The Commodity Futures Trading Commission (CFTC) Friday took a major step toward implementing the sweeping Wall Street reform bill by voting out an interim final rule and two proposed rules at its first public meeting on the new regulations, but the agency made clear that the measures were not carved in stone and urged the public to comment.
Some commissioners voiced concerns about the prescriptive nature of the proposal rules,and whether the agency will have the funding needed to carry out its task under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which President Obama signed into law in July (see NGI, July 26).
The interim final rule would require that swaps entered into prior to the enactment of the Dodd-Frank Wall Street Reform Act in July be reported to a registered swap repository within 60 days after a swap data repository is established, or to the CFTC. The interim nature of the proposal allows the agency to publish the rule in the Federal Register as final while it solicits comments.
The interim rule would apply to pre-enactment swap transactions where one of the counterparties is a swap dealer or major swap participant. Since the CFTC is still working to define who are "major swap participants," a staffer recommended that industry participants who believe they may fall into this category preserve the data that may need to be reported.
Chairman Gary Gensler said it appeared "pretty clear" that major swap participants will be a "small set of parties." While they are not swap dealers, they will have some systemic relevance, he noted.
One of the proposed rules approved by the agency requires a derivatives clearing organization (DCO) to have sufficient financial resources to meet the default of its largest clearing member. It imposes stiffer financial resource requirements on DCOs that are deemed systemically important by the Financial Stability Oversight Council, which met Friday (Oct. 1) for the first time.
The proposed rule also would require a DCO to maintain sufficient financial resources to cover its operating costs for at least one year. And the DCO would be required to report to the Commission on a quarterly basis the particulars of its financial status.
In addition, the agency cleared a proposal that's intended to mitigate potential conflicts of interest in the operations of a DCO, designated contract market (DCM) or a swap execution facility (SEF) through structural government requirements and limits on ownership of voting equity and exercise of voting power. Specifically, it calls for each DCO, DCM and SEF to have a nominating committee and one or more disciplinary panels. Moreover, it requires each DCO to have a risk management committee and each DCM or SEF to have a regulatory oversight committee and a membership committee.
In addition, the proposal would restrict members in a DCM or SEF from owning more than 20% of any class of voting equity in the DCM or SEF. The aggregate limit on voting equity is 40%. A DCM is a board of trade or exchange regulated by the CFTC, while an SEF was created in the Dodd-Frank legislation. It is a facility trading system or platform on which multiple parties can execute or trade swaps.
Commissioner Scott D. O'Malia said he supported all three measures, but he voiced concerns about their prescriptive nature, specifically the "inflexible" ownership caps for DCMs and SEFs. He further noted that he opposed the CFTC interfering with privately negotiated contracts that were entered into prior to enactment of the Dodd-Frank Act.
"These are just proposals to get the public dialogue moving to the next stage," Gensler told O'Malia.
Commissioner Jill E. Sommers also said she opposed the "numerical limits" on the ownership of DCMs and SEFs. She said she was concerned that this "may stifle competition" by preventing the creation of these entities. Sommers, who voted against the CFTC proposal, pointed out that the European Commission explicitly rejected limitations on ownership.
Commissioner Bart Chilton agreed with Sommers, saying he hoped that the agency would not become "control freaks" on the issue of ownership rights. The CFTC needs to strike the right balance, he noted.
In drafting the new regulations, Commissioner Michael Dunn called on the CFTC staff to follow the principles-based practice for regulation that the agency currently adheres to, rather than a prescriptive approach that mandates a one-size-fits-all approach. He also urged staff to present alternative regulations for the public to consider.
Funding also will have a "major impact" on the rulemaking process at the CFTC, Dunn said. "Without full funding, it [will] be impossible to meet all the...mandates" under the Dodd-Frank Act, he noted. "This puts the Commission in the position of choosing what parts of Dodd-Frank we actually have the resources to implement."
Chilton echoed the sentiment, saying "if we don't have money, I think it would be really tough for us to aggregate position limits much less enforce them. I hope that we get the funding that we need." Last Thursday Gensler told the Senate Banking Committee that the CFTC would need more resources to implement and enforce its new regulations (see related story).
Gensler said the agency's next public meeting would be on Oct. 19 and that it would try to meet weekly throughout the fall to pass as many regulations as it can to implement the Dodd-Frank Act.
Now that Congress is done with its work, regulators are "tasked with putting meat on the bone," Sommers said. Since "Congress [has] given us little choice with the statutory deadlines imposed, it goes without saying that market regulators have their hands full." The Dodd Frank reform law allows one year from the July 21, 2010 date of enactment for the CFTC to complete its tasks.
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