Aug. 2—The Dodd-Frank Wall Street Reform and Consumer Protection Act that President Obama signed into law July 21 is the first bill, or initiative, to authorize the CFTC and SEC to regulate all over-the-counter derivatives trading. Many energy trading firms are expected to be subject to new capital, margin, reporting, and position limits that were formerly free of regulatory oversight. After all the political self-congratulations, one concern is that only three Republicans in the House and three Republicans in the Senate voted for the bill. The other area of concern is that the wording of the 2,300 page bill is, in many cases, ambiguous, turning the interpretation and rule-making authority over to the regulatory agencies.

The real work of crafting rules that theoretically match the intent of the bill will take place over the coming year. This will likely be a heavily lobbied and under-reported process that determines the final outcome. The CFTC has broadly outlined the need for 60 rulemaking endeavors (processes) to determine, among other things, the basis for who is a swap dealer or "major swap participant," a framework for determining capital and margin requirements, timelines and processes for derivatives reporting, the appropriate levels at which to set position limits within each respective market without significantly reducing liquidity and the timelines for compliance.

During the initial 360 days, the CFTC will attempt to push through its rule-making process. The proposed rules are to be published between 90 and 360 days after the bill becomes law. This will be quite an endeavor as the bill contains more than 350 mandates and the CFTC expects to conduct about a dozen studies, reports, or memoranda of understanding. As for the impact on your financial trading partners, the bill will undoubtedly raise costs that will be passed through to consumers. With that said, a reasonable overview of the bill suggests that end-users taking delivery should be little affected. There is a stated exemption for hedging with forwards, and a stated intent to protect financial hedgers. The real risk is that the bill will raise costs for some market participants to the point that they exit the business, stifling liquidity or effectively killing some markets. While defining the new world will take time, it is clear the era of deregulation is over.