September and the changing of the leaves means a return to the task at hand—prepping for a complete regulatory overhaul and what that means to your firm’s IT. Yet, for all the bluster I’m hearing—about how we’re going to get inundated with the final rules with reference to how the Dodd–Frank Act will be implemented—I think this is really much ado about nothing.
This isn’t to say that major rules aren’t coming or that the already-finalized rules aren’t significant in their own right; instead, what I believe is that the really juicy stuff that pertains to final rules on swap execution facilities (SEFs) and clearing will likely be undecided until, at best, next year.
But let’s first take a look at what has been finalized. According to the Commodity Futures Trading Commission (CFTC), there are a whopping seven rules that the industry will have to become compliant with this month (September). Of those rules, however, only one has a major immediate impact on buy-side firms.
The big one, from a technology perspective, is the one that creates more strict reporting rules for large traders. For the first time, the CFTC and the Securities and Exchange Commission (SEC) will be able to “survey systematically the cleared and uncleared swaps markets.” This rule is designed to help regulators investigate more quickly and efficiently instances of market manipulation in order to help avoid market shocks, such as the one seen with last May’s Flash Crash.
This rule was brought about as a result of the increase in high-frequency trading and the fragmentation it has created, according to the SEC’s chairman Mary Schapiro. The new legislation is expected to impact more than 400 large traders, defined by the SEC as “a person whose transactions in NMS securities equals or exceeds two million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month.”
Large traders will be assigned an identification number “that will uniquely and uniformly identify the trader, which the large trader must then provide to its registered broker-dealers.” Those broker-dealers will have to maintain records of the time transactions were executed and provide transaction information to the SEC and CFTC upon request. Finally, and perhaps most controversially, “certain registered broker-dealers subject to the Rule will be required to perform limited monitoring of their customers’ accounts for activities that may trigger the large trader identification requirements” of the rule.
It’s still unclear just how much of an effect this rule is going to have on the buy-side community, but it’s likely to cause quite a bit of pain from a business strategy standpoint and could result in some unforeseeable technological challenges. However, the real earth-moving changes, with the trading and clearing of swaps being the tip of the iceberg, are not likely to be finalized this year—there might be some clarity around bits and pieces, but nothing substantial.
Spanner in the Works
In addition to what the CFTC and SEC are hashing out—they’ve previously stated that they may differ on some enforcement rules, which might just throw a spanner in the works—other industry organizations are working to establish new rules to top those introduced by the CFTC and the SEC. For example, the International Swaps and Derivatives Association (ISDA) and the Futures Industry Association (FIA) are jointly publishing rules for non-SEF traded and cleared swaps, which include a controversial “give-up agreement.” These rules will not be mandatory, but they have caused a bit of consternation among buy-side firms.
I keep hearing about how the last four months of 2011 will be dominated by the implementation of Dodd–Frank and what technological challenges will be created as a result. But the way I see it, the last four months are likely to look pretty much like the first eight months of the year—no clarity, just confusion.
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