating as dealers those commercial firms that use swaps only in connection with their manufacturing, producing, or transporting of physical goods or commodities. Our focus, therefore, should be on regulating as dealers those entities whose activities pose meaningful risks to the participants in our markets, and to the financial system as a whole.

"I believe the final rulemaking before us today adheres to these principles."

References

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