Despite mounting criticism of new derivatives rules, the US Commodity Futures Trading Commission (CFTC) will not be deterred from implementing the Dodd-Frank Act before the year is out, according to Sean Owens, director, fixed income and derivatives at US financial consultancy Woodbine Associates.
The CFTC is currently writing rules for exchange trading and central clearing of standardised OTC derivatives contracts. However earlier this month, 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 its proposed rules under the Dodd-Frank Act. Describing the new financial rules as “legally unsound”, Donohue called on Washington regulators to delay their implementation.
While acknowledging that Donohue's comments are unlikely to be the last expression of dissatisfaction with the rules, as well as the timeline for implementing them, Owens believes that regulators will push ahead regardless.
“Given the large number of rules required, it is not surprising that the level of analysis is not comprehensive,” he said. “I would expect to see a myriad of legal challenges to certain parts of the new law. Yet the reality is, many of them are driven more by a desire to delay implementation. These initiatives will not succeed.”
The CFTC has already voted to delay the effective date of new US derivatives rules, which had previously been expected in July, until 31 December. Furthermore, in June, US trade body the Securities Industry and Financial Markets Association warned that Dodd-Frank would subject securities-based swaps to old securities laws, potentially introducing new additional compliance requirements that could pose a problem for banks unsure of the exact rules. The letter requested a delay of six months on the July deadline.
Additionally, the Financial Services Committee of the US House of Representatives voted through a bill on the 25 May 2011 which extended the deadline for implementing Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act to 30 September 2012, with the exception of regulatory reporting rules and the definition of the certain terms mentioned above. But Owens points out that the political significance of the new rules is such that the regulators “will want to be seen to have succeeded” in delivering change before the end of the year.
The CFTC is expected to vote later this week to decide when the market must comply with the new rules, as well as how documentation and margining requirements would be phased in once those rules are finalised. The organisation is also considering a timeline for mandatory clearing and trading implementation rules.
US and European regulators have come under attack in recent months for a lack of coordination over a perceived lack of coordination on derivatives reform. New rules in Europe have been delayed until later this month at the earliest, following disagreements between politicians and member states over issues including the scope of derivatives to be covered and the power of national authorities.