Progress, of a sort

Eight months on from the much-heralded “path forward” agreement that set a roadmap for how US and European regulators would deal with cross-border regulatory issues, the fruits of the new cooperative approach have started to emerge. In February, the Commodity Futures Trading Commission (CFTC) issued conditional no-action relief allowing US entities to continue trading on European multilateral trading facilities that haven’t registered as swap execution facilities, so long as those platforms meet requirements that are identical to those applied in the US.

It may not have been exactly what some European venues were hoping for, but this represented notable progress. At one point last November, following two clarifications by the CFTC that seemed to extend US rules further than ever before, it looked like the path forward would become a road less traveled.

There’s still a huge number of cross-border issues that need to be tackled – among the most urgent, Europe’s equivalence determinations for US central counterparties (CCPs). Under the European Market Infrastructure Regulation (EMIR), European banks would not be allowed to act as clearing members of any CCP in a non-equivalent jurisdiction, while Europe’s Capital Requirements Regulation prevents them from applying the lowest possible 2% risk-weight for cleared exposures at those venues. Together, these rules could have a devastating impact on the business of any non-equivalent clearing houses.

A comparison between US and European clearing rules throws up a number of seemingly intractable inconsistencies – for instance, a one-day margin period for futures contracts under US rules less onerous than the two days required under EMIR. Nonetheless, some have speculated that the new-found spirit of cooperation between US and European regulators may allow a compromise to be reached.

That doesn’t answer what happens elsewhere, though. Trades conducted between US and European entities account for a large portion of the cross-border universe, but there are plenty of transactions involving counterparties from other jurisdictions too – Australia, Hong Kong, Japan, to name but three. Some regulators have set out broad parameters for equivalence or substitutability determinations, but these are imprecise and lacking in detail.

Generally, regulators agree that foreign rules should be deemed equivalent if they pursue the same outcome. But beyond a pretty clear global consensus on central clearing and reporting – both key Group of 20 (G-20) objectives and initiatives supported by ISDA and the derivatives market – the desired outcomes differ from jurisdiction to jurisdiction. Dodd-Frank, for instance, covers everything from trading, clearing, reporting and business conduct rules to broader bankruptcy and resolution proceedings. EMIR covers clearing and reporting, with trade execution covered by the revised Markets in Financial Instruments Directive, but many other countries with smaller derivatives markets have opted to tackle clearing and reporting only.

The risk is that some national regulators will approach each outcomes-based equivalence determination as a broad, like-for-like comparison of their own regulatory and legislative framework. That tactic would likely doom any equivalence process to failure. Rather, regulators need to focus on whether the core objectives set by the G-20 are being met, taking foreign legal regimes and local market practices into account.

The trouble is getting to this point, as well as having a mechanism in place to deal with any disputes. The International Organization of Securities Commissions has suggested it may be able to play a role here, drawing up a set of principles – perhaps similar to those published by ISDA last year – and intermediating in equivalence determinations. This could involve peer reviews, colleges of supervisors and regulatory visits, comparable to what the Basel Committee on Banking Supervision has in place for Basel III. It seems like a good idea, and could do much to resolve potential problems and ensure the global derivatives market continues to be just that: global.

The road to reporting consistency

road aheadEurope is about to take another big step on the road to over-the-counter (OTC) derivatives reform with the start of mandatory reporting on February 12. From that date, all derivatives conducted by European firms will need to be reported to regulators via a repository authorised by the European Union, bringing further transparency to the market – a goal that ISDA fully supports.

It hasn’t been an easy journey, though. The major derivatives dealers have been reporting to repositories for some time, well before the mandates came into force, and market participants had to meet reporting obligations under the Dodd-Frank Act last year. But European derivatives users have had to get to grips with a set of rules very different to those implemented in the US. For one thing, both counterparties to the trade have an obligation to report, creating all manner of challenges over who generates the unique trade identifier (UTI) for each transaction and how it is communicated to the other counterparty in time to meet the T+1 reporting time frame. Firms can delegate their reporting to a dealer or to a third party, but they still retain the obligation to ensure those reports are accurate. Any mistakes by the delegated party and the counterparty is on the hook – a potential liability many are uncomfortable with.

The scope of the rules is also much, much broader, capturing all asset classes without any phasing and both OTC and exchange-traded derivatives – the latter inclusion requiring huge amounts of work to adapt the systems and processes developed for Dodd-Frank. This had to be completed in a relatively short amount of time too: it was only confirmed the reporting mandate would apply to exchange-traded derivatives from day one in September 2013.

