Accounting and Regulation: Stays of Execution from the CFTC, SEC

Both regulators offer relief from Dodd-Frank derivative rules deadline; questions remain. 

Both the Commodity Futures Trading Commission and the Securities & Exchange Commission this week tried to offer some clarity and specifically some relief to the looming Dodd-Frank deadlines related to derivatives – so called Title VII section of the rules.

The CFTC was the first regulator out of the gate when on Tuesday it voted to provide “temporary exemptive relief” for swap market participants from the July 16, 2011 Dodd-Frank effective date. The proposal was somewhat convoluted and loaded with footnotes (see the Federal Register note here). Its purpose of course was to offer some “legal certainty,” although many uncertainties remain. In organizing its proposal, the CFTC grouped the provisions of Title VII into four broad categories:

1. provisions that, by their terms, do not take effect without the adoption of implementing rules;
2. self-effectuating provisions that include references to terms that require further definition;
3. self-effectuating provisions that do not reference terms requiring further definition and that repeal current provisions of the Commodity Exchange Act (CEA); and
4. other self-effectuating provisions.

The CFTC’s proposal would provide relief for categories 2 and 3 with categories 1 and 4 taking effect either on July 16 or upon the effective date of the applicable final implemented rules — which can be no earlier than 60 days following their adoption. In the “category 2″ provisions, the CFTC, relying on Section 4(c) of the Commodity Exchange Act (CEA) for its authority, will give exemptive relief to provisions that reference the terms “swap,” “swap dealer,” “major swap participant, or “eligible contract participant.” And here is one of the questions observers have: the CFTC hasn’t finalized the definitions of what swap dealers and major swap participants are. As for “category 3” provisions, the CFTC relief measures would temporarily exempt specified OTC transactions in excluded or exempt commodities.

The CFTC said the relief to the Dodd-Frank deadline will expire on December 31, 2011 or earlier in the event that the definitions are finalized before that date. It should be noted that not all CFTC commissioners were happy with the year-end date. Commissioner Scott O’Malia, in voting for the proposals, called the December date arbitrary and added that a six-month timeline “is not sufficient to provide for a seamless transition until final Commission rules are implemented.” Further, he said in remarks at the June 14, CFTC meeting, “until the Commission sets forth a comprehensive sequence for the final rulemakings or an exemptive relief that expires upon rule implementation, it can provide no assurances to market participants. This will leave market participants in November with the same questions that they have today.”

In underscoring his stance, Commissioner O’Malia pointed to the SEC’s plans, which provide exemptive relief until the final rules it’s circulating become effective.

The SEC’s rules do take a looser or broader approach, the details of which it released on June 15. The SEC’s guidance “makes clear that substantially all of Title VII’s requirements applicable to security-based swaps will not go into effect on July 16.” Further, it said in a statement, the Commission’s action “also grants temporary relief from compliance with most of the new Exchange Act requirements that would otherwise apply on July 16.”

Both the CFTC and the SEC are now seeking input from the public on their actions. For the CFTC, public comments should be received by July 1, 2011; for the SEC, it’s July 6.