Congressional Overhaul of the Derivatives Market in the United States

by Edward G. Eisert, Lawrence B. Patent, Gordon F. Peery and Charles R. Mills

The primary objectives of Dodd-Frank are to bring about greater transparency and to enable regulators to better manage individual counterparty and broader systemic risks inherent in the OTC derivatives market. The Dodd-Frank will accomplish these objectives by imposing substantial requirements on OTC derivatives market participants, such as subjecting derivatives to central clearing and exchange trading, and repealing exemptions and exclusions.

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On July 15, 2010, the U.S. Senate passed by a 60-39 vote the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), following earlier passage of the legislation by a 237 to 192 vote in the U.S. House of Representatives on June 30, 2010. On July 21, 2010, President Obama signed Dodd-Frank into law.

Dodd-Frank constitutes the most sweeping financial reform package since the 1930s. Title VII of Dodd-Frank, the Wall Street Transparency and Accountability Act of 2010 ("Title VII"), brings about a complete overhaul of the OTC derivatives market in the United States. The primary objectives of Dodd-Frank are to bring about greater transparency and to enable U.S. regulators to better manage individual counterparty and broader systemic risks that are inherent in the OTC derivatives market.

The enactment of Dodd-Frank will not be the final word on the reform of derivatives. Regulators will promulgate several dozen regulations to implement Dodd-Frank, and Congressman Barney Frank (D-MA) recently stated that a subsequent bill will be considered in early 2011 to make technical amendments to Dodd-Frank and to clarify, inter alia, an important exception for certain end-users from the requirement to centrally clear certain derivatives that are currently traded over-the-counter ("OTC"). [footnote omitted]

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Edward G. Eisert, a partner in K&L Gates' New York City office, focuses his practice on the representation of investment firms, institutional investors, and U.S. and non-U.S. diversified, global financial institutions, primarily with regard to investment management matters, securities regulatory matters, capital markets/structured finance matters, and joint ventures/mergers and acquisitions matters. Mr. Eisert began his career as a law clerk to the Honorable Charles L. Brieant, U.S. District Court, S.D.N.Y.

Charles R. Mills is a partner in the Washington D.C. office of K&L Gates. Mr. Mills' practice concentrates on securities and derivatives enforcement, litigation, and regulatory counseling. His clients include public and private companies and corporate officers, broker-dealers, investment advisers, hedge funds, traders, energy marketers, commodity trading advisors and pool operators, and other professionals and executives. He defends clients in investigations and enforcement actions of the SEC, CFTC, FERC, DOJ, state regulators and self-regulatory organizations and in private litigation and arbitration. He also regularly represents clients in regulatory matters before these agencies, counsels clients on regulatory compliance, including such issues as disclosure, internal compliance procedures, regulatory audits, trading rules, registration, fiduciary obligations and derivatives trading. He has represented, as well, many companies in listing and de-listing proceedings before the principal securities exchanges.

Anthony R.G. Nolan, a partner in K&L Gates' New York City office, specializes in domestic and cross-border structured finance, structured products and derivatives.

Lawrence B. Patent is of counsel in the firm's Washington, D.C. office. His principal areas of concentration are investment management, commodity futures, financial services and derivatives matters. Mr. Patent's experience includes substantial involvement with all of the Commodity Futures Trading Commission (CFTC) regulations related to intermediaries, including registration and fitness, sales practices, disclosure, reporting, recordkeeping, minimum financial requirements, customer funds protection, international trading, foreign currency, anti-money laundering, bankruptcy, risk assessment and managed funds.

Gordon F. Peery is a partner in the Boston office of K & L Gates. Mr. Peery works exclusively as a derivatives lawyer. He represents a wide range of clients in the firm's Investment Management, Derivatives and Structured Products practice groups and is a leader of the firm's Derivatives Task Force. Mr. Peery runs the derivatives, prime brokerage and repurchase facility training program within the firm.