The Commodity Futures Trading Commission (CFTC) last week issued a final order extending once more the effective date for market compliance with certain provisions of Section VII of Dodd-Frank involving regulation of the swaps -- this time until Dec. 31. The exemptive order is effective immediately, according to the agency.
It was the latest in a series of deadline extensions approved by the CFTC. In 2011, the agency agreed to delay compliance three separate times. "The Tuesday exemptive order makes five changes to the exemptive order issued on December 19, 2011 [which moved the compliance date to mid-July of this year]. First, [it] extends the sunset date from July 16, 2012, to December 31, 2012," CFTC Chairman Gary Gensler said.
"Second, the CFTC and the Securities and Exchange Commission (SEC) have now completed the rule further defining the term swap dealer (SD), and securities-based swap dealer. Thus, the exemptive order no longer provides relief as it once did [to those entities] until those terms were further defined."
In April the CFTC defined SDs as those companies that trade less than an aggregate of $8 billion in swaps annually during an initial phase-in period (see NGI, April 23).
Gensler also said that the CFTC and the SEC are making "great progress" in further defining the terms "swap" and "securities-based swap." "I anticipate the Commissions will take up this final definitions rule in the near term. Until that rule is finalized, the exemptive order appropriately provides relief from the effective date of certain Dodd-Frank provisions."
At a meeting scheduled for Tuesday (July 10) the CFTC said it would further consider the definition of "swap."
"Third, in advance of the completion of the definitions rule, market participants requested clarity regarding transacting in agricultural swaps. The exemptive order allows agricultural swaps cleared through a derivatives clearing organization or traded on a designated contract market to be transacted and cleared as any other swap. This is consistent with the agricultural swaps rule the Commission already finalized, which allows farmers, ranchers, packers, processors and other end-users to manage their risk.
"Fourth, unregistered trading facilities that offer swaps for trading were required under Dodd-Frank to register as swap execution facilities (SEFs) or designated contract markets by July of this year. These facilities include exempt boards of trade, exempt commercial markets and markets excluded from regulation under section 2(d)(2). Given the Commission has yet to finalize rules on SEFs, this order gives these platforms additional time for such a transition.
"Fifth, the Commission is providing guidance regarding enforcement of rules that require that certain off-exchange swap transactions only be entered into by eligible contract participants (ECPs). The guidance provides that if a person takes reasonable steps to verify that its counterparty is an ECP, but the counterparty turns out not to be an ECP based on subsequent Commission guidance, absent other material factors, the CFTC will not bring an enforcement action against the person."
In related action, the CFTC has proposed a phased compliance program for certain swaps involving foreign SDs, foreign major swap participants (MSPs), U.S. SDs, U.S. MSPs, and foreign branches of U.S. SDs and MSPs. The CFTC's proposal would give the entities more time to comply with the reforms under Dodd-Frank. The agency said it took this action to "provide greater legal certainty to market participants regarding their obligations under CEA [Commodity Exchange Act] with respect to their cross-border activities." The Commission approved the proposal by 5-0 and it is to be open for comment for 30 days following its publication in the Federal Register.
Specifically, the CFTC is proposing exemptive relief to allow non-U.S. (foreign) SDs and MSPs to delay compliance with certain entity-level requirements for swaps -- requirements that apply to an entire company, such as capital adequacy, chief compliance officers, risk management and record keeping. Non-U.S. SDs and MSPs refer to those that are not based in the U.S., as well as those that are foreign affiliates of a U.S. company.
Additionally, with respect to transaction-level requirements for swaps (clearing and swap processing, margining and segregation for uncleared swaps, trade execution and real-time reporting), the relief would allow foreign SDs and MSPs, as well as foreign branches of U.S. SDs a and MSPs, to comply only with those requirements as may be required in the home jurisdiction of an SD and MSP, (or in the case of foreign branches of a U.S. SD or MSP, the foreign location of the branch).
"This relief would become effective concurrently with the date upon which swap dealers and major swap participants must first apply for registration, and expire 12 months following the publication of this proposed order in the Federal Register," the proposed order said. The registration date has not been determined yet.
Moreover, the proposed order would allow U.S. SDs and MSPs to delay compliance with certain entity level requirements of the CEA from the date upon which SDs and MSPs must apply for registration until Jan. 1, 2013.
Foreign SDs and MSPs and foreign branches of U.S. SDs and MSPs seeking to avail themselves of the proposed phased compliance would be required to file an application to register as an SD or an MSP with the National Futures Association (NFA), and within 60 days of applying for registration submit to the NFA a compliance plan addressing how it plans to comply with all the requirements under the CEA.
Finishing out its busy week, the Commission Friday extended by two months the deadline for comments on initial and variation margin requirements for uncleared swaps. The comment period was to close on July 11, but it has been extended until to Sept. 14.
The Commission said it decided to reopen the comment period so that parties could comment on the CFTC's proposed margin rules in the context of proposals discussed in a consultative paper that was released Friday by the Basel Committee on Banking Supervision and the International Organization of Securities Committee (IOSCO).
The paper, which addressed the international effort to harmonize margin requirements for uncleared swaps, is available on the Bank for International Settlements website (www.bis.org) and the IOSCO website (www.iosco.org).
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