The U.S. Senate approved the nomination of Mary Jo White to be the 31st Chairman of SEC by unanimous consent. White was confirmed to serve the remainder of former SEC Chairman Mary Schapiro’s term, which expires on June 5, 2014. White will replace current designated Chairman Elisse Walter when she leaves the SEC or steps down as Chairman.

The CFTC provided for three types of no-action relief relating to swaps between affiliates.  The relief relates to: (i) reporting of information on new swaps, (ii) reporting of information on historical swaps and (iii) certain clearing requirements.  The relief will be available to entities that are not required to register as swap dealers or major swap participants, and is expected to be used primarily by non-financial entities.  Unfortunately, the relief is subject to numerous conditions, some of them complicated, and some of them needlessly restrictive.  Even firms that will benefit from the relief must institute procedures to assure compliance.

As to OTC swaps (i) between affiliates that are under ONE HUNDRED PERCENT COMMON OWNERSHIP, (ii) not affiliated with an SD/MSP and (iii) various other conditions are satisfied,  the parties must maintain records of all of the information that would otherwise be required to be reported to the CFTC and make such information available to the CFTC. 

As to OTC swaps (i) between affiliates that are under FIFTY PERCENT COMMON OWNERSHIP, (ii) not affiliated with an SD/MSP and (iii) various other conditions are satisfied, the parties are not subject to real-time reporting, but they must report all data required by part 45 of the CFTC Rules within 30 days of the end of each fiscal quarter.

As to swaps between parties that would satisfy the above conditions, the parties are not required to report data on historical swaps to the CFTC, but must maintain records of such swaps for production to the CFTC. 

Lofchie Comment:  As with virtually every no-action letter that the CFTC staff issues, this one is subject to some complicated and needless restrictions that will result in the relief being unavailable to many entities, and even for those entities that are entitled to the relief, will impose needless burdens on them. 

For groups that seek to benefit from the CFTC’s requirements, they will have to determine which of their affiliates come within the 100% and 50% ownership requirements such that they are able to fit within either exemption.  They will then have to develop procedures to maintain and have access to the information that would otherwise have to be reported to the CFTC if this no-action relief were not available.  For affiliates that are not at 100% ownership, they will have to develop data collection and reporting procedures so that all of this information can be reported quarterly to the CFTC.  All of these firms will have to develop procedures to assure that historical swap information is not destroyed. 

For good-sized corporate groups, these requirements are neither trivial nor inexpensive.  For example, the part 45 reporting requirements that must be complied with, even if complied with only quarterly, are fairly complicated.  This is a task that will require some legal analysis, accounting resources and, for firms that use swaps to any extent, the development of technology. 

It is a shame that there is not a trade association group that represents the interests of end-users, because it seems to me that the CFTC’s requirements fairly cry out for a lawsuit challenging the costs and benefits of the obligations that the CFTC is putting on end-users.  What possible benefit could there be to the CFTC in requiring every corporate group in the United States to maintain aged information on intra-group swaps that would be worth the cost of identifying and maintaining the information?   Is the CFTC really going to analyze quarterly data on every swap entered into by affiliates that are under 50% common control?  Certainly before the CFTC imposes these obligations, it ought to explain how it intends to use the information it requires to have saved and reported, and even whether it is capable of using this information.

Link here to view CFTC Letter 13-09.
See  Related News Story:  CFTC Exemption for Clearing Inter-Affiliate Swaps

The CFTC’s Division of Market Oversight (DMO) issued a no-action letter for all end-users, allowing them not to report under Part 45 of the CFTC’s regulations, as applicable, commodity trade options (as defined in Part 32), provided that the non-SD/MSP (1) reports such transactions pursuant to Form TO and (2) notifies DMO if it transacts in excess of $1 billion notional value of trade options in any calendar year.

Additionally, relief is provided with respect to related recordkeeping requirements if the firm entering into the trade option (1) obtains and provides a legal entity identifier to any swap dealer counterparty to its trade options and (2) notifies DMO if it transacts in excess of $1 billion notional value of trade options in any calendar year.

