Implementing Rules, Extraterritoriality, and Grandfathering (§§ 712, 715, 722, 723, 763, 764 & 772)

As discussed above, the legislation establishes a general framework for the comprehensive regulation of OTC swaps but leaves many of the details to the regulators. The legislation requires the CFTC and the SEC to develop implementing rules for all relevant provisions within 360 days, and each regulator may use emergency and expedited procedures to implement the new requirements sooner. In ad-dition, both agencies may ban foreign parties from participating in US derivatives markets if they determine that the regulation of deriva-tives in the foreign country may destabilize or adversely affect the US financial system.

The new derivatives rules apply only to swaps activity in the US, but can also apply to certain foreign activities that have a direct and significant connection with activities in, or effect on, US commerce, or contravene any rules designed to prevent the evasion of US de-rivatives laws. For security-based swaps, which are regulated by the SEC, only the evasion jurisdictional hook applies. It remains to be seen how broadly regulators will interpret each of the components of the legislation’s extraterritoriality clause.

The legislation allows participants in the swaps market to apply to the CFTC within 60 days after the enactment to remain subject to the laws in effect prior to the enactment of the legislation. The CFTC may allow the applicant to continue operating under the old regime for no longer than one year. Thus, grandfathering is not automatic and is limited to one year going forward. Moreover, grandfathering does not apply to all obligations under the legislation. For example, recordkeeping and reporting requirements under the legislation will nev-ertheless apply during the grandfathering period. Similarly, while existing trades will be permanently grandfathered from the central clearing requirement even without application, they will be subject to the new margin and capital requirements