On Tuesday, CFTC Commissioner Wetjen outlined his regulatory agenda for the next year in testimony before the House Agriculture Subcommittee on Commodity Exchanges, Energy and Credit. Commissioner Wetjen identified three key rulemakings before the CFTC – Margin for Uncleared Swaps, Capital Requirements, and Position Limits. He also addressed the issue of customer funds held by FCMs, noting that because bankruptcy law requires that an FCM’s customer funds be shared ratably among customers in the event of an FCM bankruptcy, the CFTC’s ability to require segregation of individual customer funds is limited. The Commissioner suggested that Congress amend the bankruptcy code to permit greater flexibility for the protection of customer funds, noting that customers may currently believe they can get better protection in the OTC market which allows them to require segregation of their funds. Continue Reading
Last week, the House began the process of CFTC reauthorization, with a House Agriculture subcommittee holding hearings with testimony from CME, the NFA and various other market participants. The subcommittee members seem intent on presenting a bill very similar to last year’s HR 4413, which passed the House but was not taken up by the Senate. Given changes in Senate composition the bill seems more likely to be considered by both houses of Congress this year.
At the hearings, witnesses focused on the costs of complying with new regulations, including reporting and the proposed margin and position limits rules, and the burden imposed by regulatory uncertainty. Subcommittee members were particularly focused on compliance costs and whether these costs were in line with the benefits provided by new regulations. Witnesses mentioned a number of potential steps the CFTC should take, including expanding the definition of “bona fide hedge” in the position limits rules and delaying real-time reporting for swaps in thinly-traded markets so the counterparties cannot be identified. Witnesses also suggested tweaking the CFTC’s rulemaking process to allow for industry roundtables and open meetings before regulations are proposed, rather than waiting until the CFTC has already formulated its positions.
Crowell & Moring LLP has released its inaugural “Regulatory Forecast: What Corporate Counsel Need to Know for the Coming Year.”
In this forecast, over 40 contributors from various sectors dig into the regulatory trends in Washington and beyond that are going to be affecting industry. The report focuses on sectors ranging from energy to health care, and features on-the-ground analysis from key regions, such as California and Europe, that are setting the pace for the future of industry regulation.
CFTC Commissioner Giancarlo’s recently-issued white paper on the current arc of swaps regulation has given new ammunition to proponents of principle-based oversight of the markets rather than the more recent prescriptive-based approach of the Commission. The Commissioner’s speech before the American Bar Association, the text of which was recently made public, began on a more conciliatory note but quickly moved into a summary of the white paper, including criticism of the open access rules and the all-to-all trading requirement. The open question is whether Commissioner Giancarlo’s calls for reform of the recently-finalized rules will lead to frank discussion of the rules within the Commission, or will lead to the other Commissioners circling the wagons against his calls for change. Chairman Massad has already said that he prefers a more incremental approach to tinkering with the rules. Continue Reading
On February 9, the House Committee on Energy and Commerce released a framework for a comprehensive energy package to advance its ‘Architecture of Abundance’ agenda this Congress. It focuses on four areas: modernizing infrastructure, a 21st century energy workforce, energy diplomacy, and efficiency and accountability. The planned end-state is a “solutions-focused energy package” for House consideration later this year. The committee also plans to closely coordinate the process with the Senate. Continue Reading
Last week’s biggest story was the surprise move by the Swiss government to decouple the Swiss Franc from the Euro. As the Swiss government removed the cap of 1.20 Francs to the Euro, the Franc surged in value, in part based on suggestions that the European Union is expected to follow in the footsteps of the US and institute a policy of “quantitative easing.” The Swiss government defended the surprise move, suggesting that announcing the policy beforehand would have only encouraged excessive speculation.
