Dodd-Frank’s regulatory vacuum

Larry Ribstein —  7 June 2011

There’s been a lot of talk about the regulatory impact on job-creation.  Add this: the regulatory vacuum resulting from an absence of rules under Dodd-Frank.

A WSJ article notes that

More than 100 new derivatives requirements in the law take effect on July 16, even though regulators have yet to issue final rules in the affected areas. The holdup raises concerns that a large swath of the financial system might be thrown into legal gray areas.

So what will happen? 

  • DF requires most swaps to be traded on an exchange, but regulators haven’t decided the rules that govern all this. 
  • There are no forms, systems and procedures for complying with proposed business-conduct rules for swap dealers.
  • It’s not clear who can be a swap dealer.
  • An exemption for OTC derivatives trading by corporate end users may end on July 16.

Even if regulators issue guidance for the unregulated areas, Rep. Frank Lucas, chairman of the House Agriculture Committee, said “these contracts won’t be protected from the trial bar. This could prove hugely disruptive to businesses.” One lawyer notes that “any company that takes their compliance obligation seriously faces an awful lot of dilemmas as to what do you do to be in compliance with the law when the law is murky at best.”

With the result noted by a corporate treasurer: “Any uncertainty about the future environment is one more hurdle to get over for a company to make a decision to invest and grow their business and ultimately sustain and grow jobs.”

Larry Ribstein


Professor of Law, University of Illinois College of Law

2 responses to Dodd-Frank’s regulatory vacuum

    John David Galt 7 June 2011 at 4:33 pm

    Why don’t they simply regulate the swaps as insurance? Is anyone here going to seriously suggest that CDSes should be allowed to be (1) written by companies that won’t be capable of paying claims, and/or (2) purchased by persons or companies who don’t have an insurable interest in the underlying loans or bonds? (Which are the two hazards that existing insurance regulation is designed to, and pretty well does, prevent.)

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