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Trump presidency may lead to important changes to U.S. swap regulations

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North Deborah
Deborah North


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Lucking David
David Lucking


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17 November 2016


The U.S.' political makeup is poised to change as a result of the elections held on November 8, 2016, in which Republican presidential nominee Donald J. Trump defeated Democratic nominee Hillary Clinton, and in which the Republican Party retained control of both the Senate and the House of Representatives. President-elect Trump has been an outspoken critic of the Dodd–Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).1 His presidential transition website states that his Presidential Transition Team's "Financial Services Policy Implementation team will be working to dismantle the Dodd-Frank Act."2 Additional reforms, such as a modern-day Glass-Steagall Act or changes to the Federal Reserve Board, have also been contemplated by the President-elect, but are beyond the scope of this client alert.3 The Republican Party's consolidation of executive and legislative power is likely to facilitate the passage of changes that Republicans wish to make to the current financial services regulatory framework.

Derivatives Regulation

President-Elect Trump did not discuss specific derivatives market policy on the campaign trail, but comments relating to financial reform generally suggest that President-Elect Trump is in favor of lessening regulation where possible, and he proposed a moratorium on new regulation in a speech at the New York Economic Club on September 15, 2016.4 It is unclear how such a moratorium would impact rules that are not yet finalized (e.g. the SEC's proposed uncleared swap margin and capital rules), or rules that are finalized but not yet fully implemented (e.g. the CFTC and Prudential Regulators' uncleared swap margin, capital and segregation requirements). It seems unlikely that rules that are already in the process of being implemented, such as the uncleared margin rules, will be repealed or put on hold, but the new administration may take a different approach to matters of no-action relief, substituted compliance or oversight and enforcement.
As part of the broader Republican Party agenda, Congressman Paul Ryan has proposed a 'Better Way' platform, which expresses support for proposals to "require agencies to harmonize their rulemakings to simplify compliance burdens and improve oversight" and "require the CFTC to perform a cost-benefit analysis […] for any new rulemakings that have not yet been proposed."5
Consistent with the 'Better Way' policy document, on September 13, 2016 the House of Representatives' Financial Services Committee approved the Financial CHOICE Act (the CHOICE Act),6 which includes reform of derivatives market regulations and was proposed by Congressman Jeb Hensarling (R-Texas).7 Of relevance to the derivatives industry, the CHOICE Act proposes a simplified foreign comparability regime emphasizing outcomes-based comparisons, substituted compliance for the eight foreign jurisdictions with the largest swaps markets, an expedited comparability review petition process for participants, and a combined CFTC/SEC review process of existing regulation to resolve inconsistencies. The CHOICE Act also proposes to repeal Title VIII of the Dodd-Frank Act in its entirety. Repealing Title VIII would remove the Financial Stability Oversight Council's authority to designate certain payment and clearing organizations as 'systemically important financial market utilities' (SIFMUs), de-designate as SIFMUs any entities that have already been designated as such, and cease the regulations and enhanced supervision that SIFMUs are subject to under Title VIII.
The CHOICE Act still needs to pass in the House and the Senate and be signed into law by the President, but this seems possible with the Republicans soon to control both Congress and the White House. Congressman Hensarling was an influential part of the President-elect's campaign, is currently chair of the House Financial Services Committee, and is reportedly being considered as a candidate for Treasury secretary,8 so the CHOICE Act is likely to receive serious consideration.

The Volcker Rule

The Volcker Rule, which is intended to limit certain types of high-risk investments by banks, has received little attention from President-Elect Trump. In August 2015, he stated that "if [Paul Volcker] is happy [with the rule], I’m happy,"9 but he has not specifically discussed the Volcker Rule further. However, the proposed CHOICE Act referenced above would repeal the Volcker Rule as part of its general rollback of Dodd-Frank Act provisions. To what extent President-Elect Trump supports the CHOICE Act's provisions remains to be seen.

Impact on Foreign Jurisdictions

Any repeal or weakening of the Dodd-Frank Act will of course not directly impact some of the fundamental changes that financial institutions have put in place to comply with new derivatives rules implemented internationally in response to G20 commitments following the global financial crisis. Any international financial institution would still need to comply, for example, with swap data reporting and clearing requirements that apply in certain non-U.S. jurisdictions. However, changes to Dodd-Frank could call into question equivalency determinations that have been granted by these foreign regimes in areas such as central clearinghouses. One exception to this, if it should happen, is the Volcker Rule, which does not have direct regulatory analogs in other jurisdictions, and therefore its repeal could have benefits for how U.S. financial institutions compete in foreign markets.

Composition of Regulatory Agencies

The Commodity Futures Trading Commission (the CFTC)
Commissioner Timothy Massad's term expires in April, 2017, and there is some speculation that he may even step down ahead of schedule, after the Presidential inauguration on January 20.10 Commissioner Christopher Giancarlo, the lone Republican Commissioner, is expected to serve as acting chairperson should Chairman Massad step down, until either Commissioner Giancarlo or a new candidate is officially nominated. Of the five Commissioner seats on the CFTC, only three are currently filled. President Obama has two nominees awaiting Senate confirmation,11 although it is now unclear if either candidate will be confirmed. Should Commissioner Massad step down there would be three vacant seats for President-Elect Trump to fill, though no more than three commissioners may be from the same political party at any one time, so at least one nominee would have to be from outside the Republican Party.
The Securities and Exchange Commission (the SEC)
On November 14, the SEC announced that its Commissioner Mary Jo White has decided to leave the Commission "at the end of the Obama Administration."12 13 Commissioner Michael Piwowar, the lone Republican Commissioner, is expected to serve as acting chairperson until either he, or a new candidate, is officially nominated. Currently only three out of five Commissioner seats at the SEC are filled, and, much like the CFTC, the SEC has two nominees awaiting confirmation14 whose confirmations are now uncertain. Once Chairperson White steps down from the SEC, President-Elect Trump will have three vacant seats to fill, though no more than three commissioners may be from the same political party at any one time, so at least one nominee would have to be from outside the Republican Party.
Please feel free to contact us with any questions about the implications of the above on U.S. financial services regulation.
1 12 U.S.C. §5301 et. seq.
3 These changes to the broader financial regulation landscape will be discussed in a forthcoming alert.
6  Financial CHOICE Act of 2016, H.R. 5983, 114th Cong. (2016).
11 Both Chris Brummer, a Democratic professor at Georgetown University Law Center, and Brian Quintenz, a Republican former House aide, were approved unanimously by the Senate Agriculture Committee in September, but have since been awaiting full Senate confirmation.
 13 The Securities Exchange Act of 1934 allows the President to de-designate the current chair and designate an interim or permanent chair out of the sitting Commissioners, so Commissioner White's resignation is likely a mere formality.
14 Both Lisa Fairfax, a Democratic law professor at George Washington University, and Hester Peirce, a Republican senior research fellow at the Mercatus Center at George Mason University, were approved by the Senate Banking Committee in May, but have since been awaiting full Senate confirmation.