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Virginie’s Blog – What Would a US Derivatives Reform Delay Mean for the OFR?

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It is no secret that the success of any new regulatory agency, such as the US Treasury’s recently established Office of Financial Research (OFR), is predicated on it receiving the political and financial support it needs to survive. But what happens if the foot is taken off the pedal of the derivatives reforms on which it is pinning its instrument data standardisation hopes? If the establishment of its standards support network by way of key regulatory reforms is to be delayed by up to two years, what fate lies ahead for the OFR?

Last month, the House Financial Services Committee agreed to legislation that would delay the implementation of the derivatives and swaps market reform portions of the Dodd Frank Act for two years. Of course, this decision has yet to wend its way fully through the US legislative process and it may well get shot down by the Senate, but the industry continues to campaign for the delay.

The Securities Industry and Financial Markets Association (Sifma – a key player in the feedback to the OFR on legal entity identification over recent months – see here) for one is working on a letter urging the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to postpone the 16 July deadline for the reforms. The association, along with many others, is concerned that not enough of the details of reform have yet been nailed down ahead of the implementation deadline, which it says is likely to cause confusion and potential inadvertent market violations. Although Sifma has not yet officially proposed a potential date for postponement, a period of six months has been doing the rounds on the rumour mill.

Certainly, looking at the groundwork that has been done thus far for the OFR, the focus has almost entirely been on the thorny issue of entity identification rather than instrument IDs. Hence the criticisms of the derivatives reforms could also be levelled at the new Treasury agency, which also has a July deadline for mandating the new standards. If Sifma, who is a key player in the OFR work already, is putting regulators under pressure for a delay, surely the OFR’s standards deadline is next to be put on ice?

Moreover, the CFTC has indicated this week that it will be holding an open meeting on 14 June to consider effective dates of provisions in the Dodd Frank Act, which may include a vote to delay some of these deadlines (see more about the meeting on the CFTC website here).

Given the number of times people have raised concerns about the OFR deadline to me over the last few months (see recent discussions on which at our DMRAV conference in NYC last month here), it would come as no surprise if the first deadline was limited to legal entity IDs and instrument identification was delayed by a period of at least six months. After all, we have yet to get into the Cusip versus ISIN debate between Europe and the US, and that’s bound to take at least a month or two…

Some discussion has taken place about the creation of new instrument identifiers for complex and standardised derivatives: the CFTC’s unique product identifiers (UPIs), for example, but more needs to be hammered out before regulatory action can take place in earnest with regards to mandating new standards. And if Sifma et al are engaged in deciding upon the best candidate for the legal entity ID job, then there is little time for them to provide feedback on other issues.

But, if deadlines begin to slip and the gung ho Republican campaign to alter key provisions of the Dodd Frank Act continues, will the OFR face the chop? Now, I’ve been pondering this for some time, but as many of the discussions regarding the new agency’s future are taking place behind closed doors in political circles, it is hard to tell whether there is a potential threat looming.

Certainly, a lot of work has been put into the legal entity identification standard thus far; so one would hope all of this hasn’t been in vain. Unfortunately, only time will tell.

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