Easy Part Was Passing Financial Reform: Devil In The Details of Rule Making

As the President gets his many pens ready to sign the historic Dodd-Frank bill into law amidst the smiles and flash bulbs of the cameras, it will be a different story at the CFTC and SEC where the hard work is just beginning.  It will be primarily up to these two regulators to enact arguably the most complicated part of the bill, the regulation of the OTC derivatives market under Title VII.

The CFTC has in my opinion the harder job as they are not as large as the SEC in terms of staff and budget, with the CFTC at $168.8 million with 650 FTE’s and the SEC at $1.1 billion with 3,816 FTE’s. The CFTC will need not only just enough resources, but also the resources that have the expertise in the derivative markets, and as we all know, those resources are not cheap.   And then, of course, the CFTC has its current day job to think about.

Resourcing issues aside, the CFTC will have approximately 117 rules, definitions and studies to complete for the most part within 180 and 360 days of enactment.  Granted, some of these rules can be quickly resolved like the time frame required for reporting foreign exchange forwards and swaps to the repository or defining further the meaning of a “floor broker.” But no doubt, some items will invite both heavy lobbying, like section 723 (a)(3) for determining whether small banks, credit unions and farm credit institutions should be exempt from the definition of financial entity, which would mean they could be exempt from the clearing and margining requirements. And some items will require deep analysis like the eight-month feasibility study under section 719 (b) on whether the industry can adopt computer readable algorithms .

The big one for many is the definition of “commercial risk” in section 721(b), which can affect anything from which non-financial entities can exempt a specific swap from clearing to tipping someone into the major swap participant category.  We all want the definition as broad as possible, but the regulators have to think how they can practically and realistically regulate it.

So in the next 360 days or so, all of the theory on how the law is supposed to work will be put into the hands of the regulators to see how it should work, and the devil will most certainly be in these details.