Both institutional and retail investors, as well as currency brokers, were hit with large losses as the markets fluctuated. Many retail investors were particularly hard-hit, and the news was filled with stories of investors who lost huge amounts on leveraged bets on the currency. Both the NFA and the FCA have said they are monitoring foreign currency brokers generally, and in particular are looking into practices at brokers that underwent severe losses. New York-based FXCM already received a $300 million loan from Leucadia to shore up its balance sheet, and UK-based Alpari has stated that it is insolvent. It remains to be seen how regulators will respond but a review of currency margin rules may be forthcoming. For example, it is possible that retail forex dealers will be required to segregate customer funds from their own funds in the same manner as FCMs and swap dealers.
As we move into 2015, regulators will see increasing pressure to finalize regulations mandated by Dodd-Frank. At the same time, a Republican-controlled Congress may attempt to revise Dodd-Frank based on industry concerns about the law’s viability and its effect on economic conditions.
We have already seen one example of this tinkering with Dodd-Frank regulations in the Terrorism Risk Insurance Act (TRIA) that passed the U.S. House of Representatives and the U.S. Senate (H.R. 26) on January 7th and 8th respectively. Specifically, Section 302 of the Act amends the Dodd-Frank provision requiring swap dealers and major swap participants to exchange margin when entering into uncleared swap transactions. In September, 2014, the prudential regulators and the CFTC proposed rules to implement margin requirements, but such rules have yet to be adopted. Each set of proposed rules would establish initial and variation margin requirements for Swap Dealers (SD) and Major Swap Participants (MSP) but would not require SDs and MSPs to collect margin from counterparties that are “non-financial end users” as defined in the proposed rules. Section 302 of TRIA codifies this exemption, preventing regulators from rescinding the exemption in later rulemaking. However, market participants should note the differences between the types of entities that qualify for clearing exemptions (as used in the legislation) and the definition of “non-financial end user” as used in the proposed rules.
As a part of the Terrorism Risk Insurance Act (TRIA) that passed the U.S. House of Representatives and the U.S. Senate (H.R. 26) on January 7th and 8th respectively, Congress included a section that would codify a recent proposal from the Commodity Futures Trading Commission (CFTC) on swap margin requirements as they relate to transactions with end users. Specifically, Section 302 of the Act amends Section 4s(e) of the Commodity Exchange Act to exempt the following transactions from the requirement to post and collect initial and variation margin:
- Swaps for which a counterparty is not a financial entity, and that qualify for the end-user exception from mandatory clearing;
- Swaps for which a counterparty is a financial entity that is acting on behalf of, and as agent for, a non-financial entity that qualify for the end-user exception from mandatory clearing; and
- Swaps for which a counterparty is a cooperative entity that qualify for an exemption from mandatory clearing.
On November 3rd, the Securities and Exchange Commission (SEC) charged Bio-Rad Laboratories, a clinical diagnostic and life science research company, based in California with violating the Foreign Corrupt Practices Act (FCPA) when its subsidiaries made improper payments to foreign officials in Russia, Vietnam, and Thailand in order to win business. The company agreed to pay $40.7 million in disgorgement and prejudgment interest to the SEC.
In a parallel action, the U.S. Department of Justice (DOJ) announced the company will pay $14.35 million in criminal fines for falsifying its books and records and failing to implement adequate internal controls in connection with sales it made in Russia. The department entered into a non-prosecution agreement with the company due, in large part, to Bio-Rad’s self-disclosure of the misconduct and full cooperation with the department’s investigation.
In September, the Federal Reserve and other prudential regulations and the CFTC re-proposed regulations to implement Dodd-Frank Act requirements for the margining of uncleared swaps—in some cases making significant changes to previous proposals made in 2011. The new rules raise a number of issues that Chief Compliance Officers need to understand, and Crowell & Moring attorneys Richard Holbrook, Jenny Cieplak, and Eric Edwards have authored an article in Law360 that provides an introduction to the new rules and suggests some questions CCOs need to be able to answer about their operations. The article covers when and with which counterparties margin must be posted, how margin is calculated, and what the new regulations may mean for the murky issue of cross-border application. The authors warn “these regulations may significantly reshape the market for uncleared swaps by making trading in them increasingly regulated and much more expensive.”
Click to access the PDF, “Proposed Margin Rules For Uncleared Swaps Will Be Costly.”