Background - News & Events (Landing) 2016

Commodities Regulation Update – January 19, 2015

January 20, 2015

Author: Jenny E. Cieplak.

Last week’s biggest story was the surprise move by the Swiss government to decouple the Swiss Franc from the Euro. As the Swiss government removed the cap of 1.20 Francs to the Euro, the Franc surged in value, in part based on suggestions that the European Union is expected to follow in the footsteps of the US and institute a policy of “quantitative easing.” The Swiss government defended the surprise move, suggesting that announcing the policy beforehand would have only encouraged excessive speculation.

Both institutional and retail investors, as well as currency brokers, were hit with large losses as the markets fluctuated. Many retail investors were particularly hard-hit, and the news was filled with stories of investors who lost huge amounts on leveraged bets on the currency. Both the NFA and the FCA have said they are monitoring foreign currency brokers generally, and in particular are looking into practices at brokers that underwent severe losses. New York-based FXCM already received a $300 million loan from Leucadia to shore up its balance sheet, and UK-based Alpari has stated that it is insolvent. It remains to be seen how regulators will respond but a review of currency margin rules may be forthcoming. For example, it is possible that retail forex dealers will be required to segregate customer funds from their own funds in the same manner as FCMs and swap dealers.

Meanwhile, on the Hill, H.R. 37 passed the full House. This bill would extend the deadline for banking entities to cease trading in collateralized loan obligations until 2019 (from the current 2017 compliance deadline). The bill also would amend 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.” H.R. 37 also includes a number of provisions addressing registration and reporting requirements for emerging growth companies. While the White House has already issued a veto threat, the bill passed the House with a few Democrats on board, and while it is unlikely that it will be enacted into law on its own it may become part of a larger bill that is less likely to be vetoed.

Another bill to amend the Administrative Procedure Act was also passed by the House last week, and the president also issued a veto threat. H.R. 185 would revise and expand the criteria agencies are required to consider when proposing and adopting rules, as well as requiring advance notices of proposed rulemaking for rules that have significant economic impact or involve novel policies.

The President signed into law last week the Terrorism Risk Insurance Act. 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. The CFTC’s and the prudential regulators’ proposed margin regulations exempt from these margin requirements transactions between swap dealers/MSPs and entities that qualify for the end user exemption from the Dodd-Frank clearing requirement. Section 302 of the Act codifies this exemption, preventing regulators from rescinding the exemption in later rulemaking.

Also last week, the SEC finalized its security-based swap (SBS) reporting rules. The rules establish criteria for registration of SBS data repositories, provide a hierarchy for the determination of which counterparty to the SBS is required to report, and provide for the use of the standard Global Legal Entity Identifier System for tracking of reports. Persons who are subject to the new rules must comply with them no later than 365 days after the adopted rules are published in the Federal Register. The SEC acknowledged that while the rules were a first step towards greater transparency, Commissioner Stein acknowledged that additional work is still needed, particularly around reporting of complex, bespoke swaps, so additional reporting regulations may be considered in the future.
Jenny E. Cieplak
Partner – Washington, D.C.
Phone: +1 202.624.2542