A number of technical issues have also plagued preparations. There has been little regulatory guidance on a system for UTI generation, leaving the industry to develop its own proposal. That proposal hasn’t been formally endorsed by regulators, however, causing some counterparties to develop idiosyncratic approaches. On top of that, only a fraction of the derivatives user base has applied for a legal entity identifier, a 20-digit code essential for continued trading of derivatives from February 12.

The reports themselves are also proving challenging. Several required data fields are unique to European rules, such as the type and version of any master agreement used – and this information is not currently supported by middleware providers. A lack of guidance over whether to report data subject to strict privacy laws, how to treat uncleared trades that are subsequently cleared and therefore split into two new transactions, whether the notional amount field should be updated over time, and how to deal with complex and bespoke trades where firms may use different booking models have all added to the challenges.

But there are bigger issues here: the sheer volume and inconsistency of data collected by global repositories all over the world. Commodity Futures Trading Commission commissioner Scott O’Malia frequently raised concerns last year about a lack of consistency in how US firms are reporting data and differences in how the various repositories collect their information. This is likely to get worse as more reporting mandates come online, all with their own, unique requirements, and new domestic repositories are authorised.

An initiative championed by the Financial Stability Board (FSB) will hopefully pull together all this data in a consistent format, enabling regulators to get a clear view of the market and spot a build-up in systemic risk – the original intent of the original Group of 20 mandate. The FSB published a consultation document on February 4, which outlines some of the potential models for data aggregation. But until a viable mechanism is up and running, no-one will have the full picture. Given the time, expense and resource that everyone – dealers, end-users and infrastructure providers – have put into meeting the mandates, it is disappointing a global framework for consistent data reporting wasn’t put in place by regulators from the start.

ISDA has tried to help throughout the process, proposing that the ISDA taxonomy be used as the basis for product identifiers and coordinating work on the industry UTI proposal. A further initiative will also help increase transparency, with the launch of a new portal (see screenshot below) that pulls together information currently available on interest rate and credit derivatives in a easy-to-digest and transparent format. You can access the ISDA SwapsInfo website by clicking here.

SwapsInfo for IRD

Should I stay or should I go?

Everyone knows that two of the busiest days around the office are the day before you leave on vacation and the day you return. For some of us at ISDA today is getaway day, but that doesn’t mean there isn’t time to spare a few thoughts on the current state of the derivatives markets.

We had something of a “July Surprise” with the announcement on July 11 that peace was at hand between the CFTC and European regulators on cross-border derivatives regulation. We viewed that announcement, as many people did, as a positive development and a serious attempt to advance the discussion of global regulation of a global business.

As is often the case with broad pronouncements, however, the detail is in the detail, to coin a phrase. The next day the CFTC provided its final guidance on cross-border issues and additional time for compliance under an exemptive order. It is clear from the detail that the process of determining substituted compliance is going to be a critical one. It will be important to get both the substance and the process right. You will be hearing more from ISDA on this in the days ahead.

The CFTC work plan for derivatives is largely complete, with the finalization of the cross-border guidance and the publication earlier in the summer of SEF rules and related rulemaking. We will continue to work through the implementation challenges our members face, including the third wave of mandatory clearing in early September, but the drumbeat of deadlines is fading on the US front.

But don’t think it will be a vacation from here on out — far from it. Still, at least there will be a change in locale — Europe in particular, but all over the globe as well.

Europe is considering its approach to mandatory clearing and our various product steering committees are reviewing ESMA’s discussion paper. Confirmations and portfolio reconciliation face mid-September deadlines. And the European approach to the G20 commitment on execution will be hashed out over the course of the Fall through the consideration of the Markets in Financial Instruments Regulation in the trilogue process. We will be actively engaging with policy makers to identify areas with particular market sensitivity.

Globally, we are expecting approval by the G20 of the proposals on margin for uncleared derivatives. We have written extensively, both in derivatiViews and in submissions to regulators, about our significant concerns with the proposed initial margin requirements. It seems clear that initial margin in some form and quantum will be required, so we are also working on the development of a standard initial margin model to facilitate the introduction of any initial margin that might be required. Whatever the G20 decides will need to be implemented at national levels, so this issue is going to be on the front burner for months to come.

