Dodd-Frank Act Rulemakings - End-User Update

Dodd-Frank Act Rulemakings - End-User Update

This commentary provides an overview of the status of significant rulemaking developments since the enactment of the landmark Dodd-Frank Wall Street Reform and Consumer Protection Act. It focuses on important issues facing end-users of derivatives and notes where the proposed rules would affect the derivatives activities of financial entity end-users and commercial entity end-users differently.

Excerpt:

This Legal Alert provides an overview of the status of significant rulemaking developments since the enactment of the landmark Dodd-Frank Wall Street Reform and Consumer Protection Act (D-F Act) this past summer, with a focus on those rules that will have an impact on end-users of derivatives. This paper addresses some of the important issues facing end-users and notes where the proposed rules would affect the derivatives activities of financial entity end-users and commercial entity end-users differently. As used herein, financial entities consist of entities that are not themselves swap dealers but are engaged in activities such as banking, insurance, or investing (e.g., insurers, hedge funds, mutual funds, commodity exchange-traded funds, energy traders and other investment entities). Commercial entities include manufacturers, energy firms, utilities, consumer products companies and service providers.

  • Definitions of Swap Dealer and Major Swap Participant - Will you fall into these definitions?
  • Definition of Swap - When will a "swap" be defined? This is key to the applicability of Title VII, including: (1) the determinations of who is a swap dealer or major swap participant; (2) what transactions must be cleared; (3) margin requirements; and (4) swap-related capital requirements.
  • Mandatory Clearing Requirements - Who determines what must be cleared? How broad is the end-user exemption to the clearing requirements? What is a derivatives clearing organization's role in the clearing process? How will cleared swaps be traded?
  • Margin Requirements - Who sets the requirements? How will initial margin for cleared and uncleared trades be protected? What is the status of the so-called "end-user exemption" to the margin requirements for uncleared trades?
  • Swap Recordkeeping and Reporting Requirements - Who is responsible? What is required to be kept and reported?
  • Treatment of Certain FX Transactions - Will all FX transactions be swaps?
  • Permissibility of Agricultural Swaps - Will agricultural swaps be allowed?
  • Confirmation, Portfolio Reconciliation and Portfolio Compression Requirements - What are the time frames for written confirmations? How will portfolio reconciliation and compression impact your outstanding trades?
  • External Business Conduct Rules - What will govern the end-user relationship with swap dealers and major swap participants? Are "non-reliance" provisions a thing of the past? What disclosure will be provided and when will it be provided?
  • Position Limits - When will they be imposed?

The vast majority of the rulemakings under the D-F Act are in proposed form and some have been published while others are yet to be published. To the extent that proposals have not yet been published, this overview is based on what was discussed at the meetings where the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) voted on the proposed rules and on the brief summaries released by these regulators. Certain additional key rulemaking proposals are anticipated in January, including those relating to: (1) the definition of "swaps" and "security-based swaps"; (2) the margin and capital requirements for uncleared swaps that will be imposed upon swap dealers (SDs) and major swap participants (MSPs); and (3) position limits. Attached as Appendix A is the current status of rules that have been proposed to date under Title VII of the D-F Act and the due dates for comments. Please note that comments on certain of these proposed rules are due within the next 30 days. A link to our status chart relating to all rulemakings under Title VII can be found here.

The regulatory process is ongoing and therefore the answers to the questions addressed herein will continue to emerge and possibly change as proposed rulemakings that have been adopted are published, new rulemakings are announced, comments on proposed rules are submitted, and final rules are promulgated. As a result, we will continue to provide future updates as to how the changes to the regulatory landscape are changing from an end-user perspective over the next year.

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Jamie Cain, a member of Sutherland's Corporate Practice Group, is well-versed in general corporate law and in the interpretation and application of federal securities and banking laws and state insurance laws. He also is a member of the firm's Sarbanes-Oxley Committee and reviews responses to auditors. Actively involved in the firm's transactional practice, Jamie has extensive experience with public and private securities offerings by U.S. and foreign companies and with mergers and acquisitions of these companies. He is nationally known for his experience with respect to the use of over-the-counter (OTC) derivatives including interest rate, foreign exchange, equity and commodity transactions, and related collateral arrangements. Since 1985, he has represented a wide range of financial institutions and commercial companies in documenting such transactions, as well as internal and regulatory compliance.

Warren Davis, a member of Sutherland's Corporate Practice Group, practices in the area of corporate financial transactions and, for nearly 20 years, has focused specifically on derivatives, hedge funds and related risk management. Warren's derivatives practice is diverse and includes representation of a broad range of counterparties including hedge funds, fund of funds, insurance companies, pension plans, mutual funds, foreign governments, government-sponsored agencies, universities, banks, energy companies, industrial corporations, shipping companies and high-net-worth individuals. His work encompasses many types of derivatives including transactions tied to interest rates, securities or an equity index; various commodities; credit and credit indices; freight; and weather events.

Ann Battle is a member of Sutherland's Corporate Practice Group, where she focuses her practice in the areas of corporate finance, derivatives and structured products, and banking and lending.

Ray Ramirez is a member of Sutherland's Corporate Practice Group where he focuses his practice on derivatives and structured products.