Three Takeaways On Compliance Deadlines For Derivatives Rules Under The Dodd-Frank Act
In July 2012, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) approved final rules defining what kind of derivatives products will be regulated under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Under Title VII of the Dodd-Frank Act, these regulatory agencies are charged with overseeing the over-the-counter derivatives market. Their intent is to provide greater transparency, centralization of clearing to reduce risk between counterparties, and subjecting swap dealers and major swap participants to capital and margin requirements.
The final rules define the terms “swap,” “security-based swap,” and other derivative products, triggering a countdown for compliance dates that swap dealers and major swap participants will have to observe. Since the swap definition was published in the Federal Register on August 13 2012, swap entities will have 60 days to provisionally register and comply with certain requirements. They will have until the end of 2012 to comply with several more requirements and then up to two-and-a-half years to meet a handful of others. These requirements cover areas such as, recordkeeping and reporting, position limits, business conduct, central clearing, whistleblower and anti-manipulation, and trade execution.
For swap dealers and major swap participants working to understand what the compliance deadlines for derivatives mean for them, here are three important observations.
Expect more complexity and confusion as CFTC assesses substitute foreign regulations
The CFTC will recognize some foreign regulations as a substitute for its own rules — as long as the rules are equally stringent. This means that non-U.S. swap dealers and major swap participants, including foreign branches of U.S.-based firms, will be allowed to apply so-called “substituted compliance.” However, covered entities should be aware that some complexity and confusion may ensue in complying with foreign rules and potentially open them up to more risk. The entities themselves will need to assess whether the local requirements are equal to the U.S. rules and then craft a plan to comply with them within a year of registering. Down the road, firms may encounter challenges as U.S. regulators determine whether compliance with foreign regulations is equal to U.S. standards.
Swap entities need to prepare for U.S. regulatory examinations a year after registering
One year after firms register with the CFTC and SEC, they will need to prepare for an examination by regulatory agencies, including the National Futures Association, to verify how well swap entities have complied with the new rules. Under this new comprehensive program, entities will have to demonstrate compliance through their policies and procedures and related controls, such as monitoring external and internal business conduct and ability to manage risk, among other activities.
With the compliance countdown started, swap entities should start planning for deadlines
Swap dealers and major swap participants now have 60 days — by October 12, 2012 — to comply with several of the major requirements. Some of these requirements include registration, reporting of credit and risk products to Swaps Data Repositories (“SDRs”), phase one of the risk management program, conflicts of interest, position limits, and end user exception to mandatory clearing of swaps.
Deloitte has created a timeline that shows selected deadlines for when specific requirements must be met. Some deadlines are set in stone, while other requirements have assumed dates because regulators are still hashing out certain issues.
Deloitte’s high-level takeaways offer some valuable context and insight that financial institutions can use to better understand and prepare for complex rules and reforms — whether they’re about derivatives, capital and liquidity standards, or tax obligations. As rulemaking and other financial reform activities evolve and develop, Deloitte will continue to provide in-depth observations to help institutions better respond to this new regulatory environment. For more information, please visit us at Financial Regulatory.
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