On the one-year anniversary of the passage of Dodd-Frank, regulators are scrambling and the public, including AFP, weighs in.
Over the past few weeks federal regulators have been extremely busy issuing proposed rules, receiving an influx of public comments, and suggesting alterations to implementation dates on a variety of issues addressed in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Dodd-Frank required that agencies issue rules and proposals to address concerns regarding topics such as systemic risk, the regulation of over-the-counter (OTC) derivatives markets, the regulation of credit rating agencies, and the repeal of Regulation Q.
This July marks the one-year anniversary of The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Some regulators “celebrated” by releasing several proposals that will change how our nation’s capital markets are regulated, while other agencies are coming to the realization that they need more time in order to adequately regulate the areas that Dodd-Frank mandated. As many of the deadlines quickly approach, agencies have learned through public comments and analysis from their staff that completing the major tasks directed by Dodd-Frank is not as easy.
PROPOSED RULES FOR PUBLIC COMMENT
In April, the Federal Reserve sought public comments on the repeal of Regulation Q as to whether market participants thought that this change in policy would likely result in a stronger demand for interest-bearing demand deposits.
During the same month, the Commodity Futures Trading Commission (CFTC) proposed rules to establish margin and capital requirements for swap dealers, major swap participants and their counterparties. The CFTC rules explicitly stated that they would not impose margin requirements on non-financial end users and reiterates that Dodd-Frank amended the Commodity Exchange Act (CEA) to require federal regulators to “establish and maintain initial and variation margin requirements for major swap participants (MSPs), swap dealers (SDs), security-based swap dealers (SSDs) and major security-based swap participants (MSSPs).”
Also in April, five additional agencies proposed rules to establish margin requirements—the Fed, the Farm Credit Administration, the Federal Deposit Insurance Corporation (FDIC), the Federal Housing Finance Agency (FHFA), and the Office of the Comptroller of the Currency (OCC). Their proposed rules, required under Dodd-Frank, attempted to outline the amount of margin required for derivatives contracts based on the relative risk of the counterparty of the swap or security-based swap. It is important to note that there is a distinction between the rules being proposed through the CFTC and those being proposed by the prudential bank regulators. Additionally, the proposed rule requires entities to comply with existing capital requirement standards applied as part of their prudential regulation.
In May, AFP submitted comments to the Fed in response to their proposed amendments to Regulation Q, which prohibits the payment of interest on demand deposits by institutions that are member banks of the Federal Reserve System. As a long-time advocate of the repeal of Regulation Q, AFP has served as a leader on this issue for many years and has worked with members of Congress to introduce and pass legislation in previous sessions that address concerns that Regulation Q hampered the ability of American businesses to make effective use of funds on deposit in banks. In its comments, AFP reminded regulators that “as a result of the repeal of Regulation Q, bank deposits could become a more stable source of capital funding for banks.”
In June, AFP submitted official comments to the prudential bank regulators as a result of the request for comment on a proposal to establish minimum margin and capital requirements for certain swap entities. AFP reiterated its continued support for new rules that will govern the regulation of the OTC derivatives market as a result of Dodd-Frank. However, AFP expressed concerns that the most recent proposals to require non-financial end users to post margin was outside of the intent of Congress and therefore in direct conflict with the explicit exemption that was included in the law.
AFP Government Relations Com-mittee Chairman Joe Meek, CTP, and Financial Markets Task Force Chairman Denise Laussade, CTP, wrote: “The intent of Congress is explicitly stated. The non-financial end-user exemption from the mandatory clearing requirement asserts and requires that swaps and security-based swaps involving a non-financial end-user should and must be exempt from initial margin and variation margin requirements for non-cleared swaps and security-based swaps.”
AFP’s comments went on to say that financial professionals are concerned that “the imposition of margin might also mean having to halt hiring and possibly capital investments and as a result, the company may choose not to manage those specific risks that the derivatives products attempt to mitigate.”
Also in June, the CFTC voted unanimously to propose delaying key regulations impacting derivatives and swaps for six months. Title VII of the Dodd-Frank Act establishes a regulatory framework for derivatives and along with the CEA gives the CFTC the flexibility and authority to address the issues relating to the effective dates. The vote approved “would provide relief until December 31, 2011, or when the definitional rulemakings become effective, whichever is sooner, from certain provisions that would otherwise apply to swaps or swap dealers on July 16.”
According to the CFTC, the proposal would temporarily exempt parties from complying with provisions that reference terms such as “swap”, “swap dealer”, “major swap participant,” and “eligible contract participant” because the Commission recogni, zed that the definitions for these terms would not be finalized by the July 16, 2011 implementation date. The approved proposed order exempts parties from the requirements, until the “effective date of the definitional rulemaking for such terms or Dec. 31, 2011—whichever is earlier.”
Additionally, the proposed order approved also addresses provisions of the CEA that will apply to certain transactions (primarily in financial and energy commodities) as a result of the repeal of various exemptions and exclusions in the CEA as of July16, 2011. The approved proposed order temporarily exempts such transactions from certain CEA provisions “until the repeal or replacement of certain commission regulations or Dec. 31, 2011—whichever is earlier.”
Since the debate surrounding financial regulatory reform began in late 2008, AFP has largely focused on the aspects of regulation that directly affect members, such as OTC derivatives regulation, credit rating agencies, and aspects of investor protection and credit rating agencies. AFP’s Government Relations & Public Policy team has carefully monitored the comprehensive efforts in and around Washington and we are pleased that the needs of many financial professionals have been voiced and protected as the bills went from legislation to enacted law.
AFP has been fully supportive of effective regulation and oversight of our nation’s capital markets and we have advocated for disclosure requirements that are responsible and sensible. Further, AFP has been the voice of the profession working with legislators and regulators to ensure that proposed rules and regulations do not stymie fluid capital markets or the ability of businesses to prudently manage risk.
Jeanine Arnett is AFP's director of government relations. Contact firstname.lastname@example.org