As the original date for Volcker rule compliance passes, further clarity is still needed over the looming regulatory landscape Dodd-Frank is finally poised to create two years on from drafting.
The Dodd-Frank Wall Street Reform and Consumer Protection Act’s second anniversary is 21 July, also the initial compliance date for the so-called Volcker rule ban on prop trading by deposit-taking financial institutions. However, the date has been rendered meaningless by a succession of delays to the rule, brought on by a domino effect by the drafting process.
In April, the Federal Reserve and other regulatory agencies provided big banks with guidance in response to concerns they had to comply with the July 2012 statutory deadline. Now banks will have at least until July 2014 to fully conform to Volcker.
The Commodity Futures Trading Commission (CFTC) and Securities Exchange Commission (SEC) were criticised for drafting versions of the Volcker rule that were overly complex. Regulatory agencies are yet to publish their final rule, but industry commentators speculate that not a lot of respite will come banking’s way when they do.
“All along this process, regulators have been pretty true to their original intentions,” said one senior industry researcher in the private sector. “Volcker might be simplified or streamlined, but I don’t think there will be any great changes to what they intended covering in the first place.”
At the same time, the approval this month by the SEC and the CFTC of swap definitions and clearing exemption rules will trigger a landslide of Dodd-Frank rules on reporting, clearing, trading and record-keeping to come into effect.
According to law firm Davis Polk, the timing of the swap definitions now mean position limits for some futures and swaps could come into play as early as 14 September, while some customer clearing documentation, timing of acceptance for clearing and clearing member risk management rules could begin by 1 October.
Meantime, confusion has surfaced over whether or not dealers would be able to offer discounted clearing services to win swaps execution flow.
According to TABB Group director of fixed income research Will Rhode, buried as a footnote to the final rule on 'Swap dealer and major swap participant recordkeeping, reporting, and duties', the CFTC has revealed quietly that it “generally would not view as ‘improper’ making available discounted clearing services in connection with trading activities, provided that the business trading unit personnel comply with applicable prohibitions and restrictions on their interactions with the clearing unit”.
“This regulation was designed to establish firewalls between research and trading and between clearing and trading,” wrote Rhode. “Yet this footnote would appear to negate the need for any firewall between execution and clearing.”
Rhode characterised the revelation as “music to the ears of the large swap dealers who will be able to win execution flow on the back of their powerful clearing businesses”.