Credit default swaps get another temporary exemption

The SEC recently extended “temporary” exemptions from the Securities Exchange Act for credit default swaps to allow for the anticipated implementation of the new Dodd-Frank Act which is meant to address gaps in current financial regulation.

The original exemption enacted last year was previously extended once before and the SEC recently released details of the latest revision and exemption which is set to go until July 2011. At the heart of the exemptions are various parties involved in the market who would otherwise need to register with the SEC under various classifications (such as a CDS clearinghouse having to register with the SEC as an official clearinghouse). Along with registration requirements come related reporting and regulatory requirements which could affect the way credit default swaps are currently traded.

As summarized in another posting:

The Securities and Exchange Commission extends the expiration dates in its temporary rules that provide exemptions under the Securities Act, the Securities Exchange Act, and the Trust Indenture Act for certain credit default swaps to continue facilitating the operation of one or more central counterparties for those credit default swaps until the implementation of the clearing provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the amendments, the expiration dates of the temporary rules are extended to July 16, 2011.

While the latest “temporary exemption” sounds reasonable and probably make sense given that it is probably better to have one set of regulations rather than a confusing array of different ones (under the SEC and the Dodd-Frank Act in this example), critics cannot help but wonder whether such “temporary exemptions” are only a prelude to watered down regulation or escaping regulation entirely.

Naysayers will point to what is already seen as more of an industry win (and regulatory loss)  in the asset-backed security (ABS) market that made a “temporary exemption” “effectively permanent”. Rule 436(g) of the Securities Act of 1933provides an exemption for credit ratings provided by nationally recognized statistical rating organizations (“NRSROs”) from being considered a part of the registration statement prepared or certified by a person within the meaning of Sections 7 and 11 of the Securities Act [i.e an expert]. The exemption currently does not apply to credit rating agencies that are not NRSROs.”

The Dodd-Frank Act was aiming to repeal the Rule 436(g) exemption but was meant by quite the backlash from industry participants including law firms and rating agencies.

Similarly, Bloomberg recently reported on participants in the foreign exchange (forex) derivative market trying to craft exemptions for their industry from the upcoming Dodd-Frank Act although that initiative’s success is to be determined.

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