Swap dealer compliance teams expect the finalization of 11 Dodd-Frank rules this October, leaving many to speculate how missed compliance dates will be treated by America’s regulatory agencies.
Don Thompson, the managing director and associate general counsel at JPMorgan, said that due to the complexity of the compliance climate, failure to comply with the new rules may not result in major enforcement action by the Commodity Futures Trading Commission, according to Reuters.
One rule from the CFTC, however, may be problematic. The rule relates to external business conduct and includes a “right of rescission” that essentially mandates that a counter-party has the ability to rescind a swap, should their dealer counter-party be non-compliant.
The CFTC added a provision onto swap definitions on Tuesday that may expand that rule. In its rule-making, the commission implied that swap obligations may also extend to the guarantor of the dealer counter-party, adding further to the compliance burden and uncertainty.
“Until the CFTC ‘addresses the practical implication of this interpretation,’ as they have stated in their fact sheet, I have no idea what to do about this additional interpretation,” Thompson said, Reuters reports. “We would hope that as many of the rules are finalized through the third quarter and [as] the industry tries to comply, there will be some degree of regulatory leniency. But now we have a rule that’s being extended beyond its original scope, and that’s concerning.”
The expansion of the rule to a dealer counter-party guarantor may mean that the guarantor would be required to add exposure of the affiliate’s swap to their own exposure, which could force many parent companies to cross the “swap dealer” or “major swap participant” threshold. If that occurs, the parent company would be required to register with the CFTC and be subject to an even more stringent regulatory burden.
“It would be doable and understandable if we were only doing one swap a day,” Thompson said, according to Reuters. “But we’re talking about thousands of swaps across thousands of counter-parties. So trying to hit several moving targets all around the same time would be very difficult.”
The CFTC published final swap definition rules last week, and market participants have 60 days to come into compliance with agency registration requirements. The rules expected to be finalized in October pertain to swap reporting requirements, position limits and risk management.