Dodd Frank Wall Street Paper

Dodd Frank Wall Street Paper Dodd Frank Wall Street Paper The Dodd-Frank Wall Street Reform Act Implications for energy companies, utilities and other over-the-counter market participants 2 It was July 21, 2010 when President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. Fueled by the backlash of the 2008 financial crisis, this legislation represents the most sweeping overhaul of U.S. financial regulation since the 1930s. Even though the Act centers on the financial services and capital markets industries, it includes provisions affecting all public and private companies. For companies engaged in commodities hedging or trading the most significant aspects of the Act are the rules regulating the overthe-counter (OTC) market. Commonly referred to as â€Å"derivative reform,† these rules are far-reaching and complex. As written, derivative reform addresses all types of swaps: equity, interest rate, foreign exchange, credit default and commodity. For energy companies trading OTC commodity swaps there are four major areas to evaluate for business impact: clearing, data and reporting, position limits and new business conduct rules. Since no current OTC market participant will be left untouched, it is still imperative to understand the full scope of these regulations (see caption below). While the specific rules of derivative reform have not yet been fully promulgated, and much is uncertain about the details of complying with Dodd-Frank, enough is known to assess the impact this legislation will have on companies which enter into OTC contracts today in the energy sector. Non-financial industries which participate in the OTC derivative markets include: Energy Companies - Supermajors - Independent Oil & Gas - Refining & Marketing Electric and Natural Gas Utilities Chemical Mining and Mineral Airlines Agribusiness Consumer Products What is a swap dealer and a major swap participant? The Dodd-Frank Act defines a swap dealer as any person who: Tends to accommodate demand for swaps from other parties; A major swap participant satisfies any one of the following criteria: Holds itself out as a dealer in swaps; Is generally available to enter into swaps to facilitate other parties’ interest in entering into swaps; Maintains a â€Å"substantial position†; Makes a market in swaps; Regularly enters into swaps with counterparties in the ordinary course of business for its own account, or engages in activity causing itself to be commonly known in the trade as a dealer or market maker in swaps. With these characteristics: Tends to enter into swaps on their own standard terms or on terms they arrange in response to other parties’ interest; and Tends to arrange customized terms for swaps upon request, or to create new types of swaps at their own initiative. Holds outstanding swaps which create â€Å"substantial counterparty exposure†; or Is a highly leveraged financial entity that maintains a â€Å"substantial position". End-users enter into swaps to hedge or mitigate commercial risk. 3 Many moving parts Figure 1. Timeline for Derivative Reform Implementation The original timeline for Derivative Reform is aggressive. Market participants are arguing for a phased approach to allow for an orderly, efficient and inclusive transition to the new market. July 2010 December 2010 July 2011 December 2011 December 2012 July 2013 CFTC and SEC issue final regulation on Derivative Reform EFFECTIVE DATE - TBD Bill becomes effective Registration of SDs and MSPs Interim system until â€Å"technologically feasible† Real-Time Reporting of all Swaps Clearing/Exchange Trading - Post-Enactment Swaps OTC derivatives cleared on exchanges Clearing/Exchange Trading - Pre-Enactment Swaps Proprietary Trading Study - Volcker Rule Study Complete Swaps Push Out Rule Trading ceases Transition