Dodd-Frank pushed back by Volcker and CFTC deadlock

The Dodd-Frank Act has suffered a combination of reverses that mean new rules for US derivatives and prop trading will not be implemented until 2012.
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The Dodd-Frank Act has suffered a combination of reverses that mean new rules for US derivatives will not be implemented until 2012.

Earlier this week it was revealed the Volcker rule, which had been expected to come into force in October as part of Dodd-Frank, appears likely to slide since regulators have not yet agreed a draft proposal of the rule. Although it had been reported a proposal could be imminent, the draft version would still be subject to a public consultation period of around 60 days, meaning the 18 October deadline can no longer be met.

The Volcker rule bans proprietary trading and limits investment in private equity and hedge funds. The rule aims to limit deposit taking institutions' involvement in riskier activities.

The revelation comes quickly after an initial blow struck by US regulator the Commodity Futures Trading Commission (CFTC) last week. Speaking at a public meeting of the CFTC to consider the rules proposed in Dodd-Frank, Gary Gensler, CFTC chairman, said some of the rules will not be taken up until next year, including the final rules related to swap execution facilities. Segregation for uncleared swaps will also be resolved next year, as will rules on documentation, straight-through trade processing and client clearing.

“We are focused on considering these rules thoughtfully, not against a clock,” he said. “We also will continue to reach out broadly to other regulators, both here and abroad, for their input as we consider the many thousands of comments on these rules.”

The first rule proposes a schedule for phasing in compliance with swap clearing and trading mandates. Market participants would be required to comply with a Commission-issued clearing mandate within three, six or nine months, depending on the swap's counterparties. Since this timeline would begin after the effective date of the mandatory clearing determination, i.e. autumn/winter 2011 at the earliest, Gensler also envisioned market participants would not be required to comply with Commission-issued clearing mandates until Q2 next year.

The second proposal is an implementation schedule for previously proposed rules on swap trading documentation requirements and margin requirements for uncleared swaps. The proposed compliance schedule would apply to swap dealers and major swap participants that are registered with the Commission and would allow for a three, six or nine-month compliance timeline, depending on a swap dealer’s counterparty.

The Commission is currently seeking public input on the rules. “As we progress in finishing major rules, we will continue looking at appropriate timing for compliance, which balances our desire to protect the public while providing adequate time for industry to comply with these new rules,” said Gensler.

The revision by Gensler is the latest in a series of setbacks for Dodd-Frank, which had already been delayed to 31 December 2011, from its earlier target date of July 2011. Then in September Craig Donohue, head of Chicago-based derivatives exchange CME Group, attacked the CFTC for failing to take adequate account of the costs and benefits of the proposed rules under Dodd-Frank and called on Washington regulators to delay their implementation.