CFTC Issues Final Order Granting Temporary Relief from Dodd-Frank Swaps Regulation

July 19, 2011 Authors: Jeffrey Allen Sherman, Peggy A. Heeg, Michael Loesch

On July 14, 2011, the Commodity Futures Trading Commission ("CFTC") issued a final order providing temporary exemptive relief from certain provisions of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") that were scheduled to take effect on July 16, 2011—the one-year anniversary of the Act's ratification.  

The order provides temporary relief from certain provisions of Dodd-Frank until the earlier of: (1) the effective date of rules specified in the order; or (2) December 31, 2011.  The order also provides a mechanism for the continuation of various exclusions from the Commodity Exchange Act ("CEA") that existed for most swaps prior to July 16, 2011.

Adopting most of its June 14, 2011 proposed exemptive order,1 the CFTC effectuates this temporary relief by grouping Dodd-Frank provisions into four major categories:

  1. provisions that require a rulemaking (for which relief is not being proposed);
  2. self-effectuating provisions that reference terms that require further definition (e.g., "swap," "swap dealer," "major swap participant," or "eligible contract participant");
  3. self-effectuating provisions that repeal provisions of current law that do not reference terms requiring further definition; and
  4. self-effectuating provisions for which relief is not granted.

The order provides temporary relief for Category 2 and 3 provisions, as discussed in more detail below.  The order does not grant relief for Category 1 provisions, since those provisions do not take effect on July 16, 2011, but rather, by law, take effect 60 days after the applicable final rule is published in the Federal Register (unless some other period is stated).  Nor does the order provide relief for Category 4 provisions, which are self-effectuating provisions deemed by the CFTC not to require relief.  A list of the provisions in each of the four categories is provided in an Appendix to the order.2

The CFTC's Legal Authority

In granting the exemptive relief, the CFTC relied on its broad exemptive authority under the CEA and Dodd-Frank.  Specifically, the CFTC exercised its authority under section 4(c) of the CEA, which allows the Commission to exempt certain transactions from the dictates of the CEA as is necessary in "the public interest."3  Likewise, the CFTC exercised its authority under 712(f) of the Dodd-Frank Act to issue orders and "exempt persons, agreements, contracts, or transactions from provisions of this Act" as necessary to prepare for the implementation of Dodd-Frank. 

CFTC Relief for Category 2 Dodd-Frank Provisions

Category 2 provisions are "self-effectuating" under the statute (i.e., they do not contain an express provision identifying the effective date as being 60 days following a required rulemaking) but, nevertheless, are dependent on certain key definitions yet to be finalized.  Those definitions are the key definitions that the CFTC is required by law to "further define," namely, "swap," "swap dealer," "major swap participant," and "eligible contract participant."4  The exemptive order delays the implementation of the portions of Category 2 provisions that refer to terms that will be defined by the issuance of final rules.

Specifically, the order exempts "all agreements, contracts, and transactions," as well as any person or entity offering, entering into, or rendering advice or other services with respect to any such agreements, from all provisions of the CEA, as added or amended by Dodd-Frank, "that reference one or more of the terms regarding entities or instruments subject to further definition under sections 712(d) and 721(c) of the Dodd-Frank Act," as listed in the Appendix to the Order.5

The CFTC's temporary relief expires upon the earlier of: (1) the effective date of the applicable final rule further defining the relevant term; or (2) December 31, 2011.

CFTC Relief for Category 3 Dodd-Frank Provisions

Category 3 provisions include provisions of the Dodd-Frank Act that repeal portions of the pre-Dodd-Frank CEA as of July 16, 2011.  These provisions do not fall within Category 2 because they do not refer to definitions that are subject to the rulemaking process.  Nevertheless, the CFTC determined that temporary relief is needed to maintain the legal certainty of swaps transacted on or after July 16, 2011.

One of the hallmarks of the Dodd-Frank Act is the repeal, effective July 16, 2011, of the exclusion of most swaps from broad CEA regulation.  For example, under CEA section 2(h), certain swap transactions between eligible participants in exempt commodities (such as metals, chemicals and energy) were excluded from direct CEA regulation (other than fraud and manipulation, etc.).6  Because the new swaps regulatory regime is not yet in place, however, the repeal of these exclusions raises uncertainty about the enforceability of transactions entered into in reliance on these exclusions.

