Summary of the final rule, which will repeal and replace CEA Part 35, generally permitting the transaction of swaps in an agricultural commodity subject to all rules and regulations applicable to any other swap:
New Part 35 will permit the transaction of swaps in an agricultural commodity subject to all provisions of the CEA – and any rule, regulation, or order thereunder – applicable to all other swaps.
New Part 35 will also explicitly provide that swaps in an agricultural commodity may transact on a swap execution facility (SEF) and/or Designated Contract Market Regulation|designated contract market]] (DCM) to the same extent that any other swap may transact on a SEF and/or DCM.
On April 7, 2011, the CFTC and the SEC released a joint study on algorithmic derivatives descriptions. After conducting its analysis, which included meetings with industry leaders, regulators, and academics, as well as comments submitted by the public, the staff offered conclusions. more>
At an open meeting on January 20, 2011, the SEC finalized rules requiring an issuer of asset-backed securities (ABS) to "perform a review of the assets underlying the ABS and disclose information relating to the review." Rules regarding shelf eligibility conditions for asset-backed securities were re-proposed on July 26, 2011. On October 13, 2010, the SEC adopted an interim final temporary Rule 13Aa-2T concerning the reporting of security-based swap data. Also introduced at this meeting was a new proposed rule to "mitigate conflicts of interest at security-based swap clearing agencies, security-based swap execution facilities, and national security exchanges that post or make available for trading security-based swaps." more>
Among the provisions of the Dodd-Frank Act are several requirements affecting commodity trading advisors (CTAs), commodity pool operators (CPOs) and investment advisors to private funds. The Securities and Exchange Commission submitted a proposed rule on systemic risk reporting requirements for private fund advisers including hedge funds, CPOs and CTAs in February 2011; the rules became finalized in October 2011.
The Commodity Futures Trading Commission participated in the joint rulemaking with the SEC on the reporting requirements, and also proposed its own rules on certain compliance aspects for CPOs and CTAs. These rules were finalized in February 2012. more>
Among the provisions of the Dodd-Frank Act are several requirements affecting commodity trading advisors (CTAs), commodity pool operators (CPOs) and investment advisors to private funds. The Securities and Exchange Commission submitted a proposed rule on systemic risk reporting requirements for private fund advisers including hedge funds, CPOs and CTAs in February 2011; the rules became finalized in October 2011.
The Commodity Futures Trading Commission participated in the joint rulemaking with the SEC on the reporting requirements, and also proposed its own rules on certain compliance aspects for CPOs and CTAs. These rules were finalized in February 2012. more>
[[[SEC Final Rule: Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF]]
Among the provisions of Title VII of the Dodd-Frank Act is a requirement that swaps reforms shall not apply to activities outside the United States unless those activities have “a direct and significant connection with activities in, or effect on, commerce of the United States.” The CFTC is tasked with developing a framework for oversight of the swaps market, and to adapt the Commodity Exchange Act to include swaps oversight. The SEC is tasked with developing a framework for oversight of security-based swaps, and to adapt the SEC regulations to include such oversight.
The concern is that swap trading by foreign affiliates of large financial entities pose a systemic risk to the U.S., and thus should be under CFTC jurisdiction. This guidance is meant to be the starting point for discussion with market participants regarding the structure of cross-border jurisdiction. more>
After the financial crisis of 2008 and the passage of the Dodd-Frank Act in 2010, enhancing customer protection has emerged as a major issue. Dodd-Frank contains several provisions intended to restore confidence in the financial markets, including:
Subsequently, after failures at two futures commission merchants within one year - MF Global and Peregrine Financial - the safety of customer segregated funds has come into question by market participants. The CFTC announced additional customer protection regulations to be forthcoming. more>
At an open meeting on May 10, 2012, the CFTC finalized rules, guidance and acceptable practices under Dodd-Frank Act that, among other things, amend Section 5 of the Commodity Exchange Act ("CEA") concerning designation and operation of contract markets, and add a new CEA Section 2(h)(8) to include the listing, trading and execution of swaps on designated contract markets. The rules were originally proposed on December 1, 2010. more>
At an open meeting on February 24, 2011, the CFTC proposed an interpretive order regarding disruptive trading practices. The proposal defines as disruptive any practice that:
violates bids or offers;
demonstrates intentional or reckless disregard for orderly execution; or
is of the character of, or is commonly known to the trade as, “spoofing” (bidding or offering with the intent to cancel the bid or offer before execution).
