Regulatory Watch: CFTC Swap Rule Delay Means Business as Usual for Now

Just ahead of the July 16 deadline, the CFTC issues a delay for derivatives market. 

Knowing it isn’t anywhere near completion of its rule writing for its (hefty) part of the Dodd-Frank financial regulation, the Commodity Futures Trading Commission on July 14 finalized an order temporarily delaying the effective date of new derivatives rules.

The purpose of the CFTC delay was to provide temporary relief for the OTC derivatives market from certain provisions in Title VII of the Dodd-Frank Act. The rules were to go into effect on July 16, 2011 but now will be pushed out to December 31, 2011 or the earlier of the effective dates of the final rules.

“This order enables the commission to continue its progress in finalizing rules,” Gary Gensler, CFTC chairman, said in a statement. According to Chatham, the order affects only a subset of provisions in Title VII, specifically:

1. Those that do not require a rulemaking but that reference one or more terms regarding swap entities or instruments that the Dodd-Frank Act requires to be further defined and;
2. Those that will or may apply to certain agreements, contracts, and transactions in exempt or excluded commodities as a result of the repeal of existing exemptions and exclusions by the Dodd-Frank Act.  The provisions that require rulemaking – including provisions concerning central clearing, trading, reporting, and margin – are unaffected by the new Order. 

The most relevant provision for end users of derivatives, Chatham wrote in a note to clients, is the limitation of participation provision in Section 723 of Title VII, which states that firms that do not meet the current definition of an eligible contract participant, but that relied upon the CFTC’s Policy Statement Concerning Swaps Transactions (aka the “line of business exemption”), would not be permitted to enter into OTC derivatives after July 16, 2011.  But with the new Order, the effective date for the Limitation of Participation provision is now postponed to the earlier of the effective date of the rule further defining the terms “swap,” “swap dealer,” “major swap participant,” or “eligible contract participant” or December 31, 2011. 

This means that firms that do not have total assets or net worth sufficient to meet the current definition of an eligible contract participant, can continue to rely upon the “line of business” exemption in order to enter into OTC derivatives, Chatham wrote. That is, at least until the effective date of the final rule in which the term “eligible contract participant” is further defined.  Though not an official deadline, many expect the CFTC to complete its final rule on the definitions, including “eligible contract participant,” by the end of the year. 

Chatham also cautioned that clients should be aware that the CFTC may choose to expand the definition of an eligible contract participant in its final rule.