January 13, 2011

CFTC Approves Dodd-Frank Rules on Derivatives

Public comments sought on proposals to regulate derivatives, swap trading

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Members of the Commodity Futures Trading Commission (CFTC) approved two rules proposed by the Dodd-Frank Act to regulate position limits for derivatives and swap trading relationship documentation requirements for swap dealers and major swap participants at an open meeting Thursday morning.

Originally the meeting was intended also to consider the adoption of a final rule that addresses requirements for derivatives clearing organizations, designated contract markets and swap execution facilities regarding the mitigation of conflicts of interest, but because of disagreement over its effectiveness—some felt it went too far, and others that it did not go far enough—it was withdrawn from the agenda.

Gary Gensler (left), chairman of the CFTC, conducted the hearing, and in opening statements, the members indicated their support or concerns for the measures. Commissioner Michael Dunn termed position limits a “cure for a disease that does not exist,” although he said he would support the rule in the quest to gather information. Scott O’Malia called the position points of additional monitoring a “Trojan horse,” while Gensler and Bart Chilton both voiced support for the rules; Chilton added, “We have to put something in place.” Jill E. Sommers did not support the proposals.

The commissioners posed questions to Sarah Josephson, attorney advisor and team lead for the business conduct standards team, and to Ananda Radhakrishnan, director of the division of clearing and intermediary oversight, over the way the proposed regulations were worded and how those wordings were arrived at. They also questioned Dan Berkovitz, general counsel, on several aspects of legality.

While all members in the end voted in favor of the proposals so that they would be submitted for public comment, a question to Radhakrishnan about whether the CFTC staff would be excessively burdened by the reporting requirements involved in regulating swap trading documentation brought a very direct answer.

I am appalled,” Radhakrishnan said, “that our elected representatives would give us the responsibility and not the money to do it. I think what we will do is to have discussions with the National Futures Association.”

He added that all swap dealers had to register with them, and said they would have to make a determination on who would have primary responsibility for examining swap dealers. Pointing out that the continuing resolution that funds them runs out in March and that they don’t yet know the level of funding they will have going forward, he said, “If we don’t get extra money, and I don’t believe we will, then I think the National Futures Association will have to bear the brunt of examination.”

The next meeting is scheduled for Jan. 20, at which time additional rules will be introduced.

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