Dodd-Frank News Center

OCC proposes limits on default rights in qualified financial contracts

This story appeared in Bank Digest.

The OCC is proposing to add a new part to its rules to address concerns relating to the exercise of default rights in certain financial contracts that could interfere with the orderly resolution of certain systemically important financial firms. Specifically, a covered bank would be required to ensure that a covered qualified financial contract (1) contains a contractual stay-and-transfer provision analogous to the statutory stay-and-transfer provision imposed under Title II of the Dodd-Frank Act and in the Federal Deposit Insurance Act, and (2) limits the exercise of default rights based on the insolvency of an affiliate of the covered bank.

 In addition, the proposed rule would make conforming amendments to the OCC's Capital Adequacy Standards and the Liquidity Risk Measurement Standards in its regulations. According to the OCC, the requirements of its proposed rule are substantively identical to those contained in a proposed rule issued by the Federal Reserve Board on May 3, 2016. Comments on the OCC's proposed rule must be received by Oct. 18, 2016.

House Panel Approves Bi-Partisan Legislation Clarifying Swap Execution Facility Provisions of Dodd-Frank

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

The House Subcommittee on Capital Markets approved by voice vote bipartisan legislation providing certainty and direction with regard to the Dodd-Frank definition of swap execution facility. Sponsored by Chairman Scott Garrett (R-NJ), the Swap Execution Facility Clarification Act, HR 2586, is designed to implement congressional intent reflected in the heavily negotiated language of the swap execution facility definition in Dodd-Frank. H.R. 2586 directs regulators to provide market participants with the flexibility they need to obtain price discovery in the market and in the method of execution they use.

European Central Bank Asks CFTC to Exclude Swap Activities of Foreign Central Banks from Dodd-Frank Embrace

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

In a letter to the CFTC, the European Central Bank said that the objectives of the derivatives provisions of the Dodd-Frank Act of increasing transparency and reducing risk will not be served by applying Title VII of the Act to the swap activities of the ECB or transactions with its counterparties. In fact, said the central bank, regulations constraining the ECB’s activities in the US or with US parties will have the perverse consequence of making it more difficult for the ECB to reduce risk and maintain the integrity of the financial system. Indeed, imposing transparency requirements on the ECB will not achieve greater transparency for the swap market, said the central bank, because the ECB’s trades are not ordinary commercial trades that are comparable with other transactions. If Title VII-implementing regulatory requirements are imposed on foreign central banks, said the ECB, the ECB and other central banks may shift swap activity away from the US markets or US counterparties, thereby reducing the liquidity of US markets, constraining the competitiveness of US parties, and reducing the effectiveness of central bank actions.

Senate Legislation Would Close Credit Default Swap Tax Loophole and Increase Off-Shore Disclosure

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Hedge Funds and Private Equity: Regulatory and Risk Management Update.

As part of a host of measures to combat offshore and tax shelter abuses, Senate legislation would would close an existing tax loophole that allows credit default swap payments to escape taxation if sent from the United States to persons offshore, such as an offshore hedge fund or foreign bank. The Stop Tax haven Abuse Act would close this credit default swap loophole by treating CDS payments sent offshore from the United States as taxable U.S. source income. Another provision would increase publicly available information about multinational corporations by requiring them to include basic information on a country-by-country basis in their filings with the SEC to increase transparency and facilitate IRS inquiries into transfer pricing, foreign tax credits, and abusive offshore tax shelters. The legislation was introduced by Senator Carl Levin (D-MI) and has picked up a number of co-spnsors. A companion bill is expected to be introduced in the House.

SEC Extends Temporary Rules Exempting Credit Default Swaps Cleared by Central Counterparties until April 16, 2012

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Hedge Funds and Private Equity: Regulatory and Risk Management Update.