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), named after Senate Banking Committee Chairman Chris Dodd and Chairman of the House Financial Services Committee Barney Frank, was signed into law by President Barack Obama on July 21, 2010. more>
The Dodd-Frank Act requires, among other things, that the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC), create and implement rules regarding mandatory clearing of swaps transactions. A major topic of contention has been whether end-users should be granted an exception to the Dodd-Frank requirement for mandatory clearing of swap transactions. At its July 10, 2012 open meeting the CFTC approved a final rulemaking that implements an exception to the clearing requirement for non-financial entities and small financial institutions that use swaps to hedge or mitigate commercial risk ("commercial end-users"). more>
Title IX of the Dodd-Frank Act aims to update and enhance investor protection and improve protections in U.S. securities markets. Among its provisions are five sections related to executive compensation:
Section 951, which requires advisory votes of shareholders about executive compensation and golden parachutes;
Section 952, which requires disclosure about the role of, and potential conflicts involving, compensation consultants;
Section 953, which requires disclosure on compensation practices such as pay-for-performance and ratios between CEO and median compensation;
Section 954, which aims to require compensation claw-back policies; and
Section 955, which requires disclosure about whether company directors are permitted to hedge decreases in market value of the company's stock.
Discussions surrounding possible changes in the regulation of financial benchmarks such as the London Interbank Offered Rate (LIBOR) began in 2012, in the wake of an ongoing scandal involving widespread manipulation of rate submissions by participant banks. While the initial round of fines assessed by regulators such as the CFTC and U.K. Financial Services Authority against Barclays, UBS and the Royal bank of Scotland concentrated on manipulation of LIBOR, the scandal has since widened to include other financial benchmarks such as Euribor, Yen Libor and Swiss Libor.
In January 2013, the International Organization of Securities Commissions (IOSCO) published a consultation report and request for comment on financial benchmarks. The report, which included 41 questions upon which market participants are invited to comment, is IOSCO's first step in the setting of policy guidance and principles for benchmarks. On April 16, 2013, IOSCO released its draft Principles for Financial Benchmarks. The deadline for public comment is May 16, 2013. more>
Finally, at its March 20, 2012 open meeting, the CFTC approved a final rulemaking covering clearing member risk management, clearing documentation and timing of acceptance for clearing, and allocation of bunched orders. more>
The Dodd-Frank Act requires most swaps to be traded on an exchange or on a similar system and then guaranteed by a clearinghouse, where the parties would be required to post collateral. However, the act allows the Secretary of the Treasury to make a final determination as to whether foreign exchange transactions should be granted an exemption from the Dodd-Frank definition of swaps. On November 16, 2012, the U.S. Department of the Treasury issued it final determination that effectively exempts FX swaps and forwards from mandatory derivatives requirements, including central clearing and exchange trading. more>
As mandated by Title IV of the Dodd-Frank Act, the SEC and CFTC have been tasked with creating a framework for the registration and systemic risk mitigation of hedge funds and other private funds. Additionally, the SEC is charged with rulemaking authority for Investment Advisers, and exemption thresholds for family offices, accredited investors, and venture capital funds. Information from systemically significant private funds will be shared with regulators, and the Financial Stability Oversight Council (FSOC).
