The House Agriculture Committee on Wednesday approved a bill that would delay the implementation of rules on municipal and other derivatives imposed by the Dodd-Frank Act by at least 18 months, until after the next presidential election.
The rules, approved by a 25 to 20 vote along party lines, would delay the effective date of the rules until Dec. 31, 2012, or 90 days after they are published in the Federal Register, whichever is later.
The Securities Industrial and Financial Markets Association applauded the action.
“We believe that the current July 12, 2011, deadline for the derivatives section of Dodd-Frank rulemaking does not provide adequate time for regulators to consider the critical issues related to this new regulatory system for over the counter-derivatives markets,” said Ken Bentsen, SIFMA’s executive vice president for public policy.
But even as the committee voted, Gary Gensler, chairman of the Commodity Futures Trading Commission, which would have oversight of muni-related swaps, warned members of a Senate Appropriations subcommittee that the Dec. 31, 2012, deadline “would be a delay that would put the American public at risk ... of markets that are still dark and by and large ... unregulated.”
Gensler said the derivatives marketplace is about $300 trillion and that this would mean that “$20 for every dollar in our economy would still be a dark market.”
The CFTC chairman noted that President Obama made a commitment to other countries that the rules would be completed and implemented by the end of 2012. Completing work on the rules also is critical to lowering uncertainty in the market, he said.
Under Dodd-Frank, most muni-related swaps would fall under CFTC jurisdiction because the term securities-based swaps is so narrowly defined.
Muni market participants want to make sure that state and local governments, nonprofits, and public utilities and rural electric cooperatives qualify for an “end-user” exemption from requirements that transactions be cleared and traded on exchanges.
The act says that swaps are exempt from mandatory clearing and exchange-trading requirements if one of the counterparties to the swap meets three requirements. It must not be a “financial entity” or use swaps to “hedge or mitigate commercial risk,” and it must tell the CFTC how it will meet the financial obligations associated with the swap that it’s entering into.
Municipal market participants are urging the CFTC to take the stance that states, localities, nonprofits and public utilities are not financial entities and that their swaps transactions are for hedging purposes.
Some are urging the CFTC to allow one stand-alone disclosure document to be filed to meet the financial disclosure obligation, with the provision that it would be modified to reflect any material changes.