There are other things that await your return from vacation — major regulatory capital proposals, consideration of benchmarks, new credit derivative definitions, to name a few. In a few weeks, as summer ends (or winter for those of you in the southern hemisphere), and you feel the need to quickly get up to speed on all the developments affecting derivatives, consider attending our annual regional conferences in New York or London in September or in Asia in October. Details are on our website.

Wherever you may be headed—or even if you are staying put—safe travels and we look forward to your continued involvement and support.

Surf’s Up!

Summer is here and the beaches are open in the US, Europe and elsewhere. How appropriate then that the second wave of mandatory clearing has now hit US shores.

This is an important development, and marks a big step forward in reducing counterparty credit risk through clearing, which is one of the two major strategic G20 initiatives to reduce systemic risk.  (The other – increased regulatory transparency – is being accomplished through trade reporting and the establishment of trade repositories.) At this point, the vast majority of interest rate and credit default swaps in the US must be cleared.

The first wave of mandatory clearing in March covered the (relatively) low hanging fruit, entities like dealers and active traders that were already clearing or well-prepared to do so.

The June wave of mandatory clearing covers a wider swath of the asset manager and fund communities. The focus has been on putting in place legal documents and operational arrangements that will enable these entities to clear the interest rate and credit default swaps for which clearing is now mandated. Dealers, clients and regulators will be closely observing this experience as many of these entities will be clearing trades for the first time.

ISDA has worked with its members to address the challenges of this new wave of mandatory clearing. The phased implementation adopted by the CFTC was an outgrowth of discussions between ISDA and the CFTC dating back to 2011. The documentation that firms are using is based on the FIA-ISDA Clearing Addendum published a year ago. And we announced on Monday that four dealer firms have announced their support for the Clearing Connectivity Standard (CCS) we are developing with Sapient to facilitate reporting of cleared swaps. We believe CCS provides a sound basis for reporting and communication, initially here in the US and, in due course, around the world.

And the clearing tide is rising in other parts of the world. ISDA is working with its members and regulators in other jurisdictions to anticipate those developments. This week we announced, together with the Futures and Options Association, the publication of a clearing addendum for use in the European context in clearing arrangements that use a principal-to-principal arrangement, instead of the agency model (FCM) required in the US. While driven by the upcoming clearing requirements under EMIR, the ISDA-FOA addendum can be used in any jurisdiction where the principal arrangement is used.

The final wave of mandatory clearing in the US arrives in September. The experience of the first two waves and the efforts of ISDA and its members to date will, we believe, position the swaps industry well as that next wave comes ashore.

And let’s not lose sight of the broader landscape of regulatory reform and the progress that has been made.

The September 2009 G20 commitments in Pittsburgh provide the contours of reform, with clearing and trade reporting foremost among them. Sure, there are issues firmly on the horizon yet to be fully resolved (SEF implementation, MiFIR, extraterritoriality, initial margin, to name a few). But the progress made on clearing and trade reporting is significant, something we’ll be reporting on soon in our semiannual market analysis.

So that’s the lay of the land – and the sea – of derivatives regulatory reform.

Why Limit Customer Choice on SEFs?

Last week we published the results of a survey of buy-side firms on proposals to mandate how many quotes must be requested when utilizing a swap execution facility (SEF). The CFTC proposal would require a minimum of five quotes and the entire industry has been waiting to see what the final rules will say on this point.

The survey, which we conducted with the Asset Manager Group of SIFMA with additional input from the Managed Funds Association, indicates overwhelmingly that the five quote minimum requirement will mean higher transaction costs, wider spreads, constrained liquidity, exposing of investment strategies, migration to different markets and use of alternative products that are not traded on SEFs.

Is this what regulatory reform was intended to achieve?

The fact is, the creation of SEFs was intended to provide a third way of trading derivatives, fitting along a spectrum that included the traditional means of OTC derivative trade execution on the one hand and the exchange traded world on the other. Sitting in the middle of that spectrum would allow SEFs to blend the best of both worlds. If SEFs are not sufficiently different from the former or too much like the latter, we would fall short of one of the goals of the G20 and the Dodd-Frank Act.

Dictating, and in the process limiting, customer choice does not seem to us to be a good way to achieve those goals. A minimum quote requirement takes the decision out of the hands of the users of the products with no clear demonstration that better pricing, lower costs or greater liquidity would result.

