In light of the impending July 16, 2011 effective date for certain derivatives provisions of the Dodd-Frank Act and the number of swap rulemakings that have not been finalized, both the CFTC and the SEC issued guidance regarding the effective date of various statutory and regulatory requirements for swaps. The CFTC issued a proposed exemptive order, requesting public comments by July 1, 2011. Although the SEC issued a final exemptive order effective June 15, 2011, public comments were requested on the guidance and the temporary relief granted. Under the Dodd-Frank Act, the derivatives provisions that do not have a designated effective date will become effective on the later of (1) where rulemaking was required, not less than 60 days after publication of a final rule, or (2) where rulemaking was not required, July 16, 2011 (the “self-effectuating provisions”).
CFTC Guidance. The CFTC proposed order categorizes the derivatives provisions of the Dodd-Frank Act as (1) provisions requiring a rulemaking; (2) self-effectuating provisions that reference terms requiring further definition; (3) self-effectuating provisions that do not reference terms requiring further definition and that repeal provisions of current law; and (4) self-effectuating provisions for which relief is not being proposed. The CFTC notes that the proposed order reserves the CFTC’s anti-fraud and anti-manipulation enforcement authority. The proposed order states that the provisions in categories 1 and 4, which are listed on the CFTC’s website, are outside of the scope of the proposed relief and will take effect on July 16, 2011.
With respect to category 2, the CFTC proposes to exempt persons or entities from complying with requirements of the Commodity Exchange Act (“CEA”) that go into effect July 16 and that refer to one or more terms requiring further definition, including “swap,” “swap dealer,” “major swap participant” or “eligible contract participant.” The proposed relief would apply only to those requirements or portions of such provisions that specifically relate to the referenced terms. The proposed relief would extend to the earlier of the effective date of rules defining such terms or December 31, 2011. The proposed order notes that the CFTC’s authority to issue exemptive relief may not extend to certain category 2 provisions, and that the CFTC staff is considering whether to issue a no-action letter regarding these provisions.
With respect to category 3, the CFTC proposes to expand the current derivatives exemption under Part 35 of the CEA to replace the CEA exemptions for swaps and other transactions that are being repealed effective July 16. The proposed temporary relief would exempt certain transactions in exempt or excluded commodities from the CEA if the transaction would otherwise comply with Part 35, notwithstanding that: (1) the transaction may be executed on a multilateral transaction execution facility; (2) the transaction may be cleared; (3) persons offering or entering into the transaction may be eligible contract participants as defined in the CEA prior to July 16; (4) the transaction may be part of a fungible class of agreements that are standardized as to their material economic terms; and/or (5) no more than one of the parties to the transaction is entering into the transaction in conjunction with its line of business, but is neither an eligible contract participant nor an eligible swap participant as defined in the CEA, and the transaction was not and is not marketed to the public. The proposed relief would extend to the earlier of the repeal or replacement of Part 35 or Part 32 of the CEA or December 31, 2011.
SEC Guidance. The SEC order provides guidance and temporary relief with respect to the July 16 effective date for certain Dodd-Frank Act provisions relating to security-based swaps. The SEC order identifies those provisions requiring rulemaking for effectiveness, including those that are dependent on such rulemaking, and states that such provisions will go into effect not less than 60 days after publication of a final rule. The SEC order also notes that a number of the Dodd-Frank Act provisions relating to security-based swaps apply only to “registered” persons and that until the registration processes have been established by final SEC rules and such persons have become registered pursuant to the rules, they will not be required to comply with the provisions. The SEC order also identifies those provisions that are self-effectuating and states whether temporary relief has been granted with respect to the provisions, or, if temporary relief was not granted in the order, whether the SEC will consider requests for relief from compliance with the provision. The SEC order states that the temporary relief will expire upon the adoption of related final rules and the compliance dates specified in the related final rules.
The SEC order also states that on July 16, security-based swaps will become “securities” subject to the general anti-fraud and anti-manipulation provisions of the federal securities laws. In response to market participant comments, the SEC order notes that the SEC intends to separately address requests for relief from certain provisions of the federal securities laws that will impose new obligations on counterparties to security-based swaps in connection with the expansion of the definition of security.
Additionally, the SEC order provides temporary relief from Section 29(b) of the Exchange Act, which may act to void a contract made in violation of any provision of the Exchange Act, or the rules thereunder. The SEC order temporarily exempts any security-based swap contract entered into on or after July 16 from being void or considered voidable by reason of Section 29 of the Exchange Act because any person that is a party to the security-based swap contract violated a provision of the Exchange Act that was amended or added by the Dodd-Frank Act and that has been determined to not be effective as of July 16.