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Swap dealers have eyes on Dodd-Frank dates
July 16, 2012 / 7:59 PM / 5 years ago

Swap dealers have eyes on Dodd-Frank dates

July 16 (IFR) - Swap dealer compliance teams are expecting the finalization of 11 separate Dodd-Frank rules in the month of October alone and are beginning to wonder how missed compliance dates will be treated by US regulators.

Failures to comply with many of the rules slated for October could still avoid major sanctions from the Commodity Futures Trading Commission (CFTC) given the complexity of the overall compliance regime, said Don Thompson, managing director and associate general counsel at JP Morgan in New York.

But one particular rule, relating to external business conduct standards, includes a “right of rescission”, which means that a counterparty can actually rescind a swap if their dealer counterparty is not in compliance with the standards.

On Tuesday, the CFTC, in a further rule-making concerning the definition of “swap”, added a concept that has elevated the level of concern surrounding external business conduct standards. In explaining the rule-making, the Commission implied that dealers’ swap obligations will need to be extended not only to their counterparty, but also to any guarantor of their counterparty, such as a parent company.

That could mean that the right of rescission is potentially extended to the guarantor of any swap counterparty, an additional headache amid a wave of compliance concerns.

“Until the CFTC ‘addresses the practical implication of this interpretation’, as they have stated in their fact sheet, I have no idea what to do about this additional interpretation,” said Thompson.

“We would hope that as many of the rules are finalised through the third quarter and (as) the industry tries to comply, there will be some degree of regulatory leniency. But now we have a rule that’s being extended beyond its original scope, and that’s concerning.”

Additionally, end-users that are guarantors for an affiliate may have to consider whether or not they will have to add the exposure of their affiliates’ swap to their own exposure. That could mean many parent companies will be put in further danger of crossing the “swap dealer” or “major swap participant” threshold, said Evan Koster, a partner at Hogan Lovells in New York.

For example, a company might qualify for an exemption or safe harbor from such designations in connection with the swaps it directly enters into. But if the same company has to include the exposures of an affiliate that it guarantees, the company may then cross the threshold and have to register with the CFTC under more onerous regulatory designations.

“It would all be do-able and understandable if we were only doing one swap a day,” said Thompson. “But we’re talking about thousands of swaps across thousands of counterparties. So trying to hit several moving targets all around the same time will be very difficult.”

Last week the CFTC published its final rules for the definition of a swap, which means the compliance clock has begun ticking. Market participants now have 60 days to be in compliance with registration requirements as a swap dealer or major swap participant, which sets off a domino effect for the rest of the rules, said Koster.

The CFTC could still apply another delay, he explained, but the publication all but confirms that a swath of compliance dates will be set from the middle of September to the end of October.

The rules expected to be finalized in October include, but are not limited to, definitions for how and when swaps need to be reported to the public, how clearing members must operate their risk management infrastructures, and position limits for futures and swaps.

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