CFTC and Dodd-Frank: Swaps Are Still Legal After July 16

With the one year anniversary of Dodd-Frank a month way, the uncertainty of what would actually happen on July 16, 2011 was clarified by the CFTC today. The issue is that provisions under Dodd-Frank that do not require implementation rules from the CFTC and SEC could technically be in effect 360 days after the passing of Dodd-Frank. Recently there has been concern that without rules or an extension, swap market participants could be acting illegally (e.g. by not having a Chief Compliance Officer) or selling illegal instruments (parts of the Commodities Exchange Act that would have been amended by Dodd-Frank would imply certain swaps may have to trade on a futures exchanges to be legal). There was even speculation that municipalities with swaps that were underwater were going to attempt to void their swap contracts as they would be deemed illegal.

With that overhang of uncertainty, the CFTC proposed providing “relief” of 180 days to December 31, 2011, by which time enough of the rules would have been made final or upon review the CFTC could provide another extension.

So this is not a delay, but simply a legal and practical necessity. The CFTC will have six months to start converting the proposed rules into final rules, which after 60 days would become truly effective. But now the CFTC has set this arbitrary date, so the question is, Will that be enough time or will there have to be another extension?

The ideal approach would be to map out the implementation plan of all the rules and agree on the phasing-in period. For example, define what a Swap and Swap Dealer are before deciding clearing rules, or start on the Swap Data Repository framework soon as this will take longer than 60 days to set up the infrastructure and connect to the market. Once those rules are in place, add three months to allow some room and announce a date that is less arbitrary.

Whatever the final date is, the fact (law) is these rules will be written and most likely be effective before the end of 2012. Market participants will most likely need more than a year to properly comply, and each month without a final rule is more money needed to comply in time.