Monday, June 13, 2011

House Ag Chairman Lucas Asks CFTC to Clarify Issues around July 16 Effective Date of Title VII of Dodd-Frank

Ahead of the CFTC public meeting to consider the effective date of Dodd-Frank derivatives provisions, House Agriculture Committee Chair Frank Lucas (R-OK) asked the Commission to respond to a series of questions centered on resolving the uncertainties as the July 16, 2011 date approaches when as many as 175 provisions of Title VII of Dodd-Frank could arguably automatically take effect. In a letter to CFTC Chair Gary Gensler, Chairman Lucas noted that some Dodd-Frank derivatives provisions will become effective before the regulations establishing a comprehensive oversight regime have been adopted.

Market participants are concerned that the CFTC’s failure to identify which Dodd-Frank provisions take effect on July 16 and which will not has already raised a multitude of legal and pragmatic questions and complexities. Chairman Lucas said that there is a potential for substantial market disruption.

Despite its best efforts, noted the Ag Chair, the CFTC will not complete any, let alone all, of its Dodd-Frank regulations by July. While commending the CFTC for acknowledging that it is more important to get the regulations right than to comply with an illusory deadline through a rushed and incomplete process, Chairman Lucas emphasized the important issues that must be addressed because of the uncertainty regarding which Title VII provisions take effect on July 16, 2011 and which do not because they relate to regulatory proposals currently under consideration by the CFTC.

Specifically, Chairman Lucas asks the CFTC to consider how the agency intends to address the lack of legal certainty for swaps contracts and the legal status of market participants on July 16. For example, noted the Ag Committee Chair, once the swap definition is effective on July 16, any person engaged in soliciting or accepting orders for swaps must then be registered with the CFTC as an introducing broker.

Swaps were added to the introducing broker definition by Dodd-Frank. Section 4d(g) of the Commodity Exchange Act makes it unlawful for any person to be an introducing broker unless registered with the CFTC. Chairman Lucas asks the CFTC if any entity that solicits or accepts a swap order on or after July 16 will be required to be registered with the CFTC as an introducing broker. He also queries if Dodd-Frank’s definition of swap will be effective on July 16 or deferred until the CFTC has completed its rulemaking with the SEC to implement that definition.

More broadly, Chairman Lucas asks if the CFTC is coordinating with the SEC to ensure that the SEC and CFTC are responding in a consistent and equivalent manner. He also asks what actions the CFTC can take to ensure that transactions and market participants are not exposed to unnecessary risk.

New CEA Section 4s(a)(1) as amended by Dodd-Frank requires swap dealers to register with the CFTC, noted Chairman Lucas, and no CFTC rules are required to implement that requirement. He thus asks if entities will be required to register with the CFTC as swap dealers on July 16.

Section 754 of Dodd-Frank ties the effectiveness of statutory provisions to the effective date of regulations that must be finalized in order to facilitate compliance with such provisions. Chairman Lucas asks the CFTC how it plans to proceed in light of Sec. 754 to ensure an orderly implementation of Title VII.

On May 23, a petition was submitted to the CFTC by several trade associations representing suppliers of electric power seeking exemptive relief under Section 723(c)(1) of Dodd-Frank to allow these businesses to continue to rely on the exemptions in Section 2(h) of the Commodity Exchange Act come July 16. Section 723(c)(1) applies only to CEA Sec. 2(h), noted Chairman Lucas, but Section 723(a)(2) preserves the CFTC’s authority in Section 4(c) of the CEA allowing the CFTC to exempt swap transactions from Dodd-Frank compliance. Chairman Lucas asks if the CFTC will use this authority to provide exemptive relief for market participants and transactions operating under Sections 2(d) and 2(g) of the CEA.

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