Today, the Commodity Future Trading Commission (CFTC) held an open meeting during which it introduced the first in a series of rulemakings under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The proposed rules include:
- an interim final rule relating to the time frame for reporting pre-enactment unexpired swaps to a swap data repository or to the CFTC;
- proposed rules that would prescribe certain financial resources standards for derivatives clearing organizations (DCOs) including DCOs designated as systemically important by the Financial Stability Oversight Council under Title VIII of the Dodd-Frank Act; and
- proposed rules specifying requirements for DCOs, designated contract markets, and swap execution facilities on governance arrangements and mitigation of conflicts of interest.
Pursuant to the interim final rule, swaps that were entered into prior to the enactment of the Dodd-Frank Act will have to be reported to a registered swaps data repository or the CFTC within 60 days of the registration of the appropriate swap data repository. Further, counterparties will need to keep certain data on file pertaining to the swap. The Commissioners unanimously approved the interim final rule, though they did express concern regarding the enactment of the rule prior to defining which entities will be regulated by it. There is a 30 day public comment period before this interim final rule will take effect.
The first of the proposed rules sets financial requirements for DCOs including (1) maintenance of sufficient capital to cover operating costs for one year, (2) use of a formula to calculate the market value of financial resources and (3) the conducting of quarterly stress tests.
The second proposed rule would create governance rules for a number of exchanges and clearinghouses intended to limit conflict of interests. Among the market participants the rule would affect are DCOs, swap execution facilities (SEFs) and designated contract markets (DCMs). The rule would create both structural governance requirements and limits on the ownership of voting equity and the exercise of voting power. With respect to structural governance, the rule would require boards of clearing and trading venues to be comprised of at least 35% of public directors. It also lays out the kinds of committees each entity would have to have, such as disciplinary and regulatory oversight panels.
With respect to voting requirements, the proposal provides for two alternatives. One is a two-pronged approach that would prevent clearing members from individually controlling 20% or more of the voting shares and also prohibit certain financial firms, like banks and swap dealers, from collectively owning 40% or more of the voting equity. The other would restrict both clearing members and financial entities from owning 5% or more of the voting equity. Clearinghouses would have to choose which of those two options they prefer. If neither option is appropriate, a clearinghouse could apply for a temporary waiver.
The CFTC Commissioners’ comments regarding the two proposed rules generally focused on whether they are restrictive enough to meet the equivalent standards proposed by their European counterparts as well as other American regulators such as the SEC. At the same time, they also questioned whether the proposals are too restrictive in that they may limit competition. Nonetheless, they approved both proposed rules (the first rule unanimously and the second rule by a vote of four out of five Commissioners). The Commissioners stressed, however, that public comment would be crucial to finalizing the new rules.