• adopts a new temporary definition of “U.S. person”;
• clarifies what swap activity a non-U.S. person should include in determining whether it must register as a swap dealer or major swap participant; and
• allows non-U.S. SDs and MSPs to delay compliance with most of the CFTC’s entity-level swap requirements and the CFTC’s transaction-level swap requirements in certain cases.

The Proposal’s capital and margin requirements would apply only to security-based swap dealers and major security-based swap participants that are neither banks nor bank holding companies, whereas the segregation requirements would apply to all security-based swap dealers and major security-based swap participants. In addition, the Proposal would enhance the capital requirements that apply to all large broker-dealers that have been approved to use internal models to compute net capital, regardless of whether they are security-based swap dealers.

• As of September 4, 2012, a total of 237 Dodd-Frank rulemaking requirement deadlines have passed. Of these 237 passed deadlines, 145 (61.2%) have been missed and 92 (38.8%) have been met with finalized rules.
• In addition, 131 (32.9%) of the 398 total required rulemakings have been finalized, while 132 (33.2%) rulemaking requirements have not yet been proposed.
• Major rulemaking activity this month included the Federal Reserve final rule on risk management standards for financial market utilities and the SEC final rules on conflict minerals and the disclosure of payments by resource extraction issuers. Additionally, the OCC, Federal Reserve, NCUA, FHFA and CFPB released a proposed rule on appraisals for higher-risk mortgage loans.

As of June 1, 2012, a total of 221 Dodd-Frank rulemaking requirement deadlines have passed. Of these 221 passed deadlines, 148 (67.0%) have been missed and 73 (33.0%) have been met with finalized rules.

In addition, 110 (27.6%) of the 398 total required rulemakings have been finalized, while 144 (36.2%) rulemaking requirements have not yet been proposed.

 As of May 1, 2012, a total of 221 Dodd-Frank rulemaking requirement deadlines have passed. Of these 221 passed deadlines, 148 (67%) have been missed and 73 (33%) have been met with finalized rules.

 In addition, 108 (27.1%) of the 398 total required rulemakings have been finalized, while 144 (36.2%) rulemaking requirements have not yet been proposed.

 Of particular note this month, the CFTC and SEC approved joint final rules further defining the terms "swap dealer," "security-based swap dealer," "major swap participant," "major security-based swap participant" and "eligible contract participant."

§        the arrangements that swap dealers (“SDs”), major swap participants (together with swap dealers, “Swap Entities”) and futures commission merchants (“FCMs”) that clear swaps for customers and derivatives clearing organizations (“DCOs”) have with respect to clearing customers;

§        timing of acceptance or rejection of trades for clearing by DCOs and clearing members that are FCMs or Swap Entities (“Clearing Members”);

§        risk management procedures of Clearing Members; and

§        swap processing.

In addition, 100 (25.5%) of 393 total required rulemakings have been met with finalized rules. Rules have not yet been proposed to meet 138 (35.1%) rulemaking requirements.

• reporting, recordkeeping and daily trading records requirements;
• conflicts of interest involving research and clearing activities;
• chief compliance officer designation and duties; and
• risk management and operational requirements. 

The adopted rules are largely similar to the rules proposed by the CFTC at the end of 2010, with a small number of changes in response to comments. Some of these changes will have significant ramifications for swap entities. Most importantly, the CFTC has restricted many of the risk management requirements, recordkeeping requirements and chief compliance officer duties to the "swaps activities" of a swap entity rather than applying them to all of a swap entity’s activity. The rule, however, remains quite burdensome in many ways. For example, swap entities must make and maintain records of all oral or written communications that lead to the execution of a swap and must tape all telephone conversations that include such information.

The rules will become effective 60 days after publication in the Federal Register, which is expected shortly. However, the compliance dates for different provisions depend on the regulatory status of the swap entity, as discussed in greater detail in this memorandum.

Major rulemaking activity this month included CFTC final rules relating to swap dealer internal business conduct, and a CFPB proposed a rule defining "larger participants" in certain consumer financial markets.

The earliest that SDs and MSPs will have to comply with the Business Conduct Rule is approximately eight months following the rule’s publication in the Federal Register.

The LSOC model is designed to eliminate the “fellow customer risk” to which futures customers are exposed. Under the LSOC model, if a customer of a futures commission merchant (“FCM”) defaults on a cleared swap margin obligation and the FCM is not able to satisfy the defaulting customer’s obligations, the derivatives clearing organization (“DCO”) has no recourse to funds of the FCM’s non-defaulting customers. Therefore, LSOC is intended to provide additional protection, albeit at an additional cost, to cleared swap customers beyond the current futures DCO model. In contrast, under the futures DCO model, any FCM customers’ swap collateral is available to the DCO upon a default of both the FCM and one of its futures customers. The CFTC has not extended the LSOC model to futures at this time, but will consider doing so.

