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As the Dodd-Frank deadlines rapidly approach, most of us wonder where the CFTC is regarding the rulemaking process. Are they done? Do we know what’s to be expected? Well, the short answer is – no, not exactly – at least not yet.
Although, the CFTC has pulled off what many would consider a herculean effort, promulgating proposed rules in 28 of the 31 areas that require their consideration under Dodd-Frank, they’re not quite close to doing an end zone dance.
They have quite a stack of proposed rules on the table, and are now faced with the arduous task of getting them finalized. And it’s all going to happen before July 15th, 2011 the designated drop dead date – right? Not necessarily. A good indication that the CFTC may not have all the pieces together by the target date came from CFTC Chairman Gary Gensler himself at an address given before the Futures Industry Association on March 16, when he cited that Congress gave the CFTC flexibility as to setting of the implementation or effective dates of the rules. He also indicated that the CFTC would likely undertake a phased approach to implementation, possibly based on asset class, market or market participant.
The hopes are to finalize many of the high profile rules this spring, such as the process for mandatory clearing, entity definitions, registration requirements, large trader reporting and the enigmatic end-user exception.
There’s perhaps no rule that has had more discussion, rumor and concern than the end-user exception. That certainly qualifies it as high-profile.
The end-user exception does provide the ability to opt-out of clearing swap transactions if one of the counterparties to the swap:
1. is not a financial entity
2. is using swaps to hedge or mitigate commercial risk;
3. notifies the Commission how it generally meets its financial obligations regarding those swaps.
As the end-user proposed rule stands, there is little offered in the way of loosened reporting requirements. In fact, the proposed regulation would require non-financial entities to notify the Commission each time the end-user clearing exception is elected by delivering specified information to a registered SDR (Swap Data Repository) or, if no registered SDR is available, to the Commission itself. That means each time a transaction is used for hedging purposes it must pass along several more pieces of information along with the usual bits that would normally be required of cleared transactions. The proposed regulation also appears to require board approval on a transaction-by-transaction basis for swaps opted out of the clearing requirement. This does not seem at all practical for most organizations and really requires some further clarification.
However, the real elephant in the room for the CFTC, regarding the exception, has been margin. Until recently, they have been circumspect when asked if margin requirement rules would apply to end-users. In remarks before the House Agriculture Committee on February 10th, CFTC Chairman Gensler stated that “Proposed rules on margin requirements should focus only on transactions between financial entities rather than those transactions that involve non-financial end users.”
This is good news for bona-fide hedgers, who consider a clearing exemption without a margin exemption entirely inadequate.
Where’s The Money?
The CFTC is concerned about its ability to provide oversight to swaps market given the current state of its budget which is at $169 million. With the possibility of the Congressional Republicans’ plan to cut their funding by $56.8 million, Chairman Gensler questions the ability of the CFTC to fulfill their responsibilities dictated by Dodd-Frank. This is clearly at odds with President Obama’s proposed 2012 budget of $308 million for the agency. The President’s’ budget increase would be funded by fees charged to the entities that the agency regulates.
On March 17th, Chairman Gensler took the CFTC’s case before a U.S. House Appropriations subcommittee, where he pleaded for a budget increase saying that “without oversight of the swaps market, billions of taxpayer dollars may be at risk.”