And who is more able to opine on such matters than the participating firms in the survey? Asset managers, hedge funds, insurance companies, pensions, foundations, endowments, corporates and others, together holding nearly $18 trillion in assets responded to the survey. Does someone other than those institutions know better than they what suits the needs of their accounts and investors?

SEFs can and should flourish, if we get the regulatory structure right. Many firms are eagerly awaiting the final rules from the CFTC so that they can begin final preparations to register as SEFs and launch their offerings. Rigid requirements with no demonstration of benefits, such as minimum quote requirements, will only weigh down these innovative offerings.

Let’s not burden SEFs and their many potential customers before they even get up and running.

Be Pro-Active with One Month to Clearing

March brings the first day of spring and the first days of mandatory swap clearing in the United States and Europe. In this derivatiViews, we focus on the imminent deadline in the United States. Next time we will focus on the state of mandatory clearing in Europe in light of last week’s action in the European Parliament.

The first wave of mandatory clearing in the United States comes into effect on March 11, 2013. The CFTC has specified both the categories of entities that must begin clearing, and the types of transactions that must be cleared, commencing on that date.

Swap dealers, major swap participants and active funds must begin clearing several categories of interest rate swaps and four categories of CDX and iTraxx credit default swaps. This timetable has been fixed since last November, when the categories of swaps subject to mandatory clearing were finalized by the CFTC.

Even with the advance notice, we know that many market participants that will be affected by this development, particularly the active funds, face compliance hurdles. In order to assist our member firms, we have prepared a standard form letter that can be sent to active fund customers to alert them to the requirements. Whether you are a potential sender of the letter or a potential recipient, we urge you to take the time to read it.

Keep in mind that some funds may still be determining whether they hit the “active” threshold of 200 trades a month which determines if they must comply with this first-wave clearing mandate. And swap dealers face a challenge in determining which of their customers hit the threshold because that determination is not just a function of their trades with the fund, but all the trades that the fund does with any counterparty.

The ISDA August 2012 DF Protocol and our ISDA Amend process provide a convenient mechanism that funds can use to communicate with their dealer counterparties about whether they are an active fund and, therefore, subject to the clearing mandate on March 11.

Much of the DF Protocol relates to business conduct requirements that come into effect on May 1 (as extended pursuant to a no-action letter at the end of last year). However, for entities that face the March 11 clearing mandate, the deadline is now, for all intents and purposes. As we urged in our December derivatiViews linked above, proper planning for Dodd-Frank requirements is best done as early as possible. Don’t wait until the last minute.

As always, the ISDA staff is available to provide assistance as these deadlines loom. The ISDA website, in particular our Dodd-Frank Documentation Initiative page, is your best first stop to understanding what lies ahead in the United States.

We will march on to clearing in Europe next time.

No Action ≠ Do Nothing

As the year draws to a close, we are seeing a steady stream of no action and other determinations coming out of the CFTC. ISDA has been actively involved in seeking those decisions from the CFTC in response to members’ concerns and very practical considerations that made compliance in the timeframes required increasingly challenging as deadlines loomed. We and market participants are grateful for the responsiveness of the CFTC to the concerns that have been raised. We believe that the dialogue we have established in this process will serve the industry well as regulations come into effect in 2013.

We have just posted a presentation on our website that gives an update on the status of the various no-action requests. Where the request has been granted, links are included to the letter issued by the CFTC, which includes the terms and conditions on which the relief was granted.

An important lesson to take away from the no action process is that the industry’s efforts to achieve compliance with new regulations must proceed with an undiminished level of intensity even in the face of the actions taken by the CFTC. This is for a number of reasons.

First, certain requirements are not delayed. Most importantly, reporting for credit and interest rate swaps kicks in at the end of the year. And, while reporting for equity, FX and commodity trades has been delayed, it is only until Feb. 28, 2013. So January will be busy regardless.

Second, one of the reasons that the CFTC was receptive to providing these targeted delays in effectiveness of certain provisions was because they saw demonstrable efforts being made toward compliance. For example, the ISDA Dodd-Frank Protocol now has over 4,000 adhering parties, and that number is growing steadily. But the rate of uptake on questionnaire delivery via our ISDA Amend solution  lags behind. So ISDA and market participants must show that the additional time will be warranted to  achieve greater compliance rates with the use  of these effective tools.

