During the past four years, the Commodity Futures Trading Commission (“CFTC” or the “Commission”) has substantially expanded its regulatory reach and flexed stronger enforcement muscles. Since 2010, the CFTC has dramatically increased its annual enforcement action totals, and has imposed record high financial penalties on significant market participants. In 2011 and 2012, the CFTC filed at least 201 enforcement actions, almost as many as the past five years combined, and has already recovered approximately $1.8 billion in total sanctions. As CFTC Chairman Gary Gensler has stated, “Dodd-Frank expands the CFTC’s arsenal of enforcement tools. We will use these tools to be a more effective cop on the beat, to promote market integrity, and to protect market participants.” Notwithstanding budgetary constraints, the next four years are likely to show continued emphasis on expanded enforcement efforts as the agency implements its new rules. This post focuses on the CFTC’s new rulemakings and how Title VII has increased the CFTC’s power to create and police the derivatives markets.

I. Expanding the CFTC’s Enforcement Actions

Over the past two years, the agency has hit record levels of enforcement actions and civil penalties imposed. Figure 1 below details the types of enforcement actions that the CFTC has brought from 2006 through 2012, as well as the total amounts of monetary penalties it recovered during each fiscal year.

…continue reading: The Changing Landscape of the CFTC’s Enforcement Actions

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) enacted a new regime of substantive regulation of over-the-counter (“OTC”) derivatives under U.S. securities and commodities laws. Over the course of 2013, many key provisions of Dodd-Frank are being implemented by the Commodity Futures Trading Commission (the “CFTC”) with respect to “swaps.” While many of the regime’s requirements focus on “swap dealers” (“SDs”) and “major swap participants” (“MSPs”), commercial entities that enter into OTC derivatives transactions to hedge or mitigate risk, referred to as “end users,” will also become subject to a wide range of substantive requirements.

In particular, end users will need to:

…continue reading: Navigating Key Dodd-Frank Rules Affecting Swaps End Users

The New Era of Swaps Market Reform

This hearing is occurring at an historic time in the markets. The CFTC now oversees the derivatives marketplace — across both futures and swaps. The marketplace is increasingly shifting to implementation of the common-sense rules of the road for the swaps market that Congress included in the Dodd-Frank Act.

For the first time, the public is benefiting from seeing the price and volume of each swap transaction. This post-trade transparency builds upon what has worked for decades in the futures and securities markets. The new swaps market information is available free of charge on a website, like a modern-day ticker tape.

For the first time, the public will benefit from the greater access to the markets and the risk reduction that comes with central clearing. Required clearing of interest rate and credit index swaps between financial entities begins next month.

For the first time, the public will benefit from specific oversight of swap dealers. As of today, 71 swap dealers are provisionally registered. They are subject to standards for sales practices, recordkeeping and business conduct to help lower risk to the economy and protect the public from fraud and manipulation. The full list of registered swap dealers is on the CFTC’s website, and we will update it as more entities register.

…continue reading: CFTC’s Progress on Wall Street Reform

Introduction

In the wake of the financial crisis, both the U.S. and the EU have enacted legislation to regulate the “over-the-counter” (“OTC”) swaps market and are in the process of adopting implementing rules that will make such legislation fully effective. In the U.S., Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted on July 21, 2010, provides for the regulation of the swaps market and grants to the Commodity Futures Trading Commission (the “CFTC”) and the Securities and Exchange Commission (the “SEC,” and with the CFTC, each a “Commission” and together, the “Commissions”) broad authority to regulate the swaps market and its principal participants. In the EU, the European Market Infrastructure Regulation (“EMIR”) is expected to become effective during 2013 and will create a regulatory framework for the swaps markets in all EU member states.

…continue reading: Implications of New U.S. Derivatives Regulations on End-Users of Swaps

This posting, the December 2012 Davis Polk Dodd-Frank Progress Report, is one in a series of Davis Polk presentations that illustrate graphically the progress of the rulemaking work that has been done and is yet to occur under the Dodd-Frank Act. The Progress Report has been prepared using data from the Davis Polk Regulatory Tracker™, an online subscription service offered by Davis Polk to help market participants understand the Dodd-Frank Act and follow regulatory developments on a real-time basis.

In this report:

• As of December 3, 2012, a total of 237 Dodd-Frank rulemaking requirement deadlines have passed. Of these 237 passed deadlines, 144 (61%) have been missed and 93 (39%) have been met with finalized rules.
• In addition, 133 (33.4%) of the 398 total required rulemakings have been finalized, while 132 (33.2%) rulemaking requirements have not yet been proposed.
• Although no rulemaking requirements were met in November, there was a flurry of regulatory activity in the form of no-action relief and other guidance, particularly by the CFTC with regards to Title VII implementation.

On November 16, 2012, the Secretary of the Treasury issued a much awaited determination that foreign exchange (“FX”) swaps and FX forwards should not be regulated as swaps under the Commodity Exchange Act for most purposes, including registration, mandatory clearing and trade execution, and margin. As was the case in the proposed determination, FX derivatives other than FX swaps and forwards, such as FX options, currency swaps and non-deliverable forwards, are not covered by the exemption and would be regulated as swaps.