To effectuate relief for Category 3 provisions, the order extends and broadens the existing regulatory exclusion over swap agreements contained in Part 35 of the CFTC's regulations.7  Part 35 historically exempted a broad category of over-the-counter swaps that meet certain requirements – i.e., those that are not standardized, not cleared, not exchange-traded, and not traded on a "multilateral transaction execution facility" such as an electronic platform.8  The swap agreements listed in Part 35 include rate swap agreements, basis swaps, commodity swaps, currency swaps, agreements similar to such swaps (or combinations thereof), and master agreements for such swaps.9

Following amendments to the CEA in 2000, which statutorily excluded swaps on "exempt" and "excluded" commodities from much or all of the CFTC's jurisdiction, Part 35 became relevant for agricultural swaps only.  The exemptive order broadens the exclusions in Part 35 to exclude "all agreements, contracts, and transactions in exempt and excluded (but not agricultural) commodities, and any person or entity offering, entering into, or rendering advice or rendering other services with respect to, any such agreement, contract, or transaction, from the provisions of the CEA, if the agreement, contract, or transaction complies with part 35 of the Commission's regulations."  The exclusion applies even if:

  • the transaction is executed on a multilateral transaction execution facility;
  • the transaction is cleared;
  • persons offering or entering into the swap are not "eligible swap participants" provided that they are "eligible contract participants" as defined prior to July 16, 2011;
  • the transaction is part of a fungible class of agreements that are standardized as to their material economic terms; and/or
  • no more than one of the parties to the transaction is entering into it in conjunction with its line of business, but is neither an eligible contract participant nor an eligible swap participant, and the transaction was not and is not marketed to the public.

This expanded Part 35 will remain in effect until replaced.10  Accordingly, the CFTC believes that by extending the scope of Part 35 to the types of transactions that would have been excluded prior to July 16, 2011,11  it can ensure that transactions in swaps will be 'business-as-usual' until the new Dodd-Frank regime is fully in place.

This relief also is temporary, and will expire upon the earlier of: (1) the CFTC's repeal or withdrawal of Part 35; or (2) December 31, 2011.

No Relief for Category 4 Dodd-Frank Provisions

The CFTC did not provide relief for Category 4 provisions that are self-effectuating and that became effective on July 16, 2011.  In general, Category 4 provisions do not create legal uncertainty over swaps, do not rely on key (but yet undefined) definitions, or otherwise "will not cause undue disruption to affected transactions, markets, or entities," and hence the CFTC found no reason to delay such provisions.  Notable examples of Category 4 provisions are the antidisruptive trading provisions and the "Core Principles" for derivatives clearing organizations and designated contract markets contained in  Dodd-Frank. 

The order updates its earlier list of Category 4 provisions by including additional Dodd-Frank provisions that became effective on July 16, 2011.  These provisions include Dodd-Frank provisions regarding the CFTC's jurisdiction over swaps and new whistleblower provisions. 

Conditions on Temporary Relief

The temporary relief is subject to several important conditions.  First, the relief does not apply to certain provisions of Dodd-Frank, such as the new anti-fraud and anti-manipulation authority under Dodd-Frank, nor does it impact the CFTC's existing anti-fraud and anti-manipulation authority.12  The CFTC observed that since the new Dodd-Frank anti-fraud and anti-manipulation authority refers to the defined term "swaps," which is subject to further definition, the new anti-fraud and anti-manipulation authority will not apply to "swaps" as strictly defined under Dodd-Frank, but it will apply to "all transactions other than 'swaps' (including, but not limited to, futures contracts, options on futures contracts, transactions with retail customers in foreign currency or other commodities pursuant to CEA section 2(c)(2) (7 U.S.C. 2(c)(2))."  In addition, the new anti-fraud and anti-manipulation authority will also apply to transactions that are subject to Category 3 relief discussed above, which are those swaps and other transactions falling under the expanded Part 35 of the CFTC's regulations.  In short, the CFTC's new and old anti-fraud and anti-manipulation authority will apply to virtually all transactions subject to CFTC jurisdiction, including transactions other than swaps as well as all derivatives transactions historically subject to CEA section 2 exclusions that will now be subject to the expanded Part 35.13

Second, the order will not apply to any provision of the Dodd-Frank Act or the CEA that became effective prior to July 16, 2011, or to Commission regulations already issued, since such provisions are beyond the scope of the exemptive order.  Similarly, the relief does not affect any effective date established by the CFTC in a final rule promulgated pursuant to Dodd-Frank. 

