Worries mount about arbitrage opportunities, the status of the corporate exemption and the timing of implementation.
The Commodity Futures Trading Commission and the Securities and Exchange Commission plan to hold a joint public roundtable on May 2 and 3 to discuss implementation of Dodd-Frank’s swaps provisions. The meeting will offer an opportunity to voice concerns about the timing of implementation, the status of the corporate exemption and the potential for both international and possibly domestic regulatory arbitrage.
According to the commissions, the roundtable will address:
- compliance dates for new rules for existing trading platforms and clearinghouses and the registration and compliance with rules for new platforms, such as swap and security-based swap execution facilities, and data repositories for swaps and security-based swaps;
- compliance dates for new requirements for dealers and major participants in swaps and security-based swaps;
- implementation of clearing mandates;
- compliance dates for financial entities, such as hedge funds, asset managers, insurance companies and pension funds subject to a clearing mandate and other requirements; and
- considerations with regard to non-financial end-users.
The meeting comes amid worries about the level of domestic and international coordination in the regulation effort. On the domestic front, Risk magazine reported on April 20 that Mary Schapiro, chairman of the SEC, said there would be differences in the way the SEC and CFTC regulated the swaps that fall under their separate jurisdictions. “Going into this, the desire of both agencies was to minimize the differences between our approaches,” Risk quotes Schapiro as saying. “While we have proposed some things that are different, some of that is driven by the fact they’re different products and trade differently.”
Jurisdictional questions have plagued the two agencies in the past where both claimed oversight of different derivatives with a common underlying, say, stock. But such a gray area is more of an immediate concern for corporates now that the CFTC is pressing for the ability to oversee even supposedly exempt bilateral corporate transactions. (See Prudential Regulators Dampen End-User Hopes) “The SEC has made no significant noises on that front,” says one corporate counsel, “so we’re hoping that it doesn’t cede too much to the CFTC.”
Meanwhile the Financial Stability Board issued a report on April 15 (OTC Derivatives Market Reforms Progress Report on Implementation) that warned of international regulatory arbitrage opportunities if national regulators did not bring their rules into line with G20 proposals. Differences over the necessity of a hard leverage limit, countercyclical capital buffer and other important aspects of regulation are still being discussed. Such arbitrage opportunities might be exploitable by intrepid corporates in the short term (as they have for years with, for example, the 364-day revolver), but the instability such inconsistencies would bring to the derivatives market could be disruptive in the longer term.