CFTC Chair Pledges to Reform Dodd-Frank Rules
Commentary by Steven Lofchie
CFTC Chair Michael S. Selig identified several Dodd-Frank-era regulations he called unworkable and ripe for overhaul, pledging to replace a patchwork of temporary no-action letters with permanent rulemaking.
In an address before the International Swaps and Derivatives Association ("ISDA,") criticized several Dodd-Frank implementing regulations as overly burdensome and in need of reform. On swap data reporting, he pointed to the ownership and control reports ("OCR") rule as containing requirements that have prevented compliance for years, with the industry twice filing rulemaking petitions seeking fixes, yet firms are still operating under temporary no-action relief rather than permanent solutions. He similarly flagged the error correction and error notification requirements as disproportionately costly relative to their benefits, and called for a formal materiality threshold to be codified through rulemaking rather than maintained through staff no-action letters. On swaps trading, he he said that swap execution facilities ("SEFs") have been required to offer Order Book functionality for Permitted Transactions despite over a decade of evidence that there is virtually no appetite for it, and that package transaction trading rules have similarly been propped up by repeated no-action relief rather than resolved through proper rulemaking.
Mr. Selig outlined a regulatory agenda centered on reducing these burdens, advancing tokenization, and harmonizing CFTC and SEC rules.
On swap data reporting, Mr. Selig directed staff to address the long-standing problems with the OCR rule through notice and comment rulemaking. On swaps trading, he said the CFTC would codify existing relief exempting SEFs from the order book requirement for Permitted Transactions.
On margin for uncleared swaps, Mr. Selig said the CFTC plans to finalize a 2023 rule proposal expanding eligible collateral to include money market fund shares and giving newly seeded funds up to three years before initial margin requirements apply. The CFTC also issued an exemptive order allowing the FICC and the CME to extend their cross-margining arrangement to customers ahead of the Treasury clearing mandate.
On harmonization, Mr. Selig said the CFTC and SEC plan to issue joint requests for comment on portfolio margining and swap data reporting as a first step toward joint rulemaking, with the longer-term goal of allowing a single platform to offer cross-jurisdictional products under one regulatory framework. He noted that global notional outstanding in derivatives markets exceeded $1 quadrillion for the first time, and that the CFTC oversees approximately 35 percent of that activity as the world's largest derivatives regulator.
Mr. Selig also endorsed the Federal Reserve Board, the FDIC, and the OCC release of the revised Basel III Endgame capital proposals, saying the revisions better align regulatory capital with actual risk and reduce burdens on client clearing, agriculture and energy end-users, and swap dealers.
Commentary
Chair Selig's proposals to roll back some of the Dodd-Frank provisions regulating derivatives would be a good first step, with more to come. He may want to consider rolling back the registration requirement for "major swap participants," a provision to which no entity is subject and never will be because it would make no sense to subject large end-users (for example, pension plans) to the same requirements that would be applicable to a swap dealer.
Somewhat more meaningfully, the CFTC and the SEC should revist the jurisdictional treatment of quanto swaps and compo swaps on securities on denominated in dollars, but where the swap payment is due in dollars. A quanto swap, where the relevant exchange rate if fixed at the initiation of the trade, is treated as only regulated by the SEC; whereas a compo swap, where the exchange rate floats with market rates, is treated as regulated by both the SEC and the CFTC. The regulatory treatment should be reversed.
No doubt a solicitation of industry and market comments would be well received.