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CFTC Commissioners Chilton and Sommers on Dodd Frank Implementation (with Lofchie Comment)
December 13, 2012

CFTC Commissioners Bart Chilton and Jill E. Sommers (Chair of the Global Markets Advisory Committee) delivered testimony on the status of Dodd-Frank before the U.S. House of Representatives Committee on Agriculture Subcommittee. 

Commissioner  Sommers shared her view on the challenges facing regulators across the globe in trying to meet the commitments on over-the-counter (OTC) derivatives reform made by G20 Leaders in 2009 as well as the challenges presented in interpreting the cross-border scope of Dodd-Frank. In particular, Sommers highlighted five areas which need further exploration, according to several regulatory leaders across the globe. These areas are:

  • the need to consult with each other prior to final determinations regarding which products will be subject to a mandatory clearing requirement and to consider whether the same products should be subject to the same requirements in each jurisdiction;
  • robust supervisory and cooperative enforcement arrangements to facilitate effective supervision and oversight of cross-border market participants, using IOSCO standards as a guide;
  • reasonable, time-limited transition periods for entities in jurisdictions implementing comparable regulatory regimes that have not yet been finalized and clear requirements on cross-border applicability of regulations;
  • preveningt the application of conflicting rules and minimize the application of inconsistent/duplicative rules; and
  • continued development of international standards by IOSCO and other standard setting bodies.

Commissioner Chilton testified that there were some flaws in the manner that the CFTC had handled the October 12 "deadline," which had resulted in the CFTC issuing numerous no-action letters at the last minute (or later in some cases).  In this regard, Commissioner Chilton stated:

"We do not want to repeat the process we--and the markets--underwent in October. In that instance, market participants were unclear what things would truly be required on the October 12th compliance date. We ended up working it all out, but it should have, and could have, been done in a more open and streamlined fashion. We need to avoid that now as we approach January 1, 2013 implementation of certain rules and regulations. This would give markets and participants time to comply with the new regulatory environment and also would provide assurance to global markets and regulators that we are not causing unnecessary market disruptions."

Commissioner Chilton stated, as to the CFTC's ability to issue no-action letters so as to avoid deadlines, "And we've shown that we can be flexible in implementation content and timing. The result is that during these delays, the rest of the world, and particularly the European Union, has caught up to us. It now appears that E.U. regulations will be implemented in a matter of months after U.S. rules may be finalized, as opposed to the two years originally envisioned."

To avoid a repeat of the October disruption at the end of December, Commissioner Chilton made the following recommendations for further delay and for limiting the scope of U.S. rules:

  • extend the narrower, territorial definition of U.S. Person used in the CFTC’s October 2012 staff no-action letter;  [see link to this below]
  • U.S. and foreign SD/MSP registrants would have interim relief from compliance with external business conduct standards, and during the interim period, should operate under a “good faith” compliance standard;
  • allow non-U.S. dealers to not register when facing registered U.S. swaps dealers;
  • provide relief as to the swaps dealing aggregation standard.

Lofchie Comment:    First off, once a member of the majority party of the CFTC anounces that there has to be a six-month delay in rule implementation, it is incumbent to follow through quickly on an official announcement of this delay.  Certainly, the market expects it to be announced. 

Even leaving aside the implied promise (or suggestion) that there will be a delay, it is my general sense that there are numerous respects in which neither financial nor commercial entities are ready to go "live" with Dodd-Frank on December 31st.  Further, many of those not ready to go live also have to do their Christmas shopping, recover from Sandy and watch the Patriots/Niners game, making it bascially  impossible to be done by the "deadline"-even if we actually knew what rules were going to go live on that date, which we don't.  On top of this, there is the problem that firms generally stop revising their internal IT near the end of the year, which means that the further threat of all these last minute changes creates a great risk of computer glitches (the regulators ought to be bear in mind everything that went wrong with technology this year).  On top of that more, there is an expectation that there will be a ongoing flow of no-action letters providing for "time-limited" and narrow relief, which means that no one can be certain which of the impossible deadlines they should focus on achieving.  Against this background, I simply am not sure what "good faith" means?  If firms don't cancel everyone's Christmas vacations so as to implement Dodd-Frank compliance processes, are they in good faith?

My suggestion is that the CFTC Commissioners should commend their staff for a heroic job of attempting to implement Dodd-Frank faster than any other regulator in the United States or elsewhere in the world.  In spite of this great attempt, it has simply become clear that to everyone that one relatively small domestic regulator adopting and going effective with  swap rules piecemeal just did not work in the context of an immense global financial system.  Accordingly, the CFTC should determine to coordinate with the SEC and to follow the same approach that the SEC is following: to present the U.S. public (and the rest of the world) with one complete set of rules that can be understood, and commented upon, as a whole.

As to the delay that this may cause, I note that Commissioner Chilton indicates that the United States is only a few months ahead of the rest of the world in adopting a scheme of swaps regulation.  Well, then, let's take a holiday break and let the rest of the world catch up.  Otherwise, my prediction is that U.S. firms are going to be operating at a very significant disadvantage in global competition, with all the damage that will do to the U.S. economy. 

I am also going to comment on one of Commissioner Chilton's specific proposals:  non-U.S. swaps dealers should not be required to register as a result of the business that they do with U.S. registered swap dealers.  YES!!  This is such an obvious necessity that it is hard for me to believe that it is coming up this late in the game.  Unless one wants to put a significant crimp in global commerce, there has to be a way for global financial institutions to do business with each other across national lines without all of them registering with the CFTC.   

View Sommers' speech; Chilton's speech (links externally to CFTC website).
See also:  News Item Regarding CFTC October No-Action Letter as to Definition of US persons (with Lofchie Comment) (I note that the dissatisfaction with regulatory process that I expressed in the October comment to that news item still seems accurate, even if one wishes it were outdated).