July 24th, 2012
In the summer of 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (also referred to as Dodd-Frank or DFA) was signed into law. With its passage, there will be associated regulatory and compliance changes, with one such clause known as the Volcker Rule, whose final regulation is still in the box. And not only with that clause, but with much of the subsequent regulation to proceed from DFA passage, the regulation is said to be only 1/3 completed.
DFA potentially will dramatically impact the financial services and banking industries, as regulators are granted the powers to review, monitor, and enforce the products and activities of financial institutions. Speaking to this point, in mid-July of 2012, regulatory deliberations provided guidance on the classification of many types of derivative instruments. The CFTC and SEC adopted joint final rules defining the terms “swap”, “security-based swap”, and “security-based swap agreement” while also allocating jurisdiction between agencies for “mixed” swaps. These regulators also excluded other financial products and contracts which would fall outside of what is regulated under Title VII of DFA for what was to be defined as ‘swaps’ that would clear through Central Counter-parties aka “CCPs”. Other than some interim exceptions by way of the SEC for some security based swaps, after their publication in the Federal Register, these rules will become effective in 60 days.
Meanwhile, associated final regulation has establish what is characterized as the “clock” after Federal Register publication of CFTC Title VII final product definition rules for Over-the-Counter (“OTC”) derivatives, and their clearing and management of these exposures. This so-called clock runs for compliance by US swap dealers and non-US swap dealers that have no US swap dealer affiliates or subsidiaries, however again with interim exemptions for aforementioned foreign swap dealers that extend as far out as a year.
All of these have exposures, many often needing legacy systems transformation. All also have produced operating environments needing the consulting of Capital Markets Advisors (“CMA”).
Issues. There are risks for abuse however with these definitions and exemptions and for that reason, Commissioner Chilton voted against the End User Exemption. He said he voted against in part out of fear about the skill of the ISDA members to find loop holes in the rules framework outside of the bona fide definitions attempted to be embodied in the rules. As it were, financial institutions now are facing new and challenging regulatory requirements, for example under DFA that will alter their operations and business unit structures as market makers. As a result, this will have an impact on the trading of OTC derivatives contracts. Thus, a significant component for IT executives in 2012 and going forward will include Dodd-Frank compliance in many technology areas.