Finally, more deadlines will loom next year as the requirements in Europe begin to take effect. We just heard that the timetable is jelling around reporting starting mid year, reconciliation and dispute resolution in late summer and frontloading of trades into clearing later in the year. Clearing mandates won’t likely apply until summer 2014, but many other steps will need to be taken in anticipation of those mandates. So the short delays achieved in the US through the no action process will only lead to a compression of compliance activity globally.

ISDA stands ready to assist its members in understanding and implementing these regulatory changes. We will also maintain an active dialogue with regulators to help them understand where the pressure points may be in the compliance process so that the changes are implemented in a way that achieves policy goals with the least disruption to market liquidity and the ability of companies to hedge risk.

So enjoy the holidays and be prepared to join with us as we continue to address the major changes underway.

New Slang

Cross border guidance, extraterritoriality, and third country issues. Mutual recognition and substituted compliance.

In the OTC derivatives world, these terms have replaced old favorites like day count fractions, credit events and calculation periods as topics for discussion and debate.

Comments flooded into the CFTC from industry and regulator alike on the long-awaited CFTC guidance on the cross border application of its rules (as the Commission refers to them) or to third country issues related to extraterroriality (as Europe refers to them).   Regulators are struggling over the mutual recognition of another country’s regulatory regime, or a system of substituted compliance, where one country’s rules can take the place of another’s in order to achieve compliance.

All this back-and-forth is driven by the 2012 year-end deadline to comply with the G20 commitment on clearing, execution, reporting and capital for OTC derivatives. Where do the US and Europe stand in achieving those goals? What are the differences between approaches? And how significant are those differences?

To assist our membership in understanding both the similarities and the differences, we have worked with the Clifford Chance law firm to produce a comparison of rulemaking on critical issues in both the United States and Europe. This is version 2.0, as we produced an earlier version almost two years ago. And with the regulations still evolving, don’t be surprised if there is a version 3.0.

What the comparison shows is that there is significant commonality in the approaches to issues in the United States and Europe.

But there are also some important differences. Treatment of end-users, the notion of major swap participant in the United States and the so-called “push out” rule are among those differences.

There are also differences in the timing of certain rules, driven largely by the fact that trade execution and pre- and post-trade transparency in Europe are part of the revisions to the Markets in Financial Instruments Directive (MiFiD), which is still working its way through the European process. We are not likely to have clarity on those issues until late this year or some time into 2013.

The comparison has a helpful summary chart indicating which rules (clearing, reporting, margin, capital, registration) apply to which entities (dealers, other financial counterparties, non-financial counterparties). From there, a reader can drill down to all the details.

As with any language, there are several levels of comprehension. One can learn the words, then the grammar, but true understanding comes when you know the subtle nuances of a native speaker. Think of the comparison we have produced with Clifford Chance as your Rosetta Stone for being able to be bilingual in the new world of derivativese.

The Meaning of Swap

Musings about “the meaning of life” cross philosophies, cultures and centuries. Among the philosophical strands cited by Wikipedia that have contemplated this most basic of questions are utilitarianism and pragmatism together with stoicism.

More recently, the derivatives world has been contemplating the meaning of swap, a question that is central to existence in the post Dodd-Frank world. The CFTC and the SEC have now produced their treatise on this question* and it is one that we will all be studying in great detail over the coming days and weeks to see what answers it holds. And as with the meaning of life, we might be well served by looking at this final rule in a utilitarian and pragmatic way, while remaining stoic as we contemplate its implications.

The most immediate impact of the publication of the definition of swap is that the clock starts ticking on many rules that, by their terms, were not slated to become effective until the definition of swap was final. Reporting requirements will commence 60 days after the rule becomes effective (the date of publication in the Federal Register). Various timetables relating to clearing, including mandates for the clearing of certain trades, will now commence. There will be many clocks ticking over the coming months.

Congress left the agencies with the task of filling out the definition of these terms and it has been a long process to get to these final definitions. There is a case to be made that this definitional rule should have been one of the first rules finalized, and not one of the last. And, if Dodd-Frank had allowed the agencies to proceed on a more logical timetable, they might have adopted that approach. But the fire hose of rulemaking required by the law made it difficult for the agencies to take that more logical approach.

The swap definition is also one where the CFTC and the SEC had to come to agreement given the divided oversight of the OTC derivatives business mandated by the law. The market will benefit from consistency of their approach to this issue, so the additional time it took to get to the final, joint approach to the definition will hopefully prove time well spent. Still, the translation of the jurisdictional divide between the securities and futures world into the OTC derivatives creates challenges. One need only consider the experience with single stock futures over the past decade to get a sense of the regulatory challenges that can be created by something like a “mixed swap.”