FX swaps and forwards will be subject to swap data repository trade reporting requirements applicable to swaps and to historical swaps. They will not be subject to “real-time” trade reporting requirements, however. Furthermore, the Commodity Futures Trading Commission’s enhanced anti-evasion authority will apply to FX swaps and forwards. In addition, swap dealers and major swap participants transacting in FX swaps and forwards must comply with “business conduct standards” contained in Section 4s(h) of the Commodity Exchange Act and implementing regulations. [1] These include the external business conduct rules, which impose on swap dealers and major swap participants various due diligence, fair dealing and disclosure obligations, certain heightened obligations when dealing with “special entities” and, in the case of swap dealers recommending swaps or swap trading strategies, suitability obligations. They also include the CFTC’s internal business conduct rules relating to diligent supervision. Finally, in discussing enhanced business conduct standards applicable to FX swaps and forwards, the final determination cites to the CFTC’s recently finalized rules on swap confirmation, portfolio reconciliation, portfolio compression and trading relationship documentation, which were adopted in part pursuant to Section 4s(h).

…continue reading: Treasury Issues FX Swap and FX Forward Exemption

The days of the opaque swaps market are ending. On October 12, 2012, we are shifting to a new era of transparency and commonsense rules of the road for the swaps market.

New Era — Swaps Market Reform Becomes a Reality

During the Great Depression, President Roosevelt and Congress put in place similar rules to bring transparency to the securities and futures markets, and protect investors from fraud, manipulation and other abuses.

These critical reforms of the 1930s are at the foundation of our strong capital markets and many decades of economic growth.

Swaps emerged in the 1980s to provide producers and merchants a means to lock in the price of commodities, interest rates and currency rates. Our economy benefits from a well-functioning swaps market, as it’s essential that companies have the ability to manage their risks.

The swaps marketplace, however, has lacked the necessary transparency to best benefit Main Street businesses and common-sense rules to protect the public.

…continue reading: The New Era of Swaps Market Reform

Wayne’s World

How many people here are not from Chicago or the Chicagoland area? It’s great to see you here. For those of you from the area, we all know the city of Aurora—the second largest city in Illinois. Most of you, and I’m sure a lot of others here, recall the movie Wayne’s World based upon the Saturday Night Live sketch? From a location near to us now, in that Aurora basement, long-haired Wayne Campbell and Garth Algar (played by the comedic masters Mike Myers and Dana Carvey) filmed their weekly low budget public-access Cable 10 television show, Wayne’s World. At the beginning and end of their show, and at various points Wayne plays a chord on his Fender Stratocaster and the duo sing, “Wayne’s World, Wayne’s World, party time, excellent.” That’s their “go to” when they get excited or there is a lull in conversation.

Well, there won’t be too many lulls in our conversation today, and I really am very excited to be with you—party time, excellent.

So, game on! Before we talk technology and about those wily high frequency cheetah traders—those fast, fast, fast speed traders out there nearly all of the time trying to scoop up micro dollars in milliseconds, I want to speak about Dodd-Frank.

The Status Gladys

It doesn’t matter if you’re an algo trader, a cheetah, a pit trader, an investor or a consumer—you want to know the rules of the road when it comes to financial reform.

It has been four years since the economy tanked and more than two years since Dodd-Frank became law. There are almost 400 rules to craft under Dodd-Frank. Overall, the regulators working to implement the new law have been slow. Most of the rules were to be completed within a year. That means the law called for almost everything to be completed by July of 2011. Of the 398 regulations that need to be finalized, only 131 are done. That’s a mere 33 percent. We’re not worthy. We’re not worthy.

…continue reading: Deciphering Chaos

This posting, the October 2012 Davis Polk Dodd-Frank Progress Report, is one in a series of Davis Polk presentations that illustrate graphically the progress of the rulemaking work that has been done and is yet to occur under the Dodd-Frank Act. The Progress Report has been prepared using data from the Davis Polk Regulatory Tracker™, an online subscription service offered by Davis Polk to help market participants understand the Dodd-Frank Act and follow regulatory developments on a real-time basis.

In this report:

• As of October 1, 2012, a total of 237 Dodd-Frank rulemaking requirement deadlines have passed. Of these 237 passed deadlines, 149 (62.9%) have been missed and 88 (37.1%) have been met with finalized rules.
• In addition, 127 (31.9%) of the 398 total required rulemakings have been finalized, while 136 (34.2%) rulemaking requirements have not yet been proposed.
• This month, the CFTC Final Rule on Position Limits was vacated in a decision of the U.S. District Court for the District of Columbia.

People often complain and ask why nobody went to prison for taking a wrecking ball to the economy. Well, what was done didn’t break the law. Don’t get me wrong, there were many violations of the law, but these weren’t the actions that sent economies into the gutter. That is changing, but has not changed yet.

I am also asked frequently, if we are safer today than when the markets melted down in 2008. Sure we are, but we’ve got a long way to go. Could what happened in 2008 happen today? Unfortunately, yes, because regulators throughout the world have not approved and or implemented financial reforms to ensure that there is some control over markets.

Mario Andretti, the famous Italian racecar driver, used to say, “If everything seems under control, you just aren’t going fast enough.” Well, I do not believe we are under control in financial markets, but I do not think we are going fast enough on financial regulatory reforms. We need to move fast, fast, fast.

Let’s discuss exactly that: what we need to do and doing it faster.

…continue reading: Under Control