Strategic Finance Magazine...August 2011
With the CFTC and SEC having pushed back to December 31 the date by which Dodd-Frank final rules have to be published, the focus of the business community now returns to convincing the agencies to make changes to some of the proposed rules whose provisions have left a bad taste. CFTC Chairman Gary Gensler who in mid-June announced that the original Dodd-Frank July 16 deadline for final rules was being delayed about six months noted that the effective dates of some of the derivatives provisions in Title VII could be staggered. Title VII includes provisions on swaps trading, repositories and margin requirements for companies who trade swaps simply to manage risk, companies called--in the argot of Title VII--end users, meaning manufacturing, transportation, energy and other companies who don't trade swaps in the manner of AIG and Lehman Brothers. Gensler told the Senate Agriculture Committee on June 16 that staggered dates would mean "those rules that could be implemented sooner should be so as to lower risk." He wasn't clear what he meant by that. In a similar vein, he noted that clearinghouses, for example, may be required to be registered and provide for client clearing at an effective date in advance of any determinations of clearing mandates.
End-users won't have to clear swaps, but the banks they contract with for those swaps will have to clear them on a repository and report those swaps in real-time on some sort of public website that may be like the current TRACE website which investors can view to see current trades of corporate and municipal bonds. This second Title VII requirement will, however, affect end-users, but has pretty much been a forgotten provision during debate during the first half of 2011 over the margin requirements for swaps proposed by federal banking agencies. We have discussed these previously, and the issue here has diminished considerably.
With concern over margin receding, reporting of swaps by banks in real-time, and its potential impact on end-users, comes to the fore. It will be a key focus of business groups between now and December 31 as the CFTC attempts to publish final rules. The proposed rule requires all trades, except those that qualify as block trades, to be reported on a real-time basis. Certain larger trades could be reported 15 minutes later. The real-time reporting requirements – when applied to large trades that don’t qualify as blocks – don’t sit well with business end users. "We are concerned that proposed real-time reporting rules could inadvertently jeopardize end user’s ability to secure efficient market pricing in certain situations," says Luke Zubrod, Director at Chatham Financial and an advisor to the Coalition for Derivatives End-Users. "In particular, it is important that large or less liquid transactions be classified as block trades and that the public reporting of such transactions be adequately delayed. If reporting of these types of trades occurs instantaneously, it could provide a roadmap for other market participants to trade on that information – ultimately adversely impacting pricing." Zubrod wants the CFTC to delay reporting for 24 hours. In addition, Zubrod would like to see the CFTC expand the size of the block trading exemption so that a wider array of trades qualify, perhaps by applying block trade calculations to discrete products which would provide a more granular look at the market.