Lofchie Comment:  Firms that enter into trade options will be required to institute compliance procedures in order to identify which of their options qualify for the Part 32 relief, and to track the notional value of their trades as against the $1 billion limit, and, if they do exceed such limit, to provide the required notice to the DMO.

See: CFTC No-Action Letter 13-08.

Floyd Norris of The New York Times wrote an interesting column on Libor titled “Finding A Rate That’s Fairer Than Libor.”

Norris cites that LIBOR was originally intended as a virtually risk-free private sector interest rate. But “an accurate Libor, from 2007 on, would have reflected the banks’ poorer credit, and would therefore no longer be such a risk-free rate.”

Norris also highlights the different tracks that British and European regulators are taking versus the U.S. Britain and the European Commission are determined to keep LIBOR and think that they can save it with better governance rules. They have also warned banks not to leave in the cases where banks have resigned from the panels that determine LIBOR.

Gary Gensler of the CFTC argues that there was very little unsecured interbank trading going on and would like to develop an alternative benchmark rate. One rate would be based on the fed funds rate – the rate at which the Federal Reserve lends to banks. The second rate that Gensler proposes would be based on rates charged on secured loans.

Norris is skeptical of the way that Gensler wants to gradually phase in an alternative rate but concludes that in the end any replacement to LIBOR should be based on a rate whose meaning will not change over time and says that secured loans make the most sense.

An approach by Richard Sandor (and was discussed at a CFS event last November) proposes moving LIBOR to a market-based, exchange-traded system which would be regulated and transparent. A write-up of his proposed solution can be found here.

Where Wheatley wants proof of actual transactions between banks, Sandor seems to be creating a true interbank market. Sandor’s proposal has the added advantage of offering real time information on the market as opposed to Wheatley’s three month delay. Whether the solution is by creating a true interbank market or basing the benchmark on an existing market, any step towards real time transparency and genuine transactions would be an improvement.

CFTC Commissioner Bart Chilton released ten principles today to help guide the Commission as it moves into a more transparent Dodd-Frank regulatory regime. Each principle is highlighted below.

1. The right to reasonable Dodd-Frank implementation. While noting the need for Dodd-Frank to be swiftly implemented, Chilton stated that he would extend the Dodd-Frank compliance date for end-users to October 31, 2013, provided they made good faith attempts to comply.

2. The right to legal certainty. Chilton noted the importance of providing end-users and other market participants legal certainty well in advance of compliance dates. He also stated that he would not support enforcement actions against any market participant on an issue requiring clarity that is subject to an outstanding request for interpretive guidance.

3. The right to compete in the markets. Chilton reiterated his past recommendations for high-frequency trader registration and speculative position limits to ensure that end-users are the predominant market participants.

4. The right to safe accounts. The Commissioner further remarked that end-users should have the right to decide whether to maintain segregated accounts or keep their money with futures commission merchants.

5. The right to have confidence in the commodity markets. Chilton also called for greater penalties to deter market abuse, suggesting maximum penalties of 10 million for entities and 1 million for individuals.

6. The right to clear or not to clear. He further stated that central hedging units for non-financial end-users should be free to choose whether to clear and be exempt from reporting requirements.

7. The right to margin flexibility and reasonable capital rules. Noting that under-collateralization has not been an end-user problem, stated that he supports exempting non-financial entities who are not systemically important from prescriptive margin requirements.

8. The right to hedge. The Commissioner also stated that speculative position limits should encourage prudent commercial risk management practices.

9. The right to smart regulation. Acknowledging that implementing Dodd-Frank will provide smarter ways to accomplish regulatory goals, Chilton stated that end-users should benefit from this knowledge and be given a six-month reprieve for historical swap reporting requirements.

10. The right to be heard. Finally, Chilton called for the creation of an End-User Advisory Committee, where previously unregulated end-users will be able to voice the concerns they face as a result of Dodd-Frank implementation.

