Dodd-Frank: Summary of rule-making progress so far

As regulators approach the end of the Dodd-Frank rule-making period, Energy Risk details the proposals so far and considers what lies ahead for the new regulatory regime. By Peter Madigan with additional reporting by Pauline McCallion

Paper chase - Dodd-Frank Act

The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010 fired the starting gun on what has become an intense and fast-paced effort to reform US derivatives trading. Legislators gave the regulators charged with fleshing out the legislation - the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) – a year to complete the process.

Although this deadline will not be met, proposed rules have so far been issued in all but two of the 31 areas of rule-making outlined at the start of the process. With portfolio margining and the Volker Rule still to be dealt with, the CFTC has emphasised the need for market participants to begin to consider the full impact on their businesses and the market that these new rules could have, not just individually but as a full and, hopefully, coherent body of regulation.

The speed and order of rule-making since enactment of the legislation last July has been a constant source of concern for market participants. Many players remain worried about their ability to keep up with the pace of rule-making from the regulator and how that will affect their ability to comply with the new regime further down the road. And of course, the fear of unintended consequences due to rushed rule-making continues to hang over the entire process, with many concerned that the regulator has not had enough time to consider the full impact of every rule individually, as well as the overall regulatory system.

In a bid to assuage such concerns, the CFTC approved a proposal on April 27 to reopen or extend the comment periods for a significant number of proposed Dodd-Frank Act rules for 30 days, until June 3, giving the public more time to consider each rule and post comments (see table). Speaking about the extension at the most recent CFTC rule-making meeting, which was called to consider the fourteenth set of proposed rules under Dodd-Frank, chairman Gary Gensler said the extension would also give the public "the opportunity to review the whole mosaic of rules".

The fourteenth meeting saw the proposal of rules covering capital and margin requirements, as well as product definitions. CFTC commissioner Michael Dunn made the point that "in a perfect world" the definitions would have been among the first rules proposed so that regulated entities would have some idea of what constitutes a swap before considering other rules related to swap market regulation.

Commissioner Jill Sommers also voiced concerns about implementation at the meeting, casting doubt on the CFTC's internal process for issuing final rules. "The process for issuing proposed rules was rushed, and in my view, was guided by meeting the tight deadlines set by the statute," she said. "There was often insufficient time to fully consider the implications of all aspects of some proposals, particularly when we were getting revisions the night before a vote, and sometimes the morning of a vote."

Arguing that the CFTC should be guided by policy, not deadlines, Sommers said final rules changed at the last minute should not be called up for a vote and she called for a meeting schedule with sufficient time for serious internal consideration of the other commissioners' thoughts on proposals and those of CFTC staff and the public.

But, as Dunn said at the meeting: "This is not a perfect world and the Commission is doing what it can, when it can, with the resources we have."

Although comment periods for several major elements of the new regime such as position limits have now closed, the regulators will not issue final rules until public comments have been analysed by CFTC staff. Then the final piece of the puzzle will relate to the sequence for implementation of the rules, something the CFTC and SEC have been eager to gather public comment about.

A two-day roundtable on implementation phasing held by the CFTC and the SEC in May invited attendees from companies such as Shell Energy, Barclays Capital and the Chicago Mercantile Exchange to discuss registration for clearing entities and data repositories, swap dealers (SDs) and major swap participants (MSPs) among others, as well as issues such as transaction processing and data reporting and dissemination, in a bid to develop a reasonable timetable for Dodd-Frank implementation.

Speaking at the roundtable event, Robert Cook, director of the division of trading and markets at the SEC, outlined the scope of the regulatory challenge in "seeking to transition a large existing market that developed outside the scope of any significant regulatory restrictions or requirements to a new paradigm of comprehensive regulation". He emphasised the need for market participants to understand, and comment, not only on the rules themselves, but on the sequence in which they are enforced. "Our job is to sort through the complexities and interdependencies and to determine how best to use our tools so that the transitions will occur in a logical, integrated, and cost-effective manner without causing market dislocation or creating other unintended consequences," Cook said. "Clearly, we need your help in this effort."

The tables (see PDF for full tables: 541kb) provide a summary of progress so far in terms of Dodd-Frank rule-makings and the closing dates for public consultation on each proposal.

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