Today we are voting on a proposed order aimed at providing legal certainty in the form "temporary exemptive relief" for swap market participants as of the July 16, 2011 general effective date of the Dodd-Frank Act.
This temporary relief is necessary because: (1) the Commission has not yet put forth final rules defining such key terms such as "swap" and "swap dealer"; and (2) certain exemptions and exclusions for transactions in exempt and excluded commodities currently relied upon by market participants will be repealed effective July 16, 2011. The proposal is supposed to "ensure that current practices will not be unduly disrupted during the transition period to the new regulatory regime."
However, because we have yet to put forth an implementation schedule for the final rules as to their approval and effective dates, and because the proposal includes an arbitrary sunset provision that could cut that transition period short on December 31, 2011, the proposal, albeit "temporary" will likely not provide the necessary "relief." Though it is the right thing to do at this time, I have concerns that this proposal will not provide the appropriate level of legal certainty, and if it is to last only a few months, will likely only serve to further confuse and frustrate the markets and market participants.
I support the proposal because we are just over one month away from the July 16th effective date, and it is important for the Commission to provide market participants and the public with the form of relief it is contemplating. The proposed order intends to temporarily exempt certain persons, entities and transactions from complying with any provision of the Dodd-Frank Act that references key definitions, while continuing to provide legal and regulatory certainty for transactions that had relied upon exemptions and exclusions in various sections of the Commodity Exchange Act (CEA) repealed by Dodd-Frank through reliance on established regulatory exemptions. The goal is to prevent the affected persons and entities from having to alter their current practices while the Commission finishes its rulemaking.
I believe that the proposed relief is imperfect for two reasons. First, the temporary exemptive relief will expire upon the earlier of: (1) the effective date of the applicable final rule further defining the relevant term/the repeal or replacement of the fallback exemptive provisions found in current parts 32 and 35 of Commission regulations; or (2) December 31, 2011. Second, the proposal is vulnerable to unintended consequences due to a lack of an order of final rule implementation.
December 31, 2011 is an arbitrary end point, and I am not persuaded by the proposal's arguments in support of the December 31st sunset provision. The proposal states that "[T]he Commission believes it would be appropriate to periodically re-examine the scope and extent of the proposed exemptive relief in order to ensure that the scope of relief is appropriately tailored to the schedule of implementation of the Dodd-Frank Act requirements." A six-month timeline is not sufficient to provide for a seamless transition until final Commission rules are implemented. Until the Commission sets forth a comprehensive sequence for the final rulemakings or an exemptive relief that expires upon rule implementation, it can provide no assurances to market participants. This will leave market participants in November with the same questions that they have today. I would note that it is my understanding that the SEC's order will provide exemptive relief until the final rules they are promulgating become effective.
Additionally, the proposal states that limiting exemptive relief is consistent with other provisions of Title VII and references the one-year grandfathering provisions available for persons relying on sections 2(h) and 5(d) of the CEA. However, I am baffled as to how one-year grandfathering provisions applicable to some of the same provisions addressed by the proposal supports limiting exemptive relief to anything less than one year. I am interested to hear more about staff's reasoning in making this argument.
Second, because the Commission has not set forth a comprehensive sequence of final rulemakings, the approach taken by the proposal may lead to a variety of unintended consequences in light of other rulemakings. For example, the proposed order builds, in part, on existing part 35 of the Commission's regulations. This provision is more commonly known as the swap exemption and is relied upon primarily by entities engaging in agricultural swaps. While this is logical, on February 3, 2011, we published a proposal in the Federal Register that would revoke part 35 in order to ensure that it is not used by individuals and entities who had relied on Sections 2(d), (g) and (h) of the CEA as an end run around the new statutory and regulatory requirements. Thus, while the Commission in this proposal is advocating that market participants rely upon part 35, it is, at the same time, involved in a rulemaking that would ensure that those same market participants cannot avail themselves of its relief. This is a problem because, without an implementation plan and with an arbitrary end date, market participants have no certainty as to when their relief will become obsolete. How is staff going to evaluate these issues when it is supposed to be churning out final rules minute by minute until the sun sets?
