According to the SEC/CFTC timeline, the writing of rules for OTC derivatives starts today.
October is the month of ghosts and ghouls and now something equally scary: it’s the month that the Securities & Exchange Commission, in concert with the Commodities Futures Trading Commission, begins finalizing rules on OTC derivatives.
Although corporate treasurers likely won’t be directly impacted by the new rules, or, at least to the extent that banks and other financial institutions are impacted, there are still worries regarding mandates on central clearing and whether corporates will be able to keep their end-user exemption (see related story here) and they could still see the secondary impacts of higher prices for hedging.
The SEC received dozens of comment letters regarding the OTC Derivatives portion of the legislation (and members of the public can still send them in here). Most had a clear message, like this one from a group called the Coalition for Derivatives End Users: “…it is clear that end-users, which engage in swaps transactions in order to hedge risks associated with their businesses, do not pose through their derivatives use the same gravity of risk that is introduced into our financial system by derivatives speculation through dealing and otherwise.” The coalition, which includes Agricultural Retailers Association, Business Roundtable, Financial Executives International and the National Association of Corporate Treasurers among others, went on to say that in fact end-user derivative use “actually reduces risk within companies and redistributes it more efficiently through the financial system as a whole.”
Timeline
The OTC derivative part of Dodd-Frank is known officially as Title VII, and the SEC and the CFTC plan to craft a comprehensive framework for the regulation and adopt rules in a series of actions starting today (Oct 1). This will continue on over the next few months – unfortunately, months that coincide with the midterm elections. While regulators will bend over backwards to prove they are not influenced by the politics, it is still a highly politicized atmosphere in which they will be working.
Ultimately, by July 21, 2011 (the mandated 360 days from signing), the agencies will adopt all the rules hammered out over the preceding months. In October, according to the SEC, the two agencies will mull rules regarding conflicts of interest for clearing agencies, execution facilities, and exchanges involved in security-based swaps, as well as adopt an interim final rule for the reporting of outstanding security-based swaps or those entered into before the enactment of Dodd-Frank.
In the November to December time period, the agencies will address another nine or so aspects of the Title VII, including rules regarding mandatory clearing of security-based swaps and those regarding the end-user exception to mandatory clearing of security-based swaps. Treasuries will want to keep a close eye on how this plays out.
In terms of actual rulemaking of clearing and settlement, the SEC is already working closely with the Fed as well as the CFTC and the new Financial Stability Oversight Council, to develop a new framework for supervision as required by Title VIII of Dodd-Frank. The SEC expects to propose its first set of Title VIII rules in December.