U.S. regulators are making progress on the details of derivatives market reform, but its still hard to assess the impact of the proposals, says Fitch Ratings.
The rating agency observes that the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission are finalizing their definition of “swap dealer,” which is a key part of the new Dodd-Frank regulatory framework for over-the-counter derivatives, but it says that many uncertainties remain, as other critical parts of the rules will have to be finalized over the coming year.
For example, regulators still have to define swap products, which is the next step before the rules can be implemented. Once those are defined, and the rule is in effect, swap dealers will have 60 days to register. The CFTC estimates that 125 companies will register as swap dealers under the current definition, it reports.
Another critical area that is still being debated is the extraterritorial application of the rules. Fitch notes that the final outcome of this debate will determine the extent to which the U.S. operations of foreign banks, and foreign subsidiaries of U.S. banks, will fall under the proposed rules.
“This is a sensitive rule that could have could have a negative effect on liquidity, should foreign companies that have U.S. operations be forced to comply. This and many other uncertainties make it very difficult to assess the overall impact of the proposed rules,” it says.
End-user exemptions for companies that use derivative trades to specifically hedge against market risk will also have to be defined. “A key grey area would be the burden of proof that derivatives are being used to hedge specific risks. Ultimately, this will be quite subjective and open to management’s interpretation,” Fitch says.