Twelve months of Dodd-Frank rulemaking has shown a heightened degree of cooperation between the two US regulators responsible for overseeing the $600 trillion swaps market.
The overlapping jurisdiction of the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) has required the agencies to communicate more closely than usual. US counsel have praised their work here.
“They have been communicating quite closely and harmoniously, even more than people might have expected at the beginning of the process,” said Conrad Bahlke, a derivatives partner with Stroock & Stroock & Lavan.
Panelists at Sifma’s Dodd-Frank Impact Analysis summit on July 13 said that despite their criticism of proposed rules, they see the regulators doing a good job, especially given their limited budgets and timeframes.
But some aren’t convinced that the SEC and CFTC’s cooperation is always reflected in their rules.
“I think that they talk a lot and understand each other’s positions well. I don’t think that they always develop uniform proposals as well as they could,” said Mark Young, a financial regulation partner with Skadden Arps Slate Meagher & Flom.
Dodd-Frank operates on the premise that the SEC’s rules for security-based swaps and the CFTC’s rules for all other swaps be very similar. Differences between their respective markets mean this isn’t always possible, but there are priority areas where alignment is crucial.
One is mixed swaps. Swaps with elements of security-based and other swaps are to be dealt with on a joint-basis, but have not been addressed yet.
Another is credit default swaps. The risks associated with the instrument means they have every incentive to come up with a uniform system of regulation, said one New York-based derivatives partner.
One of the few areas of Title VII where both agencies have issued proposed rules is conduct standards for swap dealers – an early example of them not converging.
The CFTC’s draft rules issued last year have been criticised for lack of clarity on when a dealer is a counterparty or advisor to a special entity (municipality and other government-related entities).
The SEC’s equivalent proposal for security-based swaps issued late last month is considered an improvement. It is more prescriptive on when a dealer is acting as an advisor, and therefore when the conduct requirements are imposed.
The strong communication between the regulators leads some to predict the CFTC will amend its proposal in light of the SEC’s.
“I wouldn’t be surprised if, for example, for that reason we end up seeing some convergence,” said Bahlke.