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This episode aired on Bloomberg TV on Apr 9, 2013


The CFTC has recently promulgated the final version of its External Business Conduct Rules (ECBR) for swap dealers and major swap participants. These new regulations were written to conform to the standards prescribed by the Dodd-Frank Act and are part of the effort to standardize, regulate and make more transparent the derivatives industry.

Q. So these are little known rules that are about to have a very big impact on an awful lot of US companies very soon, May 1. What exactly happens then?

A. The CFTC’s “External Business Conduct Rules” rules go into effect, and they fundamentally change the way swaps industry works. That might not sound like it matters much to people outside the hard core, but it does, because, unless complied with, the rules will prevent normal US companies from using interest rate and currency swaps. Of course, these are extremely common for large companies like Exxon and McDonald’s, but also many smaller ones with foreign sources of income. ISDA say 80% of those companies have not yet complied with the rules– it’s a potentially really big issue for their financial management.

Q. Why? Those companies aren’t subject to the CFTC, are they?

A. No, and I think that’s why compliance is so far behind. The CFTC governs the swaps dealers– but those dealers won’t be permitted to execute swaps with companies unless they have a lot of information about them on file. Its sort of like a person opening a brokerage account — lots of paperwork, or you can’t buy and sell stocks. Now, it will be like that for companies with swaps. It’s a big deal, which is why ISDA has a countdown clock on its home page.

Q. Somehow I have a feeling that’s not the only big new deal in these rules…

A. Right you are. One of the other really big ones is that swaps dealers have new rules about how they deal with governmental agencies and pension plans. As you know, many municipalities have been burned by complex derivatives contracts that they didn’t understand. So Dodd-Frank basically says, if that sort of counterparty isn’t represented by an independent expert in the transaction, the swaps dealer itself will be considered an “advisor” to the plan, which implies fiduciary duties…

Q. So, all in all, this really is a major overhaul of the swaps industry…

A. Yes. We’ve discussed many times how huge the industry is, trillions of dollars of face amount contracts. Its very difficult thing to change all the practices and procedures and implement new regulatory schemes over a beast that large– which is why all those companies are so far behind in complying.