CFTC Open Meeting, July 10, 2012

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Dodd-Frank Timeline, End-user Exception to Mandatory Clearing of Swaps, CFTC
Final Rule Issue Effective Date Compliance Date
July 19, 2012 September 17, 2012 April 10, 2013
Timeline-Swap Clearing Exemption for Cooperatives, CFTC
Proposal Date Final Rule Issue Effective Date
July 17, 2012 August 13, 2013 September 23, 2013
Dodd-Frank Timeline, Swap Product Definitions
Final Rule Issue Effective Date Compliance Date
August 13, 2012 October 12, 2012 October 12, 2012

The Commodity Futures Trading Commission (CFTC) held a public meeting on Tuesday, July 10, 2012, at 9:30 a.m., to consider two Final Rules and a Proposed Rule: [1]

View Webcast

Meeting Summary and Links to Related Documents

Speakers

Chairman Gary Gensler; whose statements include:

  • "This rule means that two months after the rule is published, light will begin to shine on the swaps market for the first time. Initially, likely by September, swaps price and volume information will be reported in real time to the public for interest rate and credit default swap (CDS) indices. Three months subsequently, such real-time reporting will begin for energy and other physical commodity swaps."
  • "Swap data repositories (SDRs) will receive data on all swaps transactions, giving regulators their first window into these markets."
  • "Today’s rule is especially meaningful for the implementation of position limits. For the first time, limits will apply to the aggregate spot-month positions, including both futures and swaps. Spot-month limits protect the markets against corners, squeezes and the burdens that may come from excessive speculation."
  • "After today, the foundational rules bringing oversight to the swaps market will have been completed. The next major reforms we are set to consider relate to the required clearing of swaps between financial firms."
  • "The final release provides guidance regarding forwards with embedded volumetric options, like those used within the electricity markets, and is requesting comment on this interpretation... Further, consistent with the Dodd-Frank Act, insurance products will not be regulated as swaps. Similarly, this final rulemaking clarifies that certain consumer and commercial arrangements that historically have not been considered swaps, such as consumer mortgage rate locks, contracts to lock in the price of home heating oil and contracts relating to inventory or equipment, also will not be regulated as swaps. The rule provides clarity on the dividing line between “swaps” and “security-based swaps” or both, i.e. mixed swaps."

Commissioner Scott O'Malia, whose statements include:

  • "As a whole, the three items up for vote today are the result of good decision-making that appropriately protects end-users consistent with the letter and spirit of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and provides needed guidance and clarity with respect to the definition of “swap.” Additionally, these rules are the first to benefit from our recently signed memorandum of understanding with the Office of Information and Regulatory Affairs within the Office of Management and Budget (“OMB”) providing for technical assistance with regard to the Commission’s cost-benefit analyses."
  • "Notwithstanding my approval of today’s rules, there are areas where I think we can improve, such as the provision of exemptive relief for counterparties dealing with municipal utilities and the availability of 'one-pot portfolio margining.'"
  • "I am pleased that in the final [end user] rule, we have provided legal certainty for clearing by small financial institutions as defined in section 2(h)(7)(C)(ii) of the Commodity Exchange Act (the “Act”) and new Commission regulation 39.6(d). I am equally pleased we are proposing to extend that certainty to all qualifying cooperatives, regardless of their size, pursuant to our exemptive authority under section 4(c) of the Act."
  • Regarding the joind product rule, O'Malia believes that "it is important that we take the necessary time to consider the potential consequences of the compliance dates for our rules going forward."
  • O'Malia also expresses concern regarding the treatment of minicipal utilities as "special entities."

Commissioner Mark Wetjen, whose statements include:

  • " I believe [the definition rules] strike a proper balance. On the one hand, they provide that insurance, forward contracts, and certain consumer and commercial transactions – which have never been considered to be swaps and which I am convinced Congress did not intend to be regulated as swaps – are not swept up by Dodd-Frank. On the other hand, I am confident they are comprehensive enough to prevent relevant derivatives products from escaping the new regulatory structure through inadvertent loopholes."
  • "I support the final Product Definitions release, but I am concerned that certain aspects may not meet that standard of clarity...in particular, I worry that the interpretation for forward contracts with embedded-volumetric optionality, and its seven-factor test, could needlessly complicate commercial practices that I do not believe Congress intended to bring under Dodd-Frank."
  • "Mandatory clearing is important, but the risk-reducing benefits of clearing come with certain costs. Congress was clear in its determination that those costs should not be borne by end users that use swaps to hedge or mitigate their commercial risks."

Commissioner Jill Sommers


Commissioner Bart Chilton, whose opening statement was:
"There are a couple of important events coming up that I want to share with you today. First, tonight the All-Star game will be played. Also, in just 11 days, we’ll have the two-year anniversary of the signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Now, some of you are asking, “How’s he going to put these two totally divergent things together?” It’ll all make sense in a minute. Really.

First, how many of you have heard of Bryce Harper? He’s the youngest position player ever chosen for an All Star game and plays for what is for many of you, your hometown team, the Washington Nats. He not only has a way with the bat but he seems to have a way with words, too. A couple weeks ago, a reporter asked him what he seemed to think was a silly question, and he responded by saying, “That’s a clown question, bro.” That answer went on T-shirts. It went on late-night TV. It went viral.

Now, back to Dodd-Frank. There are those who say we don’t need it. Let’s repeal it—or at least parts of it. Let’s de-fund the agencies overseeing it so they can’t enforce it. Heck, let’s just take ‘em to court if we don’t like the line-up. Let’s take our bat and ball and go home. So, here’s the question they seem to be asking: “Do we even need Dodd-Frank?”

Let’s not even talk about 2008 and the financial collapse and the real reason Dodd-Frank came along in the first place. Let’s talk about how MF Global (as some would suggest) got caught trying to steal. Let’s talk about JPMorgan’s losing streak. Let’s talk about Barclays’ balk. Do we need Dodd-Frank? That’s a clown question, bro.

So yes, we need rules. We need the funding to enforce them. Plenty of folks still seem to think they can get around the rules. Plenty of folks in this town seem to think we don’t need umpires. Do we? That’s a clown question, bro."

References

  1. CFTC to Hold Open Meeting to Consider Final Rule on the Further Definition of the term “Swap,” Final Rule on the End-User Exception to Clearing, and Proposed Rule to Exempt from Clearing Certain Swaps by Cooperatives. CFTC. Retrieved on July 6, 2012.
  2. CFTC Said to Exempt Banks Under $10 Billion From Clearing. Bloomberg BusinessWeek. Retrieved on July 6, 2012.

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