As of December 2011, five rulemakings have been finalized, including:
The SEC meeting on June 22, 2011 finalized rules concerning amendments to the Investment Advisers Act of 1940, as well as registration exemptions for reporting by certain investment advisers. An SEC notice concerning investment adviser performance compensation regulation was published on May 10, 2011. The comment deadline for this proposal is July 11, 2011. more>
One of the provisions of the Dodd-Frank Act is an amendment to the Commodity Exchange Act that would prohibit swap transactions unless it were submitted to a Derivatives Clearing Organization (DCO) for clearing, or if the swap met one of the requirements for exemption. In separate meetings, the SEC and CFTC issued final rules regarding the process for review of swaps for mandatory clearing. more>
Section 753 of the Dodd-Frank Act gives the Commodity Futures Trading Commission (CFTC) and U.S. Securities and Exchange Commission (SEC) the authority to monitor and enforce "manipulative and deceptive" practices in the swaps, security-based swaps, and commodities markets. The rules are intended to mirror the SEC's Rule 10b-5, a powerful regulation used to combat fraud and manipulation in securities markets. more>
OTC derivatives are instruments traded in venues other than on organized exchanges, or designated contract markets. Subsequent to financial crises, which many say were exacerbated by the "opacity" of the unregulated OTC markets, regulators in the United States and abroad have begun enacting and implementing rules concerning OTC derivatives. Most notably, these regulations include the Dodd-Frank Act in the U.S., Markets in Financial Instruments Directive (MiFID) and EMIR in Europe, and international efforts such as Basel III. more>
On September 10, 2010, the CFTC approved its final rules regarding off-exchange retail foreign exchange transactions. Although the rulemaking pre-dated the Dodd-Frank Act, once the Act was signed in July 2010, the commission's forex rules, along with the forex rules of other regulatory authorities, became a part of Dodd-Frank. Under Dodd-Frank, the CFTC will have jurisdiction over retail foreign exchange transactions, except in the case of entities which fall under the authority of one of the following regulatory agencies ("Prudential Regulators"):
The Act requires that such rules include appropriate requirements with respect to disclosure, record keeping, capital and margin, reporting, business conduct, documentation, and any other standards or requirements as Federal regulatory agencies shall determine to be necessary. more>
In accordance with Title II of the Dodd-Frank Act, the FDIC is required to establish rules regarding the orderly liquidation in case of a default of a "covered financial company," which is defined as financial company that poses significant risk to the financial stability of the United States. The Act outlines the process for the orderly liquidation of such a covered financial company following the FDIC’s appointment as receiver and provides for additional implementation of the orderly liquidation authority (OLA) by rulemaking. more>
Position limits are intended to protect futures markets from excessive speculation that could cause unreasonable or unwarranted price fluctuations and are sometimes referred to as "speculative position limits", or "speculative limits". The Commodity Exchange Act (CEA) authorized the CFTC to impose limits on the size of speculative positions in futures markets. The CFTC issued its final rules on position limits in October 2011. Compliance for spot month positions was to become effective on October 12, 2012, but in September 2012, a U.S. District Court vacated the rule and remanded it back to the CFTC. more>
The SEC has issued two rule proposals regarding the security-based swap data repositories (SDRs) and the reporting and dissemination of swap data through Regulation SBSR. Neither rulemaking has been finalized. more>
The Commodity Futures Trading CommissionCFTC has issued numerous rulemakings under Dodd-Frank regarding swap dealers and major swap participants (SD/MSPs) at several meetings between 2010 and 2012. The issues discussed were: duties; registration; conflicts of interest; required compliance policies; reporting and recordkeeping; further defining “swap dealer,” “major swap participant” and “eligible contract participant”; business conduct standards, confirmation; confirmation, reconciliation and compression; swap trading relationship documentation; orderly liquidation termination; and margin requirements for uncleared swaps.
The Securities and Exchange Commission (SEC) has also issued several rulemakings regarding security-based swap dealers and major swap participants (SB-SD/MSPs). Topics for which rules have been proposed but not finalized include business conduct standards, registration, and swap entity definitions (joint rule with CFTC). The final rulemaking on swap entity definitions, also issued jointly between the CFTC and SEC, was issued on April 18, 2012.
In late 2011, the CFTC began issuing final rules pertaining to SD/MSPs. As of September 2012, the CFTC had finalized all rules except those pertaining to uncleared swaps, margin and capital requirements. Aside from the definitions rules, which were approved jointly with the CFTC, the SEC has not finalized any rules. Topics for which a final rulemaking has been issued can be found in the alert box at the top of the page. Summaries and links can also be found below.
Swap execution facilities (SEFs) were given life by the Dodd-Frank Act, which requires over-the counter (OTC) swaps to be cleared and traded on this new type of regulated platform. Any swap that clears must trade on designated contract market or a SEF. The CFTC has been given the responsibility to monitor swap execution facilities; the SEC has jurisdiction over security-based SEFs.
In accordance with the Dodd-Frank Act, the CFTC and the SEC, in consultation with the Board of Governors of the Federal Reserve System, have proposed rules and interpretative guidance under the Commodity Exchange Act (CEA) and the Securities Exchange Act of 1934 to further define the terms "swap dealer," "security-based swap dealer," "major swap participant," "major security-based swap participant," and "eligible contract participant."
Under Dodd-Frank, the SEC will have jurisdiction over "security-based" swaps, and the CFTC will have jurisdiction over all other swaps, except for a category known as "mixed swaps" which may have both security-based and non-security-based components. For mixed swaps, the two agencies will have joint oversight responsibilities.
