The Commodity Futures Trading Commission ("CFTC") and Securities Exchange Commission ("SEC" and, together with the CFTC, the "Commissions") continue to meet with market participants and industry groups and to publish proposed rules and requests for comment related to the implementation of Title VII of the Dodd-Frank financial reform, titled the "Wall Street Transparency and Accountability Act of 2010" (the "Act"). The Act is generally intended to bring the $615 trillion over-the-counter derivatives market under greater regulation. The CFTC, which will have primary responsibility for the regulation of "swaps" (as opposed to "security-based swaps," which will be primarily regulated by the SEC), recently published proposed rules on various topics related to the Act, including: (i) conflicts of interest policies and procedures, registration requirements and governing duties of swap dealers and major swap participants; (ii) matters relating to compliance policies and annual reports for swap dealers and major swap participants; (iii) agricultural swaps; (iv) conflicts of interest requirements for derivatives clearing organizations ("DCOs"), designated contract markets and swap execution facilities; (v) reporting of pre-enactment swaps; (vi) financial resources requirements for DCOs; (vii) the process for review of swaps for mandatory clearing; (viii) the prohibition of market manipulation; (ix) registration of foreign boards of trade; and (x) antidisruptive practices authority.
The Commissions have received numerous comment letters and other input from firms, industry groups and other interested parties in connection with the implementation of the Act. Included in these is a recommendation by the International Swaps and Derivatives Association, Inc. ("ISDA") that the Commissions should grant waivers of mandatory clearing under the Act in limited circumstances where bilateral and/or systemic risk would be reduced, such as where a swap that is required to be cleared hedges the market and counterparty risk of a swap that is not able or required to be cleared. ISDA suggests that, in such circumstances, managing both related transactions on a bilateral basis reduces risk, as the alternative (i.e., clearing one swap through a central clearing facility and managing the other on a bilateral basis) increases risk between the two counterparties as well as in the central clearing facility and the financial system more broadly. Among other things, ISDA notes that, in granting such limited waivers, the Commissions could put in place reporting requirements and waiver limits to ensure that the use of the waivers is not designed to avoid clearing.
Separately, the Securities Industry and Financial Markets Association ("SIFMA") sent a comment letter relating to, among other things, the end-user exemption from mandatory clearing in the Act. An important exemption to clearing exists under the Act if one counterparty to a swap (i) is not a financial entity, (ii) is using the swap to hedge or mitigate "commercial risk" (as such term will be defined by regulators) and (iii) notifies the relevant Commission how it generally meets its financial obligations associated with uncleared swaps. In its letter, SIFMA proposed that "commercial risk" be defined broadly as "any risk incurred by a non-financial entity in connection with its business." In making this recommendation, SIFMA points out that such a definition would be consistent with congressional intent, as reflected in the legislative history, to provide a broad clearing exemption for non-financial entities. It further notes that an exemption limited solely to risks directly related to the production of goods and services, and not also encompassing risks related to financing, would inhibit the ability of end users to enter swaps to decrease risks generated by their commercial activities and, as a result, inhibit their ability to ultimately produce those goods and services.