Consistent with its prior swap entity registration proposal, the CFTC adopted a provisional registration process whereby swap entities must provisionally register with the CFTC by the latest effective date of the rules defining “swap,” “swap dealer” and “major swap participant,” which have not yet been established. Because some swap entity regulations are unlikely to be final by the registration deadline, swap entities must provisionally register without knowing what they will need to do in order to become permanently registered or the full extent of requirements to which they will be subject as registrants.

• As of the end of 2011, deadlines for half of Dodd-Frank's rulemaking requirements have passed. 25.5% of the passed deadlines have been met with finalized rules.
• Major rulemaking activity this month included a Federal Reserve proposal on enhanced prudential standards and CFTC final rules on swap data recordkeeping and reporting.
• In 2011, the CFTC, FDIC, Federal Reserve and SEC held 1720 reported meetings with the public on Dodd-Frank. The Progress Report includes each regulator's top five topics of discussion at those meetings.
• Davis Polk is pleased to announce the launch of the DavisPolkReg Twitter feed, which will provide real-time updates on key Dodd-Frank rulemaking activities and relevant Davis Polk publications.

Volcker Rule Proposed Regulations: Proprietary Trading Summary

Volcker Rule Proposed Regulations: Proprietary Trading Summary with Annexes

Generally, the FDIC and the Federal Reserve have agreed on an integrated single plan approach to the resolution plans, and the two resolution plan rules are intended to work in tandem. Though the earliest resolution plans will be due by July 1, 2012, the FDIC and the Federal Reserve have adopted an approach of staggered initial submissions to allow some firms to submit their resolution plans later than others based on a test linked to the size of nonbank assets. Moreover, resolution plans will be built on an iterative, tailored approach, recognizing that plans will develop over time and in successive submissions, and that plans will vary depending on the size and complexity of the covered company or covered insured depository institution. 

This memo describes key themes in both rulemakings, as well as key differences between the resolution plan rules as previously proposed and the rules as approved by the FDIC.

The proposed rules will not become effective until approved by the SEC. Once approved, FINRA will announce the implementation date of the proposed rule change, which will be no later than 365 days following the SEC’s approval. We will monitor the SEC’s and FINRA’s actions and issue a memorandum once the final rules have been adopted.

If defined and implemented properly, living wills have the potential to be a highly effective tool for improving risk management, reducing systemic risk and mitigating the too big to fail and too big to save problems. However, there are also drawbacks and risks that need to be carefully considered. Getting living wills right is a high-stakes problem for supervisors and regulated institutions.

On the same day, the CFTC proposed rules governing margin requirements for uncleared swaps entered into by non-bank swap entities subject to its jurisdiction.  Based upon the Fact Sheet and Q&As that were released by the CFTC, the CFTC’s proposal appears to be similar, but not identical, to the banking regulators’ proposal.  The SEC has not yet released a proposal for capital or margin requirements for security-based swap entities.

On March 29, 2011, the FDIC released a joint notice of proposed rulemaking that would implement the resolution plan requirements in Section 165(d) of the Dodd-Frank Act. The NPR provides comprehensive guidance on what the FDIC and the Federal Reserve expect to be contained in resolution plans submitted under Section 165(d), who must submit them, when they must be submitted and how the credibility of such plans are to be judged. But it also raises a number of very serious legal and policy issues and leaves a number of fundamental issues unanswered.

The Financial Stability Oversight Council’s (“FSOC” or the “Council”) studyon the Volcker Rule calls for robust implementation of the core proprietary trading prohibition while acknowledging the existence of difficult gray areas, especially in the areas of market making and hedging.  It also contemplates differential treatment of different asset classes.  The study strongly supports the use of quantitative metrics as one compliance and supervisory tool and envisions the creation of a brand-new and strikingly intense compliance structure to constrain impermissible proprietary trading while also providing the regulatory authorities charged with implementing the Volcker Rule (collectively, the “Agencies”) with the ability to engage in supervisory oversight and enforcement.

from multiple stakeholders about which companies the Financial Stability Oversight Council (“FSOC” or

the “Council”) should designate, when such designation should happen and what criteria the FSOC

should use, particularly in response to the FSOC’s October 6, 2010 Advance Notice of Proposed

Rulemaking (the “ANPR”). The main takeaway from the January 18, 2011 Notice of Proposed

Rulemaking (the “NPR”) is that the key regulators, who recently lived through the financial crisis, are

reluctant to adopt a formal rule that would limit their discretion to designate nonbank financial companies

as systemically important. The actual text of the proposed rule, as opposed to the commentary in the

proposal, is notable for the fact that it adds almost no new content to the broad statutory text in the Dodd-

Frank Act.