Swaps definitions fall into two categories. "Entity definitions" detail which firms and individuals fall are considered to be subject to dealer and swap participant rules. "Product definitions" detail the types of transactions that are considered to be swaps, security-based swaps, and mixed swaps, and also which products may be exempt from agency oversight. more>
The document proposes which entities will be subject to the prohibitions, and explains the types of financial transactions that will be exempt from the bans. The proposal seeks comment from the public and market participants on 394 questions on such topics as definitions of banking entities, exemptions, types of activities covered under the rule, and compliance considerations. The deadline for public comment was originally set for January 13, 2012, but on December 23, 2011, the House Financial Services Committee requested a 30-day extension to February 13, 2012. The Dodd-Frank Act mandates that the rule become effective on July 21, 2012, followed by a two-year compliance transition. more>
At an open meeting on August 4, 2011, the CFTC approved its final rule on its whistleblower program. The rule maintains the “discretionary power” of the Commission with regard to the amount awarded to informants.
At an open meeting on May 25, 2011, the SEC issued its final rule under which the whistleblower, in order to be eligible, must "voluntarily provide the SEC with original information that leads to the successful enforcement by the SEC of a federal court or administrative action in which the SEC obtains monetary sanctions totaling more than $1 million.” more>
The Bank for International Settlements (BIS) is an international organization, established in 1930, that fosters the cooperation of central banks and international financial institutions. While headquartered in Basel, Switzerland, the BIS has two representative offices in the Hong Kong and Mexico City. The BIS assists central banks and other official monetary institutions in the management of their foreign exchange and gold reserves. more>
The European Securities and Markets Authority (ESMA) is an independent European Union regulatory agency that oversees European securities trading across all of the EU member states. ESMA is a part of the European System of Financial Supervision, which consists of the European Systemic Risk Board (ESRB) and the three European Supervisory Authorities: ESMA based in Paris, the European Banking Authority (EBA) based in London and the European Insurance and Occupational Pensions Authority (EIOPA) based in Frankfurt. ESMA works closely with the EBA, the ESRB and the EIOPA in order to ensure unity among securities regulators and across various financial sectors.
ESMA was established on January 1, 2011 as part of a new regulatory framework adopted by the EU in the wake of the financial crisis and has replaced the Committee of European Securities Regulators (CESR). Steven Maijoor is the current chairman of ESMA. The executive director is Verena Ross and the vice president is Carlos Tavares. more>
The Federal Deposit Insurance Corporation (FDIC) was created by Congress though the Glass-Steagall Act in 1933 in response the frequent bank failures of the 1920s and early 1930s. As an independent agency, the FDIC is charged with maintaining stability in the U.S. financial system by insuring deposits, supervising financial institutions and managing receiverships.
Additionally, one of the provisions of the Dodd-Frank Act required the FDIC to establish rules regarding the orderly liquidation of any systemically important financial company encountering a default. more>
As established under Title I of the Dodd-Frank Act, the Financial Stability Oversight Council (FSOC) provides, for the first time, comprehensive monitoring to ensure the stability of our nation's financial system. It was passed by the House Financial Services Committee on December 2, 2009 to put an end to “too big to fail” financial firms. It was created as a nine-member council, led by the Treasury secretary, to look out for systemic risks. The FSOC will subject to Fed oversight any nonbank financial companies whose financial distress would pose risks to the financial stability of the United States.more>
The Advisory Committee on Emerging Regulatory Issues was created on May 11, 2010, five days after the so-called "flash crash" on May 6, 2010, when a single trader mistakenly entered a "sell" order of CME Group's e-Mini S&P 500 futures worth $4.1 billion. The order triggered a frenzy of high frequency trading activity that briefly saw the Dow Jones Industrial Average break 700 points in a matter of minutes. While the market stabilized quickly once the error was discovered, the incident highlighted the potential liquidity problems associated with high speed trading. more>
The Financial Services Authority (FSA) was an independent non-governmental body that regulates the financial services industry in the UK. Established by Gordon Brown in 1997 when the Labour party came into power, the FSA was granted statutory powers by the Financial Services and Markets Act of 2000. After the FSA "failed to sound the alarm as the financial system went wrong" in 2008-2010, the U.K. made plans for the transfer of regulatory oversight from the FSA to the Bank of England. more>
