The Commodity Futures Trading Commission (CFTC) adopted a proposal to carry out the orderly liquidation of a swap transaction if one of the parties has defaulted, and a proposed rulemaking that subjects agricultural swaps and commodity option transactions to the same rules that apply to all other swaps.

And in response to President Obama's order earlier this week calling for a government-wide review of regulations, CFTC Chairman Gary Gensler said he expected the agency to start "going through [its] entire rule book" in February to determine "what needs to be revised, changed or...repealed."

Agency "staff informed me that this executive order does not apply to independent commissions like the CFTC," said Commissioner Scott O'Malia. Nevertheless, "I believe we should make [it] Commission policy to implement the executive order to all of its rulemakings." At the very least, he said the CFTC should comply with the "spirit" of the executive order (see Daily GPI, Jan. 19).

"I think it [the orderly liquidation proposal] lowers litigation risk" during times of significant market stress and promotes an orderly and effective resolution process for large financial entities, Gensler said at the agency's 10th meeting proposing rules to implement parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act (see Daily GPI, Jan. 14).

Under the proposal rule, "if one of the counterparties to a swap defaults, the non-defaulting party's swap positions could be transferred to a new, solvent counterparty by the FDIC [Federal Deposit Insurance Corp.], and the non-defaulting party may not be able to terminate its claims against the defaulting counterparty until 5 p.m. [eastern time] on the business day following the day the FDIC is appointed receiver. This stay would facilitate the FDIC's orderly liquidation of the defaulting counterparty's swap positions."

FDIC has broad authority under the Dodd-Frank Act to operate or liquidate a business, sell the assets and resolve the liabilities of the company immediately after its appointment as receiver or as soon as conditions make this appropriate.

"I have some serious concerns about this proposal," O'Malia said. The FDIC's "vast new resolution authority could have significant impact on bilateral deals, which I don't believe have been properly considered."

The "FDIC will be in the driver's seat" in the event a "covered financial company" defaults on a swap transaction, a CFTC staff member said. The FDIC might consult the CFTC about a possible white knight that would be interested in assuming the defaulting party's swap positions.

"The intent here is to place the parties [to a swap transaction] on notice," another CFTC staff member said.

"I support the proposed rulemaking to authorize agricultural swap and commodity option transactions and subject them to the same rules applicable to all other swaps," Gensler said. Public comments "overwhelmingly supported treating agricultural swaps similarly to the treatment of other swaps brought under regulation by the Dodd-Frank Act. Agricultural producers, packers, processors and handlers will benefit from the ability to use agricultural swaps to hedge their risk."

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