Dodd-Frank swap rules delayed as CFTC eases transition

Delays intended to 'smooth the transition'

Risk Management Risk Management

The main U.S. derivatives regulator may delay applying some Dodd-Frank Act overseas swaps rules for about six months, part of a wave of last-minute exemptions and postponements designed to ease the shift to new regulations.

The U.S. Commodity Futures Trading Commission may put off compliance for overseas-based operations of U.S. banks including JPMorgan Chase & Co. and Goldman Sachs Group Inc. for some risk-management rules that begin to take effect at the end of the month, according to two people who asked not to be identified because the delay hasn’t been made public. The agency has already released more than 40 letters postponing other parts of Dodd-Frank, and officials have signaled that more are expected in coming weeks.

“We have and will continue to grant requests for phased compliance,” Gary Gensler, CFTC chairman, said in a telephone interview yesterday. Gensler said the delays are designed to “smooth the transition” to new oversight rules.

Dodd-Frank derivatives rules, originally intended to be in place in July 2011, have been delayed as the government seeks feedback on how to bring swaps under its oversight. The regulations will for the first time lead Wall Street’s largest banks to register as swap dealers with the CFTC at the end of the year and will require them to use clearinghouses to settle interest-rate and credit-default trades by mid-March.

The five-member commission has released more than 40 letters since January saying it won’t enforce some of the rules for months -- and in some cases never.

‘Swiss Cheese’

The letters have made the agency’s rulemaking process “resemble swiss cheese,” Scott O’Malia , one of two Republicans on the five-member commission, said in a Nov. 30 speech. “In addition to the rulemaking process, we have in effect been forced to set up a parallel exemptive process to provide relief from these rules,” he said.

The letters give relief to entire industries or specific companies, including JPMorgan, the largest U.S. swaps dealer, and LCH.Clearnet Group Ltd., the world’s largest clearinghouse for interest-rate swaps. Sometimes the letters aren’t released to the public for weeks.

“Maybe four years from now someone will ask why they issued all these no-action letters taking all the teeth out of the law,” Jeffrey Harris, professor of finance at Syracuse University’s business school and former chief economist at the CFTC, said in a telephone interview on Dec. 4. “There needs to be some method and mechanism to go back and revisit these once final rules are in place.”

On the international scope of the rules, Gensler said the agency is debating a phase-in of the regulations to be announced before Jan. 1.

Transparent Transactions

“We’re anticipating that a significant part of the financial reforms will come into place as of Dec. 31 as dealers begin to register and their transactions become known and transparent to the regulators,” Gensler said. “That’s true here in the U.S. and for foreign dealers doing business here more than a de minimis.”

The CFTC is working with overseas regulators on how to reduce the potential for gaps in the rules, Gensler said.

The agency was criticized by non-U.S. regulators after it proposed guidance in June on the international scope of Dodd- Frank rules intended to reduce risk in the $639 trillion global swaps market. The guidance indicates when CFTC regulations apply to foreign-based companies trading with U.S. clients and to branches of U.S. companies trading overseas.

The reach of the rules has prompted opposition from JPMorgan, Goldman Sachs, Bank of America Corp. and Societe Generale SA. Gensler said the cross-border guidance is needed to protect U.S. taxpayers from having to rescue companies whose overseas trades lead to their collapse.

Letters’ Impact

Since mid-October, when new regulations for swap dealers began taking effect, the letters and other guidance have provided a series of changes for clearinghouses, funds and banks. On Nov. 1, the CFTC granted a two-month delay for rules governing segregation of collateral at Chicago-based CME Group Inc., owner of the world’s largest futures exchange, and Atlanta-based Intercontinental Exchange Inc.

Between Oct. 26 and Nov. 29, the CFTC gave 10 banks, including JPMorgan, Goldman Sachs and Barclays Plc., delays in how quickly they must decide to accept or reject trades for clearing. The letters weren’t immediately posted on the CFTC’s website when they were released to banks. The rule was originally supposed to take effect Oct. 1; the banks now have until Jan. 1. Meanwhile, LCH received a delay on a related rule and won’t need to meet CFTC requirements until March 31.

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