Lofchie Comment: Commisioner Chilton’s important end-user bill of rights raises several questions. If end-users require a reasonable amount of time to implement Dodd-Frank rules, why is that not also true as to the sell side? If Principle 1, the right to reasonable Dodd-Frank implementation is to be adopted by the CFTC as a general rule of good regulation, then how does the CFTC justify the adoption of rules with impossible effective dates that are then the subject of non-action letters that are issued after the rule’s effective date? See, by way of example, this item from just yesterday’s news, where the CFTC has issued a limited exemption after the effective date of a rule.

Item 2 and the notion that a “good faith” effort to comply should be deemed to satisfy a rule, is a principle of sound enforcement at all times. Where regulated persons are making a good faith effort to comply, and assuming no injury has been done to third parties, enforcement should generally be light. Unfortunately, I read Commissioner Chilton making a different, and more limited, point: he is conceding that the CFTC rules have been adopted with an impractical deadline and, thus, it would be inappropriate to enforce them at all. In my view, the solution to that problem is not that the CFTC should “forgive” violators; the solution to that problem is that the CFTC should postpone the effective date of its rules so that firms have a reasonable opportunity to develop compliance procedures.

Likewise as to item 2, and the notion that market participants are entitled to “legal certainty” how does that principle of good regulatory behavior squared with the CFTC’s ongoing refusal to clearly define terms, such as the term “swap,” but instead to assert that every rule is subject to re-interpretation in light of the “facts and circumstances” (the very opposite of legal certainty).

As to item 3, on what policy basis would one limit the market so that end-users were predominant. Wouldn’t that ensure that the market is small and illiquid (or moves abroad)?

I want a bill of rights for lawyers.

Click here to view speech in full (links externally to CFTC website).

The Australian Securities and Investments Commission (“ASIC”) released a consultation paper and a report examining the impact of dark liquidity and high-frequency trading on Australia’s financial markets. The documents focus on the quality of the market for capital raising and long-term investment.
The dark liquidity task-force was set up in response to concerns about its impact on market efficiency and quality; the high-frequency trading task-force addressed concerns about disorderliness and unfairness. While the task-force did not find systematic manipulation or abuse of markets by high-frequency traders, it found that their trading strategies are commonly adopted by many other algorithmic traders, including the institutions. According to ASIC, dark trading is now occurring in smaller sizes that are similar to “lit” exchange markets and, for some securities, this has influenced their prices. ASIC concluded that further regulation was necessary.

See: Consultation Paper and Report (links externally to ASIC website).
See also: Proposed amendments to ASIC market integrity rules: Dark liquidity and high-frequency trading.

The CFTC’s Division of Swap Dealer and Intermediary Oversight (”DSIO”) issued a time-limited letter stating that the DSIO will not recommend that the CFTC take enforcement action against the CPOs of securitization vehicles, which are required to register by March 31, 2013, for failure to comply with certain enumerated sections in CFTC Part 4 Regulations prior to June 30, 2013.   The relief is available to operators of securitization vehicles that are not able to satisfy the conditions to CFTC Letter 12-45 or 12-14.  In Letter 12-45, the CFTC had granted CPOs that could not qualify for an exemption until March 31, 2013 to register as such.  This relief is contingent upon compliance with the guidance set forth in the letter with respect to those sections.  The first condition of the letter is that the operator of the relevant pool shall have initiated registration by March 31, 2013. 

In addition to providing limited relief from compliance with Part 4 for certain CPOs, the letter seems also to provide some additional exemptions from registration, including one as to pools that have not issued securities with a rating lower than BB. 

Lofchie Comment:  The exemptive relief from the conditions of Part 4 is only available to firms that had begun to register as CPOs by March 31st; however, the letter was not published until April 2nd.  (Further, March 29th was Good Friday, and the futures markets were closed on that day and through the weekend until April 1st.)  While it is true that the relevant firms were supposed to be registered on March 31st, the letter also provides a further exemption from registration, which would seem to imply that the CFTC did not actually expect firms to be registered.  Further, the letter begins by saying that the CFTC has not “finalized its policy determinations” with respect to securitization vehicles, which raises the question of why it is requiring registration at all. Even in light of the CFTC’s somewhat indifferent relationship with the calendar, this is an odd letter.

