SIFMA, along with a number of other trade associations, today submitted comment letters to the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) requesting regulatory relief from and legal certainty for a number of derivatives-related provisions of the Dodd-Frank Act that would arguably become self-operative without rulemaking on July 16, 2011.
“For the continued proper functioning of derivatives markets, it is vital that the CFTC and SEC provide this relief and certainty,” said Ken Bentsen, executive vice president, public policy and advocacy, at SIFMA. “We fully support the Commissions’ efforts to phase in the implementation of this new regulatory architecture for derivatives markets and products and believe that a sensible exemptive relief package for these self-operative provisions is consistent with that effort and well within Congress’ intent.”
In the letter to the SEC, the associations noted that a number of provisions related to security-based swaps (SBS) are scheduled to become effective without rulemaking on July 16, 2011. Without exemptive or interpretive relief, market participants will face intractable compliance, interpretive and operational challenges in adhering to these self-operative provisions.
The letter identified five key areas that require resolution before the self-operative derivatives-related provisions of Dodd-Frank should become effective:
- SBS must be defined;
- Definitional and registration rules for SBS dealers and major SBS participants must be adopted;
- Rulemaking on capital, margin and business conduct standards must be completed;
- Antifraud liability must be clarified; and
- Extraterritorial guidance is needed.
Additionally, the letter notes that the most problematic of the self-operative provisions are those that would expand the definition of “security” in the Securities and the Exchange Acts to include SBS. The definitional changes would result in substantial new compliance requirements and implementation challenges that the SBS market is just beginning to understand.
The inclusion of SBS in the definition of security beginning on July 16 raises three key problems:
- Application of regulatory requirements under the securities laws may be virtually impossible to ascertain with any precision because they raise questions concerning, or are related to, issues that will be addressed in rules that are not yet final;
- Application of some of these regulatory requirements will make little sense in the context of SBS and should be permanently exempted. Other provisions will involve significant interpretive issues for which SEC guidance is needed; and
- A number of requirements raise technical or operational hurdles that require more time to surmount. Significant time will be necessary to catalogue the full implications of the inclusion of SBS in the definition of security, and to determine the appropriate next steps.
The associations’ letter to the SEC can be found at the following link:http://www.sifma.org/issues/item.aspx?id=25938
In the associations’ letter to the CFTC, they noted that the CFTC also should also provide relief from the self-operative provisions to avoid unprecedented confusion, potential market disruption and an environment that would not be conducive to the respect for the rule of law that underpins the strength and competitive position of U.S. markets. Specifically, the letter referenced Section 754 of the Dodd-Frank Act as showing Congress’ intent that Dodd-Frank’s statutory and regulatory provisions to come into effect in a coordinated manner.
Some of the provisions of Dodd-Frank that would be affected include:
- Swap dealers and major swap participant registration;
- Advisors to special entities and other business conduct standards;
- Duties of swap dealers and major swap participants;
- Duties of chief compliance officers;
- Segregation of initial margin for uncleared swaps;
- Definitions and registration requirements of swap execution facilities and swap data repositories; and
- Existing Commission registrant categories.
Additionally, the associations request that the CFTC provide interpretative and exemptive relief consistent with the legal certainty provisions of Section 739 of Dodd-Frank. The letter explains that this relief is necessary to prevent uncertainty, and potentially consequential disputes, about what is and what is not a swap or a futures contract.
The associations’ letter to the CFTC can be found at the following link:http://www.sifma.org/issues/item.aspx?id=25937
SIFMA, the American Bankers Association, the Financial Services Roundtable, the Futures Industry Association, the Institute of International Bankers, the International Swaps and Derivatives Association, the Investment Company Institute and the U.S. Chamber of Commerce signed the letter to the SEC.
SIFMA, along with the Futures Industry Association, the Institute of International Bankers, the International Swaps and Derivatives Association, the Investment Company Institute and the U.S. Chamber of Commerce signed the letter to the CFTC.
