Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, gestures as he testifies before the Financial Crisis Inquiry Commission hearing on the Role of Derivatives in the Financial Crisis on Capitol Hill in Washington July 1, 2010. REUTERS/Yuri Gripas (UNITED STATES - Tags: POLITICS BUSINESS)

Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission.

(Westlaw Business) - Swap markets and players were a main focus of Dodd-Frank, yet the SEC and CFTC were left to work out the details. The market, from Ropes & Gray to the Reinsurance Association of America, has provided these regulators with public comment and disclosure commentary. Now that the public comment period has drawn to a close, one thing is clear: issues from “security-based swap” to “swap participant” are certain to have big impact on a broad array of companies, both in financial services and beyond.

Enacted on July 21, 2010, Dodd-Frank incorporated a 360-day-window for the Act’s wrinkles to be smoothed out before implementation. One of the first casualties has been the CFTC’s rejection of discretionary Grandfather relief the Act allows the Commission to provide. Some 300 days remain in which all Dodd-Frank’s administrative detail work must be concluded. According to CFTC Chairman Gary Gensler, 30 teams have been dedicated to address the key policy and drafting issues of the new law. The working definitions of affecting the entire derivatives industry now rest in the hands of the SEC and CFTC.

Title VII of the Act, subtitled Wall Street Transparency and Accountability, defines terms as part of a complex scheme to regulate swap markets and security-based swap markets. The law looks to curtail the kinds of highly leveraged derivatives trades that have the potential to wreck the U.S. economy (again). Even more acutely, the act seeks to prevent Federally regulated institutions from (more) taxpayer bailouts. Market experts, however, have expressed concern that without narrow tailoring, these changes could not only increase compliance costs and margin requirements, but erect barriers to entry and foreclose the use of important risk management tools.

The Act draws distinctions among kinds of swaps (security-based or not; mixed swaps) and the people or companies who trade in them (swap dealers; security-based swap dealers; major security-based swap participants; eligible contract participant). Companies that trade futures contracts will face or avoid heightened scrutiny depending upon where they fall on the continuum of these definitions. In the alternative, these same traders may be able to wedge themselves into statutory exclusions.

In the final analysis, the Act’s definitions, or more accurately, its statutory exclusions, will likely keep many commercial risk derivatives traders outside the thicket of new government regulation.