Click here to view CFTC Letter 13-07 (links externally to CFTC website).
Related Item:  CFTC Exclusion from Commodity Pool Regulation for Securitization Vehicles  (News Item Regarding, and Link to, Letter 12-14).
Related Item:  CFTC Staff Expands Existing Relief as to Securitizations  (News Item Regarding, and Link to, Letter 12-45).

The SEC issued a report which makes clear that companies can use social media outlets like Facebook and Twitter to announce key information in compliance with Regulation Fair Disclosure (“Regulation FD”) so long as investors have been alerted about which social media site will be used to disseminate such information.  The report was issued in response to an announcement by the CEO of NetFlix on Facebook announcing that Nexflix had streamed a significant amount of content in June.  This raised concerns that readers of CEO Reed Hasting’s Facebook page were obtaining inside information. 

(Regulation FD requires companies to distribute material information in a manner reasonably designed to get that information out to the general public broadly and non-exclusively.)   The report expresses worries that company communications made through social media channels could constitute selective disclosures and, therefore, require careful Regulation FD analysis.  Nonetheless, the SEC is not taking any action against Netflix or Hastings.

See: SEC’s Report of Investigation.

The Basel Committee on Banking Supervision (“BCBS”) and the International Organization of Securities Commissions (“IOSCO”) published the public responses to the second consultative paper on margin requirements for non-centrally cleared derivatives, which was issued for comment on February 15th for a one-month consultation period. These responses to the consultative document will inform the final joint proposal on margin requirements on non-centrally cleared derivatives.

See below for public comments received on the Consultation Report as of April 2, 2013.

• Alternative Investment Management Association
• American Council of Life Insurers
• AMUNDI
• Association Française de la Gestion Financière
• Association of British Insurers
• Association of Financial Guaranty Insurers (AFGI)
• Association of Institutional Investors
• Association of the Luxembourg Fund Industry (ALFI)
• Australian Banks
• Aviva Investors
• Barclays
• BBVA
• Better Markets
• BT Pension Scheme
• BVI (German investment fund and asset management industry)
• Canadian Bankers Association
• Captive Finance Companies
• Cardano Risk Management
• Cargill
• Christoph Barnard
• CLS Bank International
• Commercial Energy Working Group
• Commerzbank
• Czech Banking Association
• Danish Insurance Association
• Deutsche Bank AG
• Deutsches Aktieninstitut
• Edward Barron
• EFAMA
• European Association of Corporate Treasurers and the U.S. Coalition for Derivatives End-Users
• European Association of Public Banks
• European Banking Federation
• European Covered Bond Council
• European Federation of Energy Traders
• Federation of Dutch Pension Funds
• Financial Services Roundtable
• FirstRand
• French Banking Federation
• General Insurance Association of Japan
• German Banking Industry Committee
• German Insurance Association
• GFMA
• Global Pension Coalition
• HSBC
• ICAP
• IIF
• ING
• Insight Investment
• Institute and Faculty of Actuaries
• Instituto de Credito Oficial
• Insurance Europe
• Investment Company Institute and ICI Global
• Investment Management Association
• ISDA
• Italian Banking Association
• Japan Financial Markets Council (JFMC)
• Japanese Bankers Association
• KfW Bankengruppe
• Life Insurance Association of Japan
• Luxembourg Bankers Association (ABBL)
• Managed Funds Association
• MetLife
• Milko Ostendorf
• NASDAQ OMX
• National Association of Pension Funds (NAPF)
• Natixis Asset Management
• Ossiam
• PGGM
• P-Solve
• Riskcare
• Royal Bank of Scotland
• Saudi Banks
• Shell
• Siddhartha Roy
• SIFMA Asset Management Group
• SIFMA Securities Industry and Financial Markets Association
• Standard Chartered Bank
• State Street
• Towers Watson
• UBS
• UniCredit
• Wholesale Markets Broker Association