Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

Late today, the CFTC made its first public announcements regarding how it would handle petitions for the grandfather relief made available by section 723(c) of the Dodd-Frank Act. Section 723(c) allows persons to submit petitions to the CFTC on or before September 20, 2010 to remain subject to section 2(h) of the Commodity Exchange Act (CEA) (as in effect prior to Dodd-Frank) for a period of up to one year. Such relief would presumably extend from July 15, 2011, the date when Dodd-Frank’s swap trading provisions generally become effective. Dodd-Frank provided no details regarding how such grandfather petitions should be prepared or evaluated. Now, ten days before the petitions are due, the CFTC has made its first public announcements regarding how it will treat certain types of petitions.

Trading Bilateral “Exempt Commodity” Swaps—No Grandfather Relief
The Commission announced that it will not issue grandfather relief that would allow “eligible contract participants” (certain sophisticated counterparties as defined by section 1a of the CEA) to continue trading bilateral swaps in exempt commodities (i.e., energy and metals commodities) for an additional year under sections 2(h)(1)-(2) of the pre-Dodd-Frank CEA. Sections 2(h)(1)-(2) exempt such trading activity from regulation under the CEA except with respect to the CEA’s anti-fraud and anti-manipulation provisions. The Dodd-Frank Act removes this exemption effective July 15, 2011. Rather than issuing blanket grandfather relief, the CFTC determined that it is more appropriate to accommodate transitioning issues for bilateral swaps activity in the rulemakings required to implement Dodd-Frank.

Exempt Commercial Markets—Grandfather Relief Available for the Markets (But What About the Traders?)
The Commission announced that it will make grandfather relief available that will allow ECMs (electronic trading facilities on which “eligible commercial entities” can trade exempt commodities on a principal to principal basis) to continue operating as ECMs under sections 2(h)(3)-(7) of the pre-Dodd Frank CEA, on condition that they submit a timely grandfather petition and apply to become either a swap execution facility (SEF, a new category of trading facility created by Dodd-Frank) or designated contract market (DCM). The Commission will extend the same grandfather treatment to exempt boards of trade (EBOTs) under the CEA. The exemptions will extend for as long as an ECM or EBOT has a legitimate SEF or DCM application pending before the CFTC.

While this may be welcome news to the several active ECMs in operation, such as the IntercontinentalExchange (ICE) and Natural Gas Exchange (NGX), it does not clarify whether and how traders on such markets might receive temporary grandfather relief from Dodd-Frank requirements that might apply to them (e.g., registration as a major swap participant or swap dealer and capital, margin, and business conduct requirements). With only ten days remaining before petitions are due and no guidance offered as of yet to the many entities that trade swaps on ECMs, the CFTC can likely expect a flood of non-uniform petitions from traders as the September 20 deadline draws near, adding to the already-huge administrative burden the agency faces to implement Dodd-Frank.

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