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CFTC clarifies effective date for swaps regulation under Dodd-Frank Act

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The Commodity Futures Trading Commission (CFTC) has issued an order clarifying the effective date of the provisions in the swap regulatory regime established by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) as the CFTC continues to implement rules to reduce risk and enhance transparency in the swap markets.

The Order provides temporary relief from certain provisions that will become effective as of July 16, 2011, until the CFTC completes the rule-makings specified in the Order.  The CFTC’s action will avoid disruption in the markets, and will provide for the orderly implementation of the new comprehensive swap regulatory regime mandated by Congress.  This order is temporary, and it will expire upon the effective date of final rules or December 31, 2011.

“In our effort to protect the American public, the CFTC is now approving final rules called for in the Dodd-Frank Act with more final rules to be considered in upcoming meetings next week, in August and throughout the fall.  Today, we are granting temporary relief from certain provisions that would otherwise apply to swaps or swap dealers on July 16,” says Chairman Gensler. “This order enables the Commission to continue its progress in finalising rules.”

Specifically, the CFTC provided temporary exemptions from certain provisions of the Commodity Exchange Act (CEA), in two parts.  First, the CFTC  provided relief from certain provisions of the CEA added or amended by the Dodd-Frank Act that do not require a rule-making but that reference one or more terms regarding swap entities or instruments that the Dodd-Frank Act requires be “further defined” (such as the terms “swap,” “swap dealer,” “major swap participant,” or “eligible contract participant”).  The CFTC, jointly with the SEC, has issued two notices of proposed rule-making to further define these terms, but these final rule-makings will not be in place as of July 16, 2011. The provisions subject to this exemption are listed in Category 2 in the Appendix to the Commission’s Order. 

Second, the CFTC provided relief from certain provisions of the CEA that will or may apply to certain agreements, contracts, and transactions in exempt or excluded commodities (generally, financial, energy and metals commodities) as a result of the repeal of various CEA exemptions and exclusions by the Dodd-Frank Act as of July 16, 2011. This exemption is based on the CFTC’s existing “Part 35” exemption for swap agreements, but will be available for certain agreements, contracts, and transactions that may not otherwise qualify under those rules (for example, if they are cleared).  This exemption also is temporary, and shall expire upon the earlier of the Commission’s repeal or withdrawal of Part 35, or December 31, 2011.

The temporary exemptions issued today are subject to several important conditions, including: no limitation on the Commission’s anti-fraud or anti-manipulation authority under the CEA; no application to any provision of the Dodd-Frank Act or the CEA that has become effective prior to July 16, 2011; no affect on any effective date set forth in any rulemaking issued by the Commission to implement provisions of the Dodd-Frank Act; and no affect on the applicability of any provision of the CEA to futures contracts or options on futures contracts, or to cash markets.

The Commission’s Order notes that many of the swap provisions in the Dodd-Frank Act require a rulemaking before they become effective, and so these provisions are not subject to the Commission’s Order because they will not become effective on July 16, 2011.  These provisions are listed in Category 1 in the Appendix to the Order.  Further, Category 4 in the Appendix to the Commission’s Order lists provisions for which the Commission has determined not to issue relief, and which therefore will go into effect on July 16, 2011.

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