One issue that remains open is the treatment of guarantees of swaps. Both agencies take the view that the guarantee would be considered part of the swap and, therefore, subject to its jurisdiction. But for now we must await further guidance on how they will treat the guarantee. Given the central role of the definition, how they address the guarantee issue may have implications for other parts of the agencies’ rulemaking, such as reporting and even registration.

There are many details in the final rule that will require a close reading of the rule and the possible need to approach the agencies for interpretive guidance. ISDA will be working with our members, both to assist them in understanding the rule and, where necessary, seeking that guidance. The meaning of swap, like the meaning of life, is best contemplated together with others who share the journey.
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* The CFTC defined the term “swap” and related terms; the SEC defined the term “security-based swap” and related terms.

Honey, I Shrunk the Market

The OTC derivatives market knows that 2012 will be a transformational year for the industry. By year-end, the industry has to meet the challenging objective, laid out by the G-20, of trading all “standardized” derivatives transactions on electronic platforms, where appropriate, and clearing them through central counterparties (CCPs).

Increasingly, this task is looking extremely ambitious. ISDA made its views known in a letter to the European rule-making bodies. Market participants and regulators need time to think through the issues and prepare solutions to the challenges posed. Rushing through them can only lead to increased risks and unintended consequences. 

We have written before on some of these issues. Many of them emanate from the fact the supervisors are attempting to regulate a global marketplace with a series of “national” or “jurisdictional” regulatory initiatives – Dodd-Frank in the US, EMIR and MiFID in Europe, as well as other initiatives elsewhere (Japan, Canada, Hong Kong, Korea, Australia and others).

The OTC derivatives market, however, is perhaps the clearest example of a global market that has emerged over the past three decades. Unlike most of the underlying “cash markets” – which have grown locally and have been in existence for decades if not for centuries – the youth of the OTC derivatives market has enabled it to build its international foundations from the beginning. The ISDA Master Agreement is used by almost all participants to document transactions ubiquitously, and is perhaps one of the few – if not the only – document with global acceptance and application. Most OTC derivative trading books are global, feeding on demand and supply of client flows from all over the world. The integrated technology they use allows them to “see” and manage the same book as it passes through time zones and locations. Most banks that deal in OTC derivatives typically have a single global back-office where all the transactions, occurring around the world, are processed. The industry has built single data repositories where virtually all worldwide OTC derivatives transactions are captured by product.

Attempting to shrink this global industry and make it fit “national” or “jurisdictional” definitions presents a monumental task and an equally monumental risk. It gives rise to a myriad of risk management, operational, legal and technological issues that the industry and the regulators are only beginning to come to grips with.

An example from the US dollar interest rate swaps (IRS) market helps illustrate some of the issues that arise. It is well known that Fannie Mae and Freddie Mac are massive receivers of fixed rate IRS to compensate for the prepayment risk that exists in the large mortgage portfolios that they hold. This risk, to a large extent, is offset by European or Japanese corporate hedgers (in addition to the US), which are typically fixed rate payers. Attempting to clear such transactions can potentially lead to massively unbalanced positions in the respective CCPs, resulting in (and creating) a bifurcation of risk (in an otherwise risk-neutral position) and the need to post potentially different (and incremental) amounts of initial margins. Similar examples can be drawn from the CDS, commodities and equities OTC derivatives markets.

Worse, these “national” or “jurisdictional” regulatory initiatives are incompatible both in content and in the timeframe in which they are being rolled out. The CFTC in the US has a head start, having issued a number of rulings, but even that Commission is behind its own stated schedule. The SEC is further behind in its rulemaking, although it is supposed to work jointly in some cases with the CFTC. The situation is even more challenging in Europe where EMIR (the European equivalent of Dodd-Frank regarding clearing) is just now being finalized. ESMA – which is supposed to follow with its own rules – has not started the process either. And this is on clearing alone. The introduction of electronic trading platforms is likely to be another transforming event for the industry’s structure, the effects of which are only beginning to be discussed.

And while all this is happening, the end-2012 deadline is casting its shadow. There is increasing realization that there is simply not enough time to deal with all these issues. And if things are rushed so that deadlines are met, the likelihood increases substantially that mistakes will be made, risks will be overlooked, or simply that ill-conceived rules will be put in place with unintended consequences.