The Commodity Futures Trading Commission, meeting in open session today, passed a proposed order to address effective date concerns engendered by the anticipated lack of completion of the majority of needed implementing regulations by the July 16 date indicated by the statute. The proposed order will be subject to a 14-day comment period. As of this writing, the proposed order is not yet available and thus close analysis will await the proposed order’s publication.
Commissioners, speaking informally, aired the view that the purpose of the proposed order would be to allow the over-the-counter (OTC) swap markets to continue to function normally until such time as Title VII regulations might be phased in. The proposed order, if it becomes effective, will expire on December 31, 2011. This sunset feature was the subject of some debate, and the vote on this aspect of the proposed order broke on party lines.
As explained during the open session, the effectiveness of those parts of the statute that are now subject to rulemakings will be determined by the progress of those rulemakings. The relevant statutory provisions will not become effective until effectiveness of the rulemakings. Any statutory provision not itself subject to rulemaking, but that references the term “swap, swap dealer, major swap participant or eligible contract participant” will not become effective until the rulemaking to further define those terms has been completed and becomes effective. Some form of no-action relief may be available to back-stop this bifurcated division of the provisions that will be subject to delayed effectiveness.
The Commission indicated that it will provide continuing “legal certainty” protection (preemption and contract enforcement safety) for the OTC markets, though the exact nature of that protection was not clear. The Commission also stated that it will list which Title VII provisions will be effective on July 16. The Commission indicated that its anti-fraud and manipulation powers will be effective on July 16, though it is unclear whether, or how, they will be effective with respect to “swaps.”
The Commission proposal potentially raises a number of questions that must await textual review. The proposal apparently offers no answers to the fundamental issues of extraterritorial application that are now part of the public discussion of Title VII.
The Securities and Exchange Commission (SEC) has promised parallel broad guidance and relief with respect to the July 16 effective date. More specifically, the SEC has released proposed rules to exempt certain transactions by clearing agencies in certain security-based swaps from all provisions of the Securities Act (other than Section 17(a) anti-fraud provisions). The SEC also proposes to exempt these transactions from Exchange Act registration requirements and other provisions, subject to certain conditions. These proposed rules will succeed temporary rules now in place. The comment period for this rulemaking ends on July 25, 2011.