Posted on 15 Jun 2011
Behind schedule in finalizing key rules mandated by last year's financial-regulatory overhaul, U.S. regulators agreed to delay a host of new requirements scheduled to hit the $600 trillion derivatives market next month.
Banks, companies and investors who have worried their use of derivatives could run afoul of regulation are getting a temporary relief from the delay. Certain parts of the Dodd-Frank financial law automatically take effect July 16, though regulators have yet to issue final rules in affected areas.
The Commodity Futures Trading Commission on Tuesday offered a six-month reprieve. It delayed until as late as Dec. 31 the effective date of requirements such as business-conduct rules and registration requirements, which affect those who use and trade derivatives.
The delay comes amid wrangling over a financial-regulatory landscape that is in some ways largely unchanged since the 2008 financial crisis.
Regulators are so mired by the process of writing rules triggered by Dodd-Frank that some of the most vulnerable areas of the financial system haven't been addressed.
Derivatives are especially controversial because critics say they encouraged huge risk-taking and spread damage far and wide during the crisis. American International Group Inc. and Lehman Brothers Holdings Inc. were among companies battered by derivatives bets.
Regulators gained broad new powers to protect the financial system, including authority to regulate derivatives, impose stricter capital and supervisory requirements on financial firms and regulate consumer financial products.
Yet more than half the 387 sets of rules have yet to be proposed, and many provisions are subject to fights on Capitol Hill.
Regulators have yet to designate which nonbank financial firms pose risk to the system and are in need of heightened scrutiny. And a new consumer agency may begin life without some of its tough new powers next month because of political fighting over its director.
Banks, hedge funds, insurers and other market participants have flooded regulators with requests to either slow their rule making or avoid imposing anything too onerous.
On Tuesday, House Republicans proposed cutting the CFTC's 2012 budget by 15% from its current level and 44% from what President Barack Obama requested.
Treasury Secretary Timothy Geithner, concerned about the financial overhaul's momentum, recently asked regulators to speak out against efforts to undermine Dodd-Frank, say people familiar with the matter. Administration officials worry that delays could sap momentum for finishing rules as the crisis recedes in the rear-view mirror.
Regulators are making progress in other areas, such as proposing rules that require banks to hold onto some of the risk from mortgage-backed securities. Banks have boosted capital levels beyond precrisis levels, giving them a bigger cushion. But new rules for a much longer list of problems that helped fuel the financial crisis still are up in the air.
The CFTC has been at the apex of concerns because rules it is writing are central to the functioning of financial markets.
The CFTC and the Securities and Exchange Commission were supposed to finish rules creating a new regulatory framework for trading and clearing derivatives by July 21, the anniversary of the law's signing. The majority won't be complete by then.
But the law mandates that those who use and trade swaps begin complying with certain rules on July 16, such as business conduct and registration regulations. Dodd-Frank also repeals parts of an earlier law that exempted swaps—agreements between parties for payments pegged to the performance of stocks, bonds, commodities or indexes—from being traded on regulated exchanges. Regulators haven't yet built the new regime that is supposed to replace the expiring law, raising the possibility that some trades could be considered illegal.
The just-announced CFTC delay aims to avoid that legal uncertainty, but some lawyers say they remain concerned that deals done after the July deadline could be challenged in court.
In its move Tuesday, the CFTC didn't delay any of the actual rules it is in the midst of writing, but essentially told market participants they don't need to comply with the new regulatory regime for at least six months.
"There have been suggestions to delay implementation of the derivatives reforms included in the Dodd-Frank Act. That is not what today's proposed order is," CFTC Chairman Gary Gensler said at a commission meeting. "Instead, it provides the time necessary for the commission to complete the rule-making process to implement the Dodd-Frank Act.
Some lawmakers questioned whether simply delaying the rules was enough. "I have strong concerns that simply replacing 'July 16' with 'Dec. 31' does not provide sufficient certainty to the markets that we won't be right back where we are now at the end of the year," said Kansas Sen. Pat Roberts, the top Republican on the Senate Agriculture Committee.
Mr. Gensler said a six-month delay would give the market certainty while ensuring the CFTC has enough time to make its rules final. He said the CFTC would vote on final rules beginning this summer and could finish before the end of the year. He rejected a proposal by Scott O'Malia, a Republican commissioner, to delay the effective date indefinitely.
"I think we'll know a lot more" in six months, Mr. Gensler said. "I do think the American public is still very much vulnerable. The crisis in 2008 was very real. The regulatory system failed, Congress reacted, the president reacted."
Simon Johnson, an MIT professor and former chief economist at the International Monetary Fund, said that since the financial crisis, "the biggest banks and their creditors are more convinced than ever that they would be protected in any future crisis."
Steven Lofchie, co-head of financial services at Cadwalader, Wickersham & Taft LLP, said it was unrealistic to expect much to change quickly given the "gargantuan task" regulators face to implement Dodd-Frank. "The regulators are trying to re-create all financial regulation done over an 80-year period in a single year," said Mr. Lofchie.
The financial-services industry has taken some steps to curb risk taking, with firms such as Goldman Sachs Group Inc. jettisoning their proprietary-trading desks in advance of federal rules requiring such a move. Banks have also boosted capital levels well beyond pre-crisis levels, although regulators are expected to propose even tougher capital buffers later this summer that set a minimum capital level for depository institutions.