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CFTC Postpones Derivative Rules for Six Months

With the July 16 deadline fast approaching for implementation of much of the sweeping Dodd-Frank Wall Street Reform Act, the Commodity Futures Trading Commission (CFTC) Tuesday agreed to postpone compliance with the new derivative law by at least six months to the end of the year.

By 5-0 the Commission voted to provide the "exemptive relief" to the provisions of Dodd-Frank that are "self-effectuating" on July 16, one year after the financial overhaul measure passed out of Congress and was sent to the White House (see Daily GPI, July 22, 2010).

The CFTC's proposed order would provide temporary relief under Dodd-Frank for derivative transactions involving primarily financial commodities, energy commodities and excluded metals. These derivative transactions have been largely unregulated under the existing Commodity Exchange Act, but they will continue to be subject to the CFTC's antifraud and manipulative jurisdiction until the reforms under Dodd-Frank take effect.

The exemptive relief also would extend to Dodd-Frank provisions that do not require rulemaking but reference "swap," "swap dealer," "major swap participant," or "eligible contract participant," which the CFTC has not yet defined. These persons or entities would be temporarily exempted from complying with Dodd-Frank until Dec. 31 or whenever the terms are defined, whichever is earlier.

Commissioner Jill Sommers voted for the proposed order but added that she did so "reluctantly" due to the fact that it would allow the $600 trillion derivatives market to operate as it has done since 2000. She further noted that it was unlikely that the agency would issue a final rule on product definitions -- to coincide with one on entity definitions -- by Dec. 31, which would require the agency to extend the exemptive relief even further.

Commissioner Scott O'Malia also begrudgingly voted for the proposed order, although the "relief offered isn't perfect for the simple reason that it ends on an arbitrary date of Dec. 31, 2011 even if the Commission does not finalize key definitions [on swap entities or products] or swap execution framework before that time. He offered an amendment to "extend [the] relief until the Commission completes relevant rulemaking and final rulemakings become effective," but it was defeated.

The proposed exempt relief would not apply to futures contracts, options on futures, or transactions by retail customers in foreign currency or other commodities. Nor would it apply to the provisions of Title VII of Dodd-Frank that have already become effective. Moreover, the agency noted that it would not limit its ability to pursue fraud and manipulative behavior in markets.

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