Third, nothing in the order limits the CFTC's Dodd-Frank section 712(f) authority discussed above to issue rules, orders, or exemptions prior to the effective date of any provision, in order to prepare for the implementation of Dodd-Frank. 

Lastly, the Final Order does not affect the applicability of any provision of the CEA to futures contracts or options on futures contracts.

This article was prepared by Jeffrey A. Sherman (jsherman@fulbright.com or 202 662 4573), Peggy A. Heeg (pheeg@fulbright.com or 713 651 8443), Michael Loesch (mloesch@fulbright.com or 202 662 4552) and Lui Chambers from Fulbright's Energy Practice and Fulbright's Corporate Governance Practice.



[1] 76 Fed. Reg. 35,372 (June 14, 2011).
[2] The Final Order is available at http://www.cftc.gov/PressRoom/PressReleases/pr6073-11.html
[3] 7 U.S.C. § 6(c).
[4] See Dodd-Frank §§ 712(d)(1) and 721(c).  The Commission has issued two notices of proposed rulemaking relating to those definitions, but has not yet issued a final order.  See 75 Fed. Reg. 80,174 (Dec. 21, 2010); 76 Fed. Reg. 29,818 (May 23, 2011).
[5] The CFTC does not have authority to provide exemptive relief for several Category 2 provisions, including new CEA section 4s(l), 7 U.S.C. § 6s(l) (providing for swap dealer segregation requirements with respect to uncleared swaps) and new CEA section 4s(k), 7 U.S.C. § 6s(k) (providing for the duties and designation of a chief compliance officer for swap dealers and major swap participants).  To provide similar relief for those provisions, the CFTC staff has issued a no-action letter which states that it "will not recommend that the Commission commence an enforcement action against any person for failure to comply with the above referenced provisions during such period."  That letter is available on the CFTC's website at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/noactionletter071411.pdf.
[6] 7 U.S.C. § 2(h).  Under former Section 2(h)(1), 7 U.S.C. § 2(h)(1), "eligible contract participants" could enter into bilateral, negotiated over-the-counter swaps in exempt commodities, so long as such transactions were not executed on a trading facility.  Under Section 2(h)(3), 7 U.S.C. § 2(h)(3), "eligible commercial entities" could enter into principal-to-principal transactions executed on an electronic trading facility which is an exempt commercial market.
[7] 17 C.F.R. Part 35.
[8] Eligible Part 35 swaps: must be entered into between "eligible swap participants" (§ 35.2(a)); must not be part of a "fungible class of agreements that are standardized as to their material economic terms" (§ 35.2(b)); must not be cleared, i.e., creditworthiness of any party must be a material consideration in entering into or determining the terms of the swap (§ 35.2(c)); and must not be entered into and traded on or through a "multilateral transaction execution facility" (i.e., an exchange or electronic trading system) (§ 35.2(d)).
[9] 17 C.F.R. § 35.1(b)(1).
[10] The CFTC proposed, but has not yet finalized, modifications to Parts 32 and 35 of its rules to conform them to the new Dodd-Frank regime because, once the new regime is in place, Part 35 will no longer be needed as written.  See 76 Fed. Reg. 6095 (Feb. 3, 2011).  That rulemaking will be kept on hold presumably until the broadened Part 35 is no longer needed; that is, once all of the rulemakings necessary to implement the new swaps regime are finalized.
[11] This relief applies to transactions covered under the following now-repealed exclusions, as identified by the CFTC: CEA §§ 2(d)(1), 2(d)(2), 2(g), 2(h)(l)-(2), 2(h)(3)-(7), 5d, and 2(e).
[12] The order lists those provisions as: "CEA sections 2(a)(1)(B), 4b, 40, 6(c), 6(d), 6c, 8(a), 9(a)(2), or 13" as well as "the regulations of the Commission promulgated pursuant to such authorities, including regulations pursuant to CEA section 4c(b) proscribing fraud."
[13] The CFTC recently finalized its new anti-fraud and anti-manipulation rules, which will be effective on August 15 and are  promulgated at 17 C.F.R. §§ 180.1 and 108.2.  For a discussion of those rules, see our July 11, 2011 alert.