Understanding Dodd – Frank and How Eco + Risk Markets Can Help
July 2011
Background and Key Drivers for CFTC Rulemakings
On July 17, 2010, the US Congress passed the Wall Street Reform and Consumer Protection Act (“Dodd – Frank”). Since that time, the Commodity Futures Trading Commission (CFTC) has begun a relatively rapid process of publishing rules, policies and procedures to establish an operating and regulatory framework for derivatives market activity across the five (5) major asset categories for which it has oversight (interest rates, foreign exchange, credit, equity and commodities). Through its rules promulgations the CFTC has communicated its core objectives as follows:
“Providing for the registration and comprehensive regulation of swap dealers and major swap participants;”
“Imposing execution and clearing requirements on standardized derivative products;” and
“Creating rigorous recordkeeping and real-time reporting regimes.”
Since November 2010, there have been thirty (30) teams of CFTC officials working on new rules to amend the Commodity Exchange Act (CEA) for reform of the derivatives market. That said, the Dodd- Frank mandated enactment date of July 16, 2011 will not be met. During a recent public hearing in June, the CFTC granted temporary exemptive relief from provisions subject to a rulemaking which include key terms and definitions of: swap, swap dealer and major swap participant. Despite potential funding constraints, we believe that there is a commitment among the majority of CFTC Commissioners to establish rules for registered entities, markets and other functional entities by early in Q4 (October), to achieve a new operating framework by year-end.
How Can Eco + Risk Help
We believe that there are key aspects of CFTC rulemakings that require attention ahead of enactment including reporting requirements for “Historical Swaps” and therefore there is a need for market participants to identify potential compliance requirements.
Eco + Risk can help by providing a comprehensive and practical approach to readiness ahead of an anticipated year end enactment date. Our deep backgrounds in derivative products through both transaction structuring, origination and risk management processes helps our clients achieve a practical and cost efficient path to readiness.
Specifically our approach for market participants would include the following:
- Identify key CFTC rulemakings with direct and indirect impact on transacting activities.
- Provide a “roadmap” for compliance tailored to transacting activities, with emphasis on:
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- Reporting, Record Keeping, Data Retention and Retrieval Requirements
- Hedge Policy and compliance for End-User Exception (if applicable)
- Transaction (Enabling) Documentation
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- Provide a “roadmap” for compliance tailored to existing and prospective transacting activities and reporting capabilities including discrete steps that should be undertaken to align procedures, processes, policies and controls with CFTC requirements.
- Identify certain potential indirect or “knock-on” commercial impacts of the new Dodd-Frank rules; particularly as they pertain to the obligations and compliance requirements of registered counterparties (capital and position limits), liquidity management, market depth and connectivity.
Our deliverable is a report detailing procedures and recommendations to support the company’s post-enactment transacting activities as outlined by the rules and procedures issued by the CFTC. Recommendations would address each identified implementation gap, with a priority ranking, clearly defined benefits, applicability to operating environment and estimated effort to complete.