Established by Title X of the Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB) will conduct rule-making and enforcement of consumer financial protection laws, promote financial education and monitor financial markets that affect consumers. Many parts of the Dodd-Frank Act relating to the CFPB are planned to go into effect on July 21, 2011. Treasury Secretary Timothy Geithner is charged with creating the CFPB. On September 17, 2010, Elizabeth Warren was named Assistant to the President and Special Advisor to the Secretary of the Treasury on the CFPB. On July 17, 2011, Richard Cordray was nominated as Director of the CFPB, having formerly served as head of the enforcement division at the agency. more>
The mission of the Commodity Futures Trading Commission (CFTC) is to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially sound futures and options markets. more>
The U.S. Securities and Exchange Commission (SEC) is the U.S. regulatory agency charged with the oversight of securities markets and market participants in the U.S. Its mission is to protect investors, to maintain fair, orderly, and efficient markets, and to facilitate capital formation. Mary L. Schapiro is the current chairman of the SEC. more>
On December 21, 2011, the SEC passed final rules setting a net worth standard for accredited investors. These rules were proposed on January 25, 2011, and conform the definition of "accredited investor" to the requirements of the Dodd-Frank Act. The rules clarify the criteria by which household net worth is measured. Under Securities Act rules, individuals and entities that qualify as "accredited investors" are eligible to participate in certain private and limited offerings that are exempt from Securities Act registration requirements. One of the bases on which individuals may qualify as accredited is having a net worth of at least $1 million, either alone or together with their spouse.
Rules go into effect 60 days after publication to the Federal Register. In 2014, and every four years thereafter, the SEC will reexamine accredited investor definitions and rules.[1]
Final Rules
The Dec. 21 SEC release:
"SEC rules permit certain private and limited offerings to be made without registration, and without requiring specified disclosures, if sales are made only to 'accredited investors.' One way individuals may qualify as 'accredited investors' is by having a net worth, alone or together with their spouse, of at least $1 million. The Dodd-Frank Act requires that the value of a person’s primary residence be excluded from the net worth calculation used to determine the person’s 'accredited investor' status.
Under the amended net worth calculation, indebtedness secured by the person’s primary residence, up to the estimated fair market value of the primary residence, is not treated as a liability, unless the borrowing occurs in the 60 days preceding the purchase of securities in the exempt offering and is not in connection with the acquisition of the primary residence. In such cases, the debt secured by the primary residence must be treated as a liability in the net worth calculation. This is intended to prevent manipulation of the net worth standard, by eliminating the ability of individuals to artificially inflate net worth under the new definition by borrowing against home equity shortly before participating in an exempt securities offering. In addition, any indebtedness secured by a person’s primary residence in excess of the property’s estimated fair market value is treated as a liability under the new definition."
Background
Under the Securities Act of 1933, a company that offers or sells its securities must register the securities with the SEC or find an exemption from the registration requirements. The Act provides companies with a number of exemptions. For some of the exemptions, such as rules 505 and 506 of Regulation D, a company may sell its securities to what are known as "accredited investors." Regulation D defines an accredited investor as:
a bank, insurance company, registered investment company, business development company, or small business investment company;
an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
a charitable organization, corporation, or partnership with assets exceeding $5 million;
a director, executive officer, or general partner of the company selling the securities;
a business in which all the equity owners are accredited investors;
a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.[2]
Prior to enactment of the Dodd-Frank Act, the value of one's primary residence was allowed to be included in the calculation of net worth. Traditionally, this was defined by the amount of equity in the home (fair market value less any secured indebtedness). Section 413(a) of Dodd-Frank required the SEC to adjust the net worth standards for an accredited investor in our Securities Act rules that apply to any natural person individually, or jointly with the spouse of that person, to “more than $1,000,000 . . . excluding the value of the primary residence of such natural person.”
This proposal would amend the Dodd-Frank rules to clarify the term "value of primary residence," by adding the phrase "...“calculated by subtracting from the estimated fair market value of the property the amount of debt secured by the property, up to the estimated fair market value of the property.” As a result, under the proposed rule:
An investor's net worth would be reduced by the amount of "value" that the primary residence would have contributed to net worth if the residence were not required to be excluded.
Limiting the amount of indebtedness subtracted from a property's value circumvents the adverse effect of allowing the holder of an "underwater mortgage" (a property whose fair market value is less than the debt secured against it) being allowed to add the underwater amount to one's net worth calculation for accreditation purposes.
