Thursday, June 02, 2011

Futures and Securities Industry Groups Ask CFTC to Repropose Dodd-Frank Derivatives Regulations

The futures and securities industry have asked the CFTC to repropose the proposed regulations implementing the derivatives provisions of the Dodd-Frank Act in a manner reflecting the incorporation of prior public comments, and then allow for a final comment period for all the rules in their entirety that runs from the date of the last proposed rule. In a letter to the CFTC, SIFMA and the Futures Industry Association said that by providing market participants with the opportunity to comment more meaningfully on the new regulatory structure, the Commission will be better able to draft effective final rules and ensure that it has used a process providing for the least possibility of unintended consequences, adverse market impact and anti-competitive impact while still achieving the objectives of Dodd-Frank. The letter was also signed by the US Chamber of Commerce, ISDA, and the Financial Services Roundtable. A similar letter was sent to the SEC.

The letter is in response to the CFTC’s action re-opening and extending comment on proposed rules as published in the Federal Register May 4, 2011 and further regarding the process by which the Commission will finalize its proposed rules establishing a comprehensive new framework for the regulation of swaps under Title VII of the Dodd-Frank Act. While appreciative of the CFTC’s recognition of the need for additional comment and feedback, the industry groups believe that the proposed extension is inadequate to ensure a timely implementation of the Title. Rather, the FIA and SIFMA urged the Commission to repropose the CFTC proposed regulations, along with an implementation timetable and guidance on the extent of their extraterritorial application, to allow an additional comment period after the rule proposals have been amended to reflect comments received.

The industry groups noted that the process for finalizing the CFTC proposed rules is critical and market participants should have an opportunity to review and comment on revised versions of the rules, and their interdependencies, prior to implementation. . Historically, an iterative approach to rulemaking has been taken when regulations have an unusually large impact on market structure and participants. Allowing for more than one round of comments helps ensure that market participants can more fully assess the implications of new regulations in their entirety.

As an example of this, the associations pointed to the SEC’s adoption of Regulation NMS. After the initial release of proposed Regulation NMS, the Commission held public hearings, sought supplemental comments, and re-proposed the entire Regulation NMS for additional comment. In the view of the industry groups, Title VII of Dodd-Frank requires the Commission and market participants to implement regulatory changes on an even larger scale, an undertaking meriting a more considered review than is possible with only one round of proposed rules.

In order to ensure that the substance of the final rules works efficiently as a whole, said the letter, it is essential that market participants have an opportunity for additional review to comment on the entire framework as envisioned by Congress in Title VII. The industry groups endorsed Professor Hal Scott’s recommendation that the Commission decide a sequence for issuance of final rules, re-propose the entire set of rules, along with plans for implementation, and permit another round of comment on the substance of the proposed set of rules. See testimony of Hal Scott, Director of the Committee on Capital Markets Regulation and Professor and Director of the Program on International Financial Systems at Harvard Law School, before the House Agriculture Committee (April 13, 2011).

Despite the deadlines imposed by Congress in the Dodd-Frank Act, said the letter, it is clear that many members of Congress believe that the Commission should take any necessary additional time to solicit more feedback. The groups noted, in this regard statements by Chairman Conaway and Rep. Goodlatte at the House Committee on Agriculture, Subcommittee on General Farm Commodities and Risk Management hearing (April 13, 2011). Also cited was an April 15, 2011 letter from 24 Democratic Congressmen to regulators emphasizing that the importance of the rule-making process be thorough so that it ends up with the right result.