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CFTC Relaxes DCM Core Principles, Proposes Some Delays

The Commodity Futures Trading Commission (CFTC) last Thursday issued a final rule that relaxes the prescriptive core principles related to trading swaps on designated contract markets (DCM), and proposed delaying until the end of the year the effectiveness of some provisions of Title VII of the Dodd-Frank Wall Street Reform Act.

"I am pleased that Commission staff has dialed back or eliminated many of the prescriptive rules that the Commission proposed over a year and a half ago [for DCMs]. Instead, most of what is before the Commission today will codify guidance and/or acceptable practices in lieu of the proposed rules," said CFTC Commissioner Scott D. O'Malia of the final rule, which was voted out by 5-0. O'Malia and Commissioner Jill Sommers, both Republicans, had expressed concerns about the proposed rule when the agency took it up in late 2010 (see NGI, Oct. 4, 2010).

Sommers also welcomed the final core principles, saying they "recognize the value of retaining flexibility and pull back from the overly prescriptive regime set out in the proposed rules."

The rulemaking, which includes 23 core principles, calls for DCMs to implement trade-risk control mechanisms, such as pauses and halts to trading; meet specified financial resource requirements; and establish operational and system safeguards, as well as reporting and record-keeping systems. Dodd-Frank, which was signed into law in July 2010, requires standardized swaps to trade on either a DCM, an exchange regulated by the CFTC, or a swap execution facility (SEF).

Testifying before Congress in 2010, Chairman Gary Gensler said the agency expected as many as 30 new entities to register as DCMs or SEFs. That would be in addition to the 16 futures exchanges that the CFTC already regulates.

"In many instances, we're codifying industry practices that the Commission has observed and found appropriate to comply with these core principles," Gensler said. Prior to the meeting, he noted that the agency approved a proposed exemptive order that "provides additional relief through Dec. 31 of this year" from certain Dodd-Frank rules that initially had been set to go into effect in July 2011. The original date had already been extended twice and the latest deadline would have been this July (see NGI, July 18, 2011).

The highly controversial core principle 9 was absent from the rules. It requires a DCM to delist any futures or swap contract that failed to maintain a total trading volume of 85% on the DCM's centralized market based on the prior 12-month period. "Unsurprisingly, the 85% centralized market trading requirement was wildly unpopular and controversial both inside and outside of the Commission," O'Malia said.

"While I support the protection of price discovery of trading on centralized markets, I am pleased that the Commission is delaying its consideration of the series of rules, guidance and acceptable practices under the revised core principle 9 to take place alongside the Commission's SEF core principles final rulemaking. This additional time will allow the Commission to continue to consider available alternatives to the proposed 85% requirement; anticipate and calculate the associated costs and benefits of core principle 9 to the overall swaps trading infrastructure; and address the related implications of the rules for transactions executed on SEFs as well as for off-exchange transactions."

According to a schedule released Thursday, the Commission expects to take up core principle 9 in July, while rules on "product [swap] definition" and end-user exemption will be up for consideration in June.

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