Anxieties are mounting in the derivatives market and the connected legal community as it becomes increasingly evident that the Commodities Futures Trading Commission (“CFTC”) and the Securities and Exchange Commission (“SEC”) will not have the new regulatory rules for that market completed by July 16, the day they are required to go into effect by law. A derivative is a contract the value of which varies dependent on the value of something else, such as another financial instrument or some currency or commodity. Deregulation in the derivatives market is thought to have been in part responsible for the recent economic downturn, and the Dodd-Frank Wall Street Reform Act of 2008 made broad regulatory changes to that market, the details of which were to be ironed out in rules to be written before they take effect on July 16, 2011. As the deadline approaches, however, and it becomes clear that the rules will not be complete before the deadline, many worry that the $583 trillion derivates market will be cast into a legal grey area, prompting a host of lawsuits and misconduct, and a slowing of market transactions as firms hesitate over that legal ambiguity.
The Dodd-Frank Act mandates that by July 16, among other things, most of a type of derivative called a “swap,” which is a contract to exchange one asset or liability for another in the future, must be traded on exchanges or other open platforms, rather than directly and privately between two parties, what is often called “over-the-counter” derivatives trading. Certain laws that exempt some businesses from the asset or net-worth requirements of derivatives training are set to expire on July 16. The specifics of the implementation of these reforms will be in question should the rules not be produced by the deadline, the worst-case scenario being that swaps themselves will be in an immobilizing legal limbo.
“The issuance of rules for derivatives trading is critical to successful reform in the financial markets,” said KMB partner David J. Marshall, who represents whistleblowers before the SEC and CFTC whistleblower programs. “The Dodd-Frank Act tasked the SEC with a great deal of rulemaking, and the commission has done an excellent job with rules such as those governing the whistleblower program, but the derivatives rules are needed in order to prevent a new wave of questionable trading on Wall Street.”