In order to allow central counterparties to clear eligible credit default swaps while the Commission completes the regulatory implementation of the derivatives provisions of Dodd-Frank, the SEC extended the expiration dates of Temporary Rules to April 16, 2012 or until the Commission adopts permanent exemptions for security-based swaps issued by certain clearing agencies. In January 2009, the SEC adopted the Temporary Rules, which exempt eligible credit default swaps issued or cleared by a central counterparty and offered and sold only to eligible contract participants from all provisions of the Securities Act, other than the anti-fraud provision, as well as from the registration requirements of the Exchange Act and from the provisions of the Trust Indenture Act.. In September 2009, the rules were extended until November 30, 2010. These are interim final temporary Rule 239T and a temporary amendment to Rule 146 under the Securities Act, interim final temporary Rules 12a-10T and 12h-1(h)T under the Exchange Act, and interim final temporary Rule 4d-11T under the Trust Indenture Act.

Amendment Introduced to Ensure Well-Functioning Swaps Market

This story appeared in Bank Digest.

Rep. Scott Garrett, R-N.J., Chairman of the House Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, has introduced an amendment to the 2012 Agriculture Appropriations bill that would require swap data reporting rules to be finalized and in effect for 12 months before the Commodity Futures Trading Commission can promulgate block trade and real-time reporting rules. With this change, the CFTC would have the ability to collect transaction data it needs to determine reasonable standards for block trade levels and real-time reporting without disrupting the marketplace, according to Garrett, who stated that “It's unreasonable to think we can try to regulate a multifaceted and complex industry without fully understanding the dynamics of the marketplace...Finalizing any numerical determination of block trade sizes or setting real-time reporting time frames prior to having the necessary data is arbitrary, encourages litigation, and will likely have unintended consequences on pension funds' ability to protect their investors as well as on economic growth and job creation at a time when we can least afford it.”

FX Swaps and Forwards to Be Exempted from Dodd-Frank Clearing and Trading Requirements

This story appeared in Bank Digest.

The Treasury Secretary has issued a Notice of Proposed Determination providing that central clearing and exchange trading requirements would not apply to foreign exchange (FX) swaps and forwards. In a Fact Sheet, the Treasury Secretary noted that the proposed determination is narrowly tailored and FX swaps and forwards will remain subject to Dodd-Frank’s rigorous new trade reporting requirements and business conduct standards. The Treasury Secretary also stressed that the proposed determination does not extend to other FX derivatives, such as FX options, currency swaps, and non-deliverable forwards.

SEC Proposed Antifraud Rule for Security-Based Swaps Exceeds Dodd-Frank’s Authorization Says Hedge Fund Association

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and CCH Derivatives Regulation Law Reporter.

SEC proposed Rule 9j-1 to prevent fraud and manipulation in the trading and exercise of security-based swaps exceeds the authority granted the Commission under Section 763(g) of the Dodd-Frank Act, said a global hedge fund association, and go beyond Congress’s delegated authority in extending the prohibitions of Rule 10b-5 to ongoing obligations between the execution and extinguishment of a security-based swap contract which do not fall within the statutory definitions of purchase and sale. In a letter to the SEC, the Managed Funds Association also asked the SEC to clarify that the redefined statutory terms of “purchase” and “sale” will not include the post-execution performance of security-based swap contracts in accordance with their pre-negotiated terms.

SEC Extends, Modifies ICE Trust Exemptions

This story appeared in Bank Digest.

The Securities and Exchange Commission has issued an order extending and modifying temporary exemptions under the Securities Exchange Act of 1934 in connection with a request of ICE Trust U.S. LLC related to central clearing of credit default swaps and request for comment. Under this deemed registered provision, ICE Trust will be required to comply with all requirements of the Exchange Act, and the rules thereunder, applicable to registered clearing agencies to the extent it clears security-based swaps after the effective date of the deemed registered provision.

House Ag Chair Peterson Details SEC, CFTC and FERC Jurisdiction over Derivatives in Dodd-Frank Act

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

In the view of House Agriculture Committee Chair Collin Peterson, the Dodd-Frank Act allocates authority over swaps and security-based swaps as follows. First, the CFTC has exclusive jurisdiction over swaps, including swaps on broad-based security indexes. Within the swap definition is a category of swaps called security-based swap agreements. For this specific category of swaps, the CFTC will continue to exercise its full jurisdictional authority, while the SEC may exercise certain specific authorities over these products. Title VII also clarifies that the SEC has jurisdiction over security-based swaps, which are swaps on narrow-based security indexes and single securities, and that the two agencies share authority over mixed swaps.