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Commodities Regulation Update – January 12, 2015

January 12, 2015

Authors: Mike Gill and Jenny E. Cieplak.

As we move into 2015, regulators will see increasing pressure to finalize regulations mandated by Dodd-Frank. At the same time, a Republican-controlled Congress may attempt to revise Dodd-Frank based on industry concerns about the law’s viability and its effect on economic conditions.

We have already seen one example of this tinkering with Dodd-Frank regulations in the Terrorism Risk Insurance Act (TRIA) that passed the U.S. House of Representatives and the U.S. Senate (H.R. 26) on January 7th and 8th respectively. Specifically, Section 302 of the Act amends the Dodd-Frank provision requiring swap dealers and major swap participants to exchange margin when entering into uncleared swap transactions. In September, 2014, the prudential regulators and the CFTC proposed rules to implement margin requirements, but such rules have yet to be adopted. Each set of proposed rules would establish initial and variation margin requirements for Swap Dealers (SD) and Major Swap Participants (MSP) but would not require SDs and MSPs to collect margin from counterparties that are “non-financial end users” as defined in the proposed rules. Section 302 of TRIA codifies this exemption, preventing regulators from rescinding the exemption in later rulemaking. However, market participants should note the differences between the types of entities that qualify for clearing exemptions (as used in the legislation) and the definition of “non-financial end user” as used in the proposed rules.

The proposed rules still require SDs and MSPs to perform a credit analysis to determine if the collection of initial and variation margin is warranted. Under certain circumstances, SDs and MSPs may require initial and variation margin from end-users due to overall counterparty credit risk or other unique characteristics of a particular transaction, but there would be no regulatory mandate to do so.

Republicans in Congress were stymied in their efforts to fast-track another bill to ease Dodd-Frank restrictions. H.R. 37 would extend the compliance deadline for the Volcker Rule until 2019 (from its current 2017 compliance deadline). However, the bill also includes provisions amending the clearing exception for treasury affiliates to require that if the treasury affiliate is entering into an uncleared swap with a swap dealer or major swap participant, the terms of the swap must include “an appropriate credit support or other mechanism.” Other matters addressed by H.R. 37 include registration and reporting requirements for emerging growth companies.

Cross-border application of Dodd-Frank will continue to be a hot issue, as the CFTC continues to investigate the activities of overseas affiliates of US swap dealers. For example, the Commission has further delayed the implementation of one of the most controversial aspects of its Cross-Border Guidance, the application of transaction-level requirements to non-US swap dealers if transactions are negotiated, arranged or executed by US personnel. Currently enforcement has been delayed until September 15, 2015.

Current proposed rules that are open for comment at the CFTC include the Position Limit Rules. Comments for the rules close on January 22. In addition to general comments on the proposed rules, the CFTC has asked for commenters to specifically address questions posed at the recent Agricultural Advisory Committee meeting, including guidance for estimating deliverable supply and differences between cash- and physically-settled contracts.
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Jenny E. Cieplak
Counsel – Washington, D.C.
Phone: +1 202.624.2542
Email: jcieplak@crowell.com