New regulations: Clear as mud

When the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law last month, we ran a poll question on our website asking whether it: a) ends "too big to fail," b) doesn't end "too big to fail," or c) is a full employment act for lawyers. Most of those who responded chose option c, and from the looks of things at the Futures Industry Association's financial reform forum in Chicago yesterday, they were right. The forum was packed with lawyers who will be very busy over the next year as new rules stemming from the legislation are put in place. Their discussion on the new rules was complicated and mind-numbing, and it seemed like the only certainty at this point is that there are many UNcertainties.

The forum kicked off with a few words from David Blass, associate general counsel at the Securities and Exchange Commission and Ananda Radhakrishnan, director of clearing at the Commodity Futures Trading Commission (CFTC).  Blass said that the timeline for reconciling rules is uncertain, that more staff resources and funding from Congress was required and called rulemaking "an immense undertaking in a short amount of time." Both had a positive outlook on the coordination that would be required between the two agencies to implement the rules, with Blass admitting it was a "challenge" to coordinate but said "it's going well."

Other participants weren't quite so optimistic. Kenneth Rosenzweig, partner at Katten, Muchin, Rosenman, said he was concerned about "the ability of regulators to act in a coordinated fashion," citing past hiccups on issues that required agency cooperation, like single stock futures and portfolio margining.

Major complications of the new rules include new categories for swaps and swap dealers and rules regarding swap execution facilities, which many panelists point out have not yet been defined, making rule writing that much more complex. New capital requirements and margin issues will affect business for futures commission merchants(FCMs). Dennis Klejna, assistant general counsel at  MF Global, said that the FCM business will change based on how attractive it will be to clear certain contracts, and in theory, FCM business should be enhanced, but that's not certain because capital requirements and margin issues are still undetermined.

Rita Molesworth, partner at Willkie, Farr & Gallagher, noted that new regulations would make things more expensive for traders. Alessandro Cocco, associate general counsel for J.P. Morgan, agreed, saying, "There's a point when you can drive costs up so much that you take participants out of the market. Finding a balance is important."

Klejna said the hardest parts of the law to implement would be capital and margin requirements and position limit requirements. The CFTC's previous efforts to establish position limits in energy have now been pushed back due to a mandate in the law requiring position limits in all products, which Klejna called "complex to achieve and provocative within the industry."

Also still on the table are the CFTC's new rules for forex, including the proposal to reduce leverage to 10:1. The agency is scheduled to issue final rules on Oct. 19. Daniel Driscoll, COO at National Futures Association, said he wasn't sure how the "controversial" parts of the proposal (likely meaning the 10:1 leverage rule) would be resolved.

One panelist called Dodd-Frank the most significant change in the futures industry since the Commodity Futures Modernization Act of 2000, and the complex decisions regarding the new rules make it hard to disagree. One thing's for sure: on the regulatory front, it's going to be a very interesting year.

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