As the finalization of 11 major Dodd-Frank rules approaches in October, swap dealer compliance teams are beginning to wonder how US regulators will handle missed compliance dates.
The US Commodity Futures Trading Commission (“CFTC”) may choose not to sanction firms for failing to comply with the rules by the compliance dates, given the complexity and novelty of the new regulatory regime, according to Don Thompson, managing director and associate general counsel at JP Morgan in New York.
However, CFTC sanctions are not the only foreseen consequence of non-compliance. One rule in particular allows for a “right of rescission,” which means that a counterparty can actually rescind a swap if the other counterparty is not in compliance with the rules.
The CFTC has not offered further guidance on the rescission rule, and compliance teams are in the dark about the rule’s practical implications. “[U]ntil the CFTC addresses the practical implication of this interpretation, as they have stated in their fact sheet, I have no idea what to do with this additional interpretation,” said Thompson.
Additionally, firms would have to consider whether to aggregate the exposure of their affiliate’s swaps to their own, a move that could be the difference between crossing the swap dealer and major swap participant threshold. A firm that crosses the threshold would be required to register with the CFTC and comply with a more onerous regulatory regime.
“It would all be do-able and understandable if we were only doing one swap a day, but we’re talking about thousands of swaps across thousands of counterparties. So trying to hit several moving targets all around the same time will be very difficult,” said Thompson.
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