A group of associations including American Bankers Association, ABA Securities Association, The Clearing House Association L.L.C., Financial Services Forum, Financial Services Roundtable, Futures Industry Association, Institute of International Bankers, International Swaps and Derivatives Association, Investment Company Institute, Managed Funds Association, and Securities Industry and Financial Markets Association submitted a letter on comment periods and implementation of new derivatives regulations to CFTC and SEC.

Swaps and other derivatives are important financial tools used by asset managers, insurance companies, banks, and the vast majority of the largest commercial and industrial companies to manage risk. Derivatives play an important role in the economy. The markets for these products are large and diverse, with rules and conventions governing trading activity that have developed over decades. Thus, it is important that the Securities and Exchange Commission (“SEC”), Commodity Futures Trading Commission (“CFTC”) (together, the “Commissions”), and other agencies writing the new regulatory rules develop those rules through a process that is deliberative, gives all affected parties a reasonable opportunity to comment (and have their comments be given thoughtful consideration), and implements those rules in a manner that gives market participants sufficient time to do the work necessary to comply with new requirements being imposed on them. 

The associations appreciate that Dodd-Frank imposes short and strict deadlines by which each agency must adopt various rules and that many of these concern activities and products that are complex and new to regulatory oversight. They commend the SEC and CFTC for their diligence and dedication with regard to this unprecedented rulemaking endeavour. They believe, however, that the Commissions should consider making certain changes in the rulemaking process, as discussed below. 
Specifically, there is a concern that the order in which rules are being published for comment makes it difficult for many firms to know whether they should submit comments on particular rules, and also to determine what the substance and extent of their comments should be. The timing of the issuance of these rules is problematic because the Commissions have only recently (in open meetings of the CFTC on December 1 and the SEC on December 3) addressed the terms “swap dealer” and “major swap participant” in proposed regulation. Without guidance as to the scope of these definitions, some firms – in particular, smaller firms – were (and are) uncertain whether they should comment on the rules that apply to swap dealers and MSPs, because they did not know whether these rules would apply to them. Preparing comment letters requires significant time and expense and firms are reluctant to incur the cost of commenting unnecessarily. To give all possibly affected parties an opportunity to comment on relevant proposed rules, we recommend the CFTC and SEC extend the comment deadlines for rules that utilize terms that were not defined when the rules were published so that those comment deadlines are at least no earlier than the deadlines applicable to the rules defining the terms. 

There are also concerns about a process that provides for provisional registration of entities prior to adoption of final rules defining the various categories of registrants and establishing their respective obligations. A more logical sequence would first adopt definitions for the different regulated entities, then requirements for such entities, and finally registration of such entities. Such a sequence would better serve both market participants and the public. 

With respect to the implementation process for new rules, the associations are concerned that market participants will be asked to do too much in too short a time. They agree with other commentators who have observed that application of Dodd-Frank’s clearing and execution provisions across the full or a broad range of different types of swaps within a relatively short period would likely impose a compliance burden with which market participants, and in particular dealers, simply could not comply. Further, mandating the implementation of reporting requirements in the same short period as implementation of clearing and execution requirements increases the likelihood that market participants will be unable to comply. Their only alternative would be to stop entering into the transactions for which compliance is not immediately possible, thus leaving segments of the market with diminished or possibly no liquidity. This could have significant adverse consequences for the customers that rely on these products and it would be inconsistent with the risk reduction goals of Dodd-Frank. To implement a complex new regulatory structure without adequate time to adapt, prepare, and test systems also could lead to an ineffective or poorly designed reporting, clearing, and exchange infrastructure, which also would impair liquidity, and lead to higher costs, increased risk, and other adverse consequences. 

Implementing clearing and execution requirements without thoroughly analyzing the ability of particular asset classes to absorb the changes carries a number of other risks as well. Clearing, for example, is an extraordinarily complex undertaking that requires significant adaptation to existing (and development of new) technology systems, operational infrastructure, and legal arrangements between parties. As new clearinghouses proliferate and compete, the early-mover advantage may entice some clearinghouses to start clearing products before they are truly ready from an operational standpoint. Problems are likely to develop, and significant disruption of the markets for certain asset classes can be expected. Similar problems are likely to arise with trade execution requirements, where liquidity considerations should play a primary role in driving implementation timeframes. In all of these instances, premature imposition of new rules can, and likely will, lead to increased risks for markets and market participants. 

The CFTC has demonstrated its willingness to use its regulatory discretion under Dodd-Frank to address impossible or impractical requirements. For example, in establishing the effective date for interim reporting of pre-enactment swaps, the CFTC noted that although the legislation imposed reporting requirements that became effective upon enactment of Dodd-Frank, there are no registered data repositories to accept the data, nor is the CFTC ready to accept it. Accordingly, the CFTC provided in its interim final rule that the obligation to report such transactions would not become effective until the compliance date for reporting under section 2(h)(5) of the Commodity Exchange Act or “within 60 days after a swap data repository becomes registered . . . and commences operations to receive and maintain data related to such swap, whichever occurs first.” It is important for the CFTC, SEC, and other agencies to utilize their discretion in this manner where it is appropriate, including situations where the demands placed upon regulated entities would make it impossible or impractical for them to comply in accordance with the most restrictive time limits provided in the legislation. 

Full letter