DTCC Connection

Oct 01, 2010 • DTCC Connection

Countdown Starts to Implement Financial Reform Legislation in U.S.

by Craig Donner


The massive undertaking of implementing hundreds of new provisions in the Dodd-Frank financial reform legislation has begun. “We are going to see a significant amount of activity from the regulatory agencies in the coming months as the countdown begins for implementing Dodd-Frank,” said Larry Thompson, DTCC managing director and general counsel. The majority of rules must be enacted by July 2011.


“We continue to meet with regulators and other stakeholders to explain how DTCC can play a key role in enhancing market transparency and mitigating systemic risk,” Thompson said. “By working collaboratively with our customers and regulators, we want to ensure that new regulations protect the safety and soundness of the market without negatively impacting the industry’s competitiveness.”


OTC derivatives

The Commodity Futures Trading Commission (CFTC) recently approved several proposed rules that will impact the over-the-counter (OTC) derivatives market. The CFTC published these rules in the Federal Register, kicking off the 30-day period for market participants and other interested parties to offer public comments before the agency finalizes the provisions by January 2011. During a public meeting on October 1, the agency voted in favor of publishing the proposed rules to address potential conflicts of interest in the operation of derivatives clearings organizations (DCOs), designated contract markets (DCMs) and swap execution facilities (SEFs).


determining whether a swap contract can be cleared and what the minimum criteria is for firms to become clearing members. The rules also address potential conflicts that could arise for DCMs and SEFs in trying to balance their commercial interests with their self-regulatory responsibilities.


The fine print

The rule governing the operation of DCMs and SEFs would prohibit members from beneficially owning more than 20% of any class of voting equity in the institution, or directly or indirectly voting an interest exceeding 20% of the voting power of any class of equity interest. The rule does not include aggregate ownership restrictions nor does it place any restrictions on the ownership of non-voting equity.


For DCOs, the CFTC’s proposed rule would require the entity to choose one of two alternative limits on the ownership of voting equity or the exercise of voting power:


  • First Alternative: Restricts DCO members from beneficially owning more than 20% of any class of voting equity in the DCO or directly or indirectly voting an interest exceeding 20% of the voting power of any class of equity interest in the DCO. The rule also restricts banks, systemically significant nonbanks, dealers and major swap participants (MSPs) and their affiliates from collectively owning, on a beneficial basis, more than 40% of any class of voting equity in the DCO or directly or indirectly voting an interest exceeding 40% of the voting power of any class of equity interest in the DCO.
  • Second Alternative: Restricts DCO members or banks, systemically significant nonbanks, dealers and MSPs (and their affiliates) from beneficially owning more than 5% of any class of voting equity in the DCO or directly or indirectly voting an interest exceeding 5% of the voting power of any class of equity interest in the DCO.

The CFTC indicated that it will also allow DCOs to apply for a waiver from complying with these two alternatives in certain circumstances. The proposed rules would come with a two-year transition period.


Reporting swaps

The CFTC also issued a final interim rule establishing the timeframe for counterparties to report to a swap data repository (SDR) or the agency unexpired swaps entered into prior to passage of Dodd-Frank on July 21, 2010.


TUnder the rule, counterparties will be required to retain and report certain trade information within 60 days after the registration of a SDR. The interim final rule alerts market participants of the need to retain certain swap data until the permanent rule is finalized.@

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