I have at least two solutions to many of the problems I have with this proposal. Today, I am introducing an amendment that would extend the relief in the proposed order until: (1) the Commission completes the relevant final rulemaking; (2) and the final rulemaking becomes effective. This amendment would give market participants the clarity and certainty that they have requested. This amendment would also be in line with the relief contemplated by fellow market regulators, such as the SEC.
I am also reiterating my call for the Commission to set forth a comprehensive schedule, for public comment, on when it plans to vote on final rulemakings and when the final rules will become effective or phased in. Such a schedule will help the Commission avoid potential contradictions, like our treatment of part 35. I hope that the Commission will consider my amendment and my renewed call for a rulemaking and implementation schedule with an open mind.
Even if the proposed amendment fails to secure enough votes, and my call for a plan continues to go unheeded, I will support today's proposed order to provide temporary exemptive relief. As Teddy Roosevelt said: Do what you can, with what you have, where you are. That's what I am doing today.
EFFECTIVE DATE: AMENDMENT TO THE NOTICE OF PROPOSED ORDER FOR EXEMPTIVE RELIEF AND REQUEST FOR COMMENT
(THE "PROPOSED ORDER")
1. In the Summary section of the Proposed Order, strike the following sentences:
a. This temporary relief, as described further herein, would expire upon the earlier of the effective date of the applicable final rule further defining these terms, or December 31, 2011.
b. This proposed relief would expire upon the earlier of the repeal or replacement of part 35 or part 32, as applicable, or December 31, 2011.
2. Insert, in the Summary section of the Proposed Order, the following sentence instead of the sentence specified in section 1(a) herein:
a. This temporary relief, as described further herein, would expire upon the effective date of the applicable final rule further defining these terms.
3. Insert, in the Summary section of the Proposed Order, the following sentence instead of the sentence specified in section 1(b) herein:
a. This proposed relief would expire upon the repeal or replacement of part 35 or part 32, as applicable, by the effectiveness of a final rule implementing the Dodd-Frank Act.
4. In part II(A) of the Proposed Order, strike all text between the following sentences:
a. The proposed temporary exemptive relief would expire upon the earlier of (1) the effective date of the applicable final rule further defining the relevant term; or (2) December 31, 2011.
b. Should the proposed order expire at the end of the fixed time period - December 31, 2011 - such expiration will not affect the Commission's ability to provide further relief, as appropriate, to avoid undue disruption or costs to market participants.
5. Insert, in part II(A) of the Proposed Order, the following sentences instead of the text specified in section 4 herein:
a. The proposed temporary exemptive relief would expire upon the effective date of the applicable final rule further defining the relevant term.
b. As mentioned above, the Commission is proposing this relief to ensure that current market practices would not be unduly disrupted during the transition to the comprehensive new regulatory framework under the Dodd-Frank Act.
c. The transition to such framework would not be complete until the final rulemakings defining "swap", "swap dealer", "major swap participant", or "eligible contract participant" become effective. The Commission reiterates its intent to deliberatively and efficiently proceed to complete such rulemakings. Extending the proposed relief until such rulemakings become effective would provide maximum clarity and certainty to market participants, and would be consonant with the approach contemplated by other market regulators.
6. In part II(B) of the Proposed Order, strike the following sentences:
a. This proposed temporary exemptive relief would expire upon the earlier of: (1) December 31, 2011; or (2) the repeal or replacement of part 35 or Part 32, as applicable. The Commission is proposing to provide this exemptive relief in part two of the proposed order for no longer than a fixed period of time for the same reasons as described above with respect to part one of the proposed order.
7. Insert, in part II(B) of the Proposed Order, the following sentences instead of the sentences specified in section 6 herein:
a. This proposed relief would expire upon the repeal or replacement of part 35 or part 32, as applicable, by the effectiveness of a final rule implementing the Dodd-Frank Act. The Commission is proposing to provide this exemptive relief for the period specified for the same reasons described above with respect to part one of the proposed order.
8. In part V(B)(5) of the Proposed Order, strike the following sentence:
a. The termination provision will permit the Commission to ensure that the scope and extent of exemptive relief is appropriately tailored to the schedule of implementation of the Dodd-Frank requirements.