Both the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) were given monumental tasks by Congress in promulgating rules that will shape the Dodd-Frank Wall Street Reform and Consumer Protection Act, the largest overhaul of the financial markets since the Great Depression. Along with the list of rules to write (see "Financial reform from A to Z"), they were both given very tight timetables for actually completing the job. Some rules, such as those pertaining to retail forex, had deadlines as little as 90 days after the passage of the Act. Most have a one-year deadline from enactment.
While some of the recent rules are areas the CFTC already has been studying, Dodd-Frank gave the Commission direction to bring an entire class of previously unregulated products under their rule. "They have an enormous job. They have been asked to create a regulatory system for a whole series of market participants and regulatory categories that didn’t exist before," says Daniel Waldman, partner at Arnold & Porter LLP. "They have to figure out what to require to be cleared, what to be exchange-traded, what new forms of exchange trading really mean and how trades will actually be executed in this new market paradigm."
In addition to this task, both agencies have been working hard to increase transparency in the rulemaking process, just as Dodd-Frank aims to increase transparency in the marketplace. In addition to almost weekly meetings to release rule proposals, the CFTC and SEC also hosted a number of public roundtables to gather public insight into issues. Also, the CFTC has issued advance notices of rulemaking in which they have asked for industry comment on subjects such as disruptive trade practices and anti-manipulation rules.
Considering the task and timetable the regulators have been given, most in the industry are pleased with the progress so far. "I’ve been impressed with the amount of openness shown by both the CFTC and SEC. The fact that they have given some of these time and study makes me applaud them," says Dr. Sharon Brown-Hruska, economist at NERA Economic Consulting and former CFTC commissioner. "I would ask that they slow down a little bit so we have time to digest and comment on what they have put out so far."
Others have been more impressed with the regulators’ commitment to accomplishing the task given to them. "In terms of the timeline, the CFTC and SEC have been pretty impressive. The CFTC grabbed the bull by the horns at the get-go and came out with the list of areas for which it needed to make rules and it has been rolling out proposed rules," says Willa Bruckner, partner at Alston & Bird LLP.
Even since clearing the final legislative hurdles on its way to becoming law, the Dodd-Frank Act has faced challenges and passed those onto the regulators who now must shoulder them, end-users who must wait patiently and a new Congress with many fresh members who oppose the Act.
Regulators are being asked to write rules for a major overhaul of the markets by three standards that normally do not all go together — good, fast and cheap. An old production management axiom says that in any endeavor, you can pick two of those qualifications, but never all three. Congress gave the regulators a task that requires all three qualifications to be met for success. As such, each is an individual challenge and doing the job while meeting all three is an even greater one.
By the nature of the rules being written, they have to be good. "Regulators have to provide a fairly robust justification for the decisions they make," Brown-Hruska says. "It behooves them to do a very well reasoned and careful analysis; otherwise they may be subject to challenge. We’ve seen this at the SEC and even have seen some of its rules thrown out by judges."
Couple stringent dealines with the need for comprehensive, detailed rules, and you have a daunting task. A prime element of this is definitions.
Being new regulations, definitions to incorporate the new swaps market had to be adjusted and whole new ones created. Just to get rules out for comment, the CFTC had to promulgate many of them without formal definitions in place. "In an ideal world, there would have been a better way, but it has an incredible task in a very short amount of time. Congress put this legislation in place, but I’m not sure Congress sat down and realized what an enormous task they were giving the CFTC," Bruckner says. "If the CFTC had sat down to hash out the definitions first before writing all the rules, it may never have met the deadlines imposed on it."