On Tuesday 14 June 2011 the Commodity Futures Trading Commission (CFTC) voted unanimously to issue a Proposed Order providing temporary exemptive relief with respect to Dodd-Frank requirements that may apply to certain "agreements, contracts, and transactions." See Proposed Order at 6. The text of the Proposed Order is available.
Pursuant to Section 754, Dodd-Frank's derivatives provisions will "take effect on the later of 360 days after the date of the enactment of this subtitle or, to the extent a provision of this subtitle requires a rulemaking, not less than 60 days after publication of the final rule or regulation implementing such provisions of this subtitle." For the purposes of the Proposed Order and Section 745, the CFTC split Dodd-Frank's derivative provisions into four major "categories." Category 1 contains provisions that "require a rulemaking," and thus will not become effective on 16 July 2011. Category 2 provisions "reference terms that require further definition" such as "Swap," "Swap Dealer," and "Major Swap Participant," and will otherwise become effective on 16 July 2011. Category 3 provisions "repeal provisions of current law" and will otherwise become effective on 16 July 2011. And Category 4 contains provisions for which the CFTC is not proposing exemptive relief and will become effective on 16 July 2011.
The Proposed Order exempts only Category 2 and 3 provisions (i.e., provisions that reference a term that requires a rulemaking and provisions that repeal parts of the Commodity Exchange Act (CEA)).
Generally, Category 1 provisions are those relating to the registration and duties of Swap Dealers and Major Swap Participants (SDs and MSPs, respectively), the operation of Swap Execution Facilities (SEFs), capital and margin requirements for SDs and MSPs, SD and MSP business conduct rules, the end-user exception, the operation of Swap Data Repositories (SDRs), whistleblower "bounty" provisions, and the reporting and recordkeeping requirements. Because these provisions will not become effective until at least 60 days after the CFTC issues a final rule, the CFTC decided not to provide exemptive relief. A list of Category 1 provisions is available.
Category 2 provisions are self-executing provisions of Dodd-Frank that reference terms contained in the entity or products definitions proposed rules (e.g., Swap, Swap Dealer, Major Swap Participant, and Eligible Contract Participant, etc.). This exemption will last until 31 December 2011 or until the rule containing the relevant term is finalized, whichever is earlier. The exemptive relief will apply "only with respect to those requirements or portions of such provisions that specifically relate to such referenced terms." See Proposed Order at 9.
There are three Category 2 provisions for which the CFTC cannot, by the terms of Dodd-Frank, provide exemptive relief. See id. at 9 n.15. The first relates to the duties and designation of a Chief Compliance Officer for SDs and MSPs. The second is a SD's requirement to segregate customer funds for uncleared swaps. Finally, the CFTC cannot provide exemptive relief from the provision that prohibits a Derivatives Clearing Organization (DCO) from clearing swaps without being registered. According to the CFTC staff, either the Commission or staff will be providing a no-action letter or other form of relief to ensure that no enforcement actions will be taken against market participants for failing to comply with these provisions.
The Category 3 exemption generally relates to transactions in exempt or excluded commodities that were previously exempted or excluded under the CEA as amended by the Commodity Futures Modernization Act of 2000, such as financial and energy commodities transactions. Specifically, the Category 3 exemption is for transactions previously exempted by CEA Sections 2(d)(1), 2(d)(2), 2(g), 2(h)(1)-(2), 2(h)(3)-(7), 5d, and 2(e). See Proposed Order at 12-13. The Dodd-Frank Act repeals these provisions effective 16 July 2011. The CFTC notes that Part 35 (and Part 32) of the CFTC's regulations will continue to be available for market participants, "until such time as it may be withdrawn, amended, or replaced by the Commission." See id. at 13, 14 n.36. Thus, the Proposed Order will exempt these previously exempted transactions from certain provisions of the CEA until the CFTC repeals or replaces Part 35 or Part 32 of the CFTC's regulations, or until 31 December 2011, whichever is earlier. Because Part 35 generally covers "non-standardized, non-cleared, non-exchange traded transactions," the CFTC is proposing to also exempt transactions that otherwise would comply with Part 35 but are standardized, traded on multilateral transaction execution facilities, or are cleared. See id. at 15.
Some of the significant Category 4 provisions for which the CFTC will not be providing exemptive relief include:
- The Federal Energy Regulatory Commission (FERC)-CFTC MOU;
- The FERC Jurisdictional Provisions;
- The Grandfathering Provisions of Section 2(h) of the CEA;
- DCO Core Principles and Designation of a Chief Compliance Officer;
- Designated Contract Market (DCM) Core Principles and Designation of a Chief Compliance Officer;
- Anti-disruptive Practices Authority;
- Legal Certainty for Swaps; and
- Whistleblower Protection from Retaliation.
A list of Category 4 provisions is available.
Notably, the Proposed Order does not:
- Limit the CFTC's ability to pursue fraud and manipulation;
- Alter the implementation schedule of any proposed rule;
- Change the CFTC's current regulatory authority regarding futures, options on futures, and retail FX transactions;
- Apply to any Dodd-Frank provision or regulation that is, or will become, currently effective (including the interim final rules on recordkeeping and reporting); and
- Limit the CFTC from issuing any additional exemptions under Section 712(f) of the Dodd-Frank Act, which allows the CFTC to issue other exemptions to prepare for final implementation of the Act.
The Proposed Order will be open for comment for 14 days from its publication in the Federal Register. It has not yet been published in the Federal Register. The CFTC anticipates voting on the Final Order during its next rulemaking meeting on 7 July 2011.
The CFTC announced five additional rulemaking meetings to consider the issuance of final rules—7 July, 19 July, 4 August, 8 September, and 22 September. Notably, Chairman Gensler stated that the CFTC anticipates issuing its final anti-manipulation rule in July and the final Swap Execution Facility rule in August.
Also, on 15 June 2011, the Securities Exchange Commission (SEC) issued an order providing temporary exemptive relief for security-based swaps. A copy of the SEC's order is available.