With the Dodd-Frank Act's July deadline quickly approaching, regulators for the first time acknowledged officially that a delay would be necessary to implement new rules impacting corporate end users of swaps when they queried members of a 10-person panel on May 3 about the best implementation approach.
Early this year, the regulators were focused on how to complete implementation of end-user requirements by the end of 2011. However, the one-year anniversary of Dodd-Frank on July 21, the deadline by which its rules were slated to be completed, is just a few months away and there's still significant work to be done.
Jiro Okochi, CEO of Reval, which provides technology to support derivatives transactions, said the regulators' questions to the panel were unsurprising, given the current timeframe. "Now we're being asked how we would phase this in and the right way [to do it]," Okochi said, adding, "It's the first time they've asked our opinions on how to do it."
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Okochi was a member of the panel that focused on how to implement the end-user exemption to clearing swap transactions and reporting to data repositories. The panel was the last in a two-day session sponsored by the Securities and Exchange Commission and the Commodity Futures Trading Commission that sought feedback from market participants. Other panel members included executives representing swap dealers, institutional investors, corporate swap users and consumers.
The regulatory proposal exempting end-users was issued last December and comments were due Feb. 22. The proposal was reopened for comment May 4 and comments are due June 3.
Regulators asked panel members about the benefits of implementing the end-user exemption rule in stages and, if so, how to prioritize those steps. Starting with the companies most actively using swaps, for example, raised concerns about those businesses establishing the template in their favor, although some smaller participants said they preferred have large companies work out the kinks.
Another approach may be to phase in the riskiest asset classes first. Wallace Turbeville, a derivatives specialist at Better Markets, noted the difficulty involved in identifying which types of assets pose the greatest risk.
The Treasury Department said April 29, for example, that it will propose exempting foreign-exchange swaps from Dodd-Frank's requirement to clear transactions and trade them over swap execution facilities, because such swaps performed well during the financial crisis. In an earlier comment letter, however, Better Markets noted that significant independent research suggests the FX market also froze and would have collapsed were it not for the Federal Reserve's intervention, in which it flooded the global markets with dollars.
Another area of inquiry focused on the proposed requirement for end users to provide 10 items of information for each transaction in order to elect the swap clearing exemption. Okochi said the "check-the-box" obligation should impose relatively little burden, but an unintended consequence may be more information required from swap dealers, since they must report transaction data to swap data repositories (SDRs), and "they're more on the hook than the end user."
In some cases, such as when an end user's counterparty is not a dealer or major swap participant, the end user may have to report transaction-related data to the SDR, which has raised concerns among end users about costs. Okochi said his interpretation of the proposed rule does not require reporting the data in real time, which could require developing costly new systems.
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