With commissioners feeling the pressure of the deadlines imposed in the Dodd-Frank Wall Street Reform Act, the Commodity Futures Trading Commission (CFTC) Friday voted out proposals seeking to protect collateral of customers in cleared and uncleared swaps, provide real-time reporting for swaps and to report swap transactions to swap data repositories (SDR).
At its fifth meeting the Commission acted on three proposals and one advanced notice of proposed rulemaking (ANOPR) to implement the Dodd-Frank Act. "We're probably halfway there," with the CFTC approving 28 measures since October, said Chairman Gary Gensler (see NGI, Nov. 15).
"My concern is whether we're moving too fast," said Commissioner Michael Dunn. "Our ambitious [schedule] calls for us to complete almost every rule Dodd-Frank requires by July 15, 2011...We are under a difficult time line...It's like herding cats."
"As we continue this process, the rules are becoming more complicated," said Commissioner Jill Sommers. "As Commissioner Dunn said, people are having trouble following what we're doing. I might be having trouble following what we're doing," she acknowledged.
Due to the deadlines in Dodd-Frank, "I would say that I'm not sure this process is sustainable through finalizing some of these rules," Sommers said. "The statutory deadlines are demanding, but I think they also help to lower regulatory uncertainty," Gensler countered.
"Maybe we need to step back and take a deep breath," said Commissioner Bart Chilton. "Some of the most challenging (and important) rules are not yet proposed, and we are proceeding as we can with getting out as many of the required rulemakings as possible...Within a very short period of time, there will be a lot more out there to review and analyze, and a lot more 'meat on the bones.'"
The ANOPR, which the agency approved, solicits comments on a number of options for protecting the collateral of a customer entering into cleared swaps, in the event of another customer's default. This proposal "is particularly important as we move forward to implement Congress' mandate that for the first time standardized swaps must be cleared," Gensler said.
The CFTC said it is considering a range of models for protecting customer collateral, including:
The Commission has allotted 45 days for the public to comment on the ANOPR, which Sommers said is "not enough time."
A related proposal would provide protection of collateral of counterparties to uncleared swaps. "The proposal follows the congressional direction that end-users must have a choice to have any initial margin that they post with a swap dealer to be kept in a segregated account and with a third-party custodian" that is independent from a swap dealer or major swap participant, Gensler said.
The CFTC also set the stage for a real-time public reporting regime for swaps. The proposal requires real-time reporting for swap transactions and pricing data to occur as soon as "technologically practicable" for trades other than trades of large notional size or block trades, Gensler said.
The proposal includes a time delay and a method to report the large-sized trades. It includes a 15-minute delay on standardized blocks. This compares to the futures marketplace, which currently has a five-minute delay for blocks. With regard to customized trades of large notional size, the proposal asks a series of questions about whether a similar delay of 15 minutes would be appropriate for interest rate, currency and other financial swaps and what delays might be appropriate for customized large trades referencing physical commodities.
"I am not convinced we are doing the best thing by mandating a 15-minute time limit to report block trades and large notional swap trades between dealers and end-users, while providing little to no direction on the reporting of all remaining trades...I believe we owe the market some certainty as to what the Commission believes is 'technologically practicable,'" said Commissioner Scott O'Malia.
The agency approved a proposal that requires all swaps -- whether cleared or uncleared -- to be reported to a SDR, which must register with the CFTC. A staff member expects the agency will see 15 SDR applicants. The review of each application will take at least 180 days and could require up to 10-15 staffers at the CFTC.
"We need direct feeds into these swap data repositories" so the CFTC will need additional funds to upgrade its information technology capabilities, Gensler said.
SDRs, entities that were created under Dodd-Frank, are required to confirm all swap data transactions between counterparties; maintain books and records on swap transactions for five years; provide the CFTC with direct electronic access to an SDR; comply with real-time reporting requirements; and maintain the confidentiality of swap data.
As to who must report to SDRs, Dodd-Frank says that if only one counterparty is a swap dealer, the swap dealer is required to report. If one counterparty is a major swap participant and the other counterparty is neither a swap dealer nor a major swap participant, the major swap participant must report. Where counterparties have the same status -- two swap dealers, two major swap participants and two non-swap dealers and major swap participant counterparties -- the counterparties must select a counterparty to report, according to the CFTC.
Gensler said the Commission expects to hold three more meetings in December and one or two in January.
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