Much of Title VII of the Dodd-Frank Act is dedicated to the "plumbing" of the financial system, in particular, the clearing organizations that will be expected to clear those swaps that are deemed to be clearable by the CFTC and SEC, and the clearing members that will intermediate the clearing of swaps on clearing organizations on behalf of swaps customers. Under Section 724 of Dodd-Frank the CFTC is permitted to prescribe rules related to the treatment of funds and collateral received by a clearing member from a swaps customer and by a clearing organization from a clearing member. Under the current futures clearing model, clearing members (future commission merchants, or FCMs) are required to segregate customer funds from the FCMs' own funds and are not permitted to use the funds of one futures customer to margin the position of another futures customer. However, FCMs are permitted to commingle all futures customer funds in a single omnibus account at the futures clearing organization, and in the event of a default of a clearing member caused by a customer default to the clearing member that the clearing member is unable to cover out of its own funds, the clearing organization is permitted to cover such customer default out of the non-defaulting customer funds contained in the omnibus account of the clearing member at the clearing organization. Thus, there exists a level of mutualization of risk of loss among all futures customers of any particular FCM to the extent such FCM is unable to cover the loss of a customer. (To our knowledge no futures clearing organization has applied the funds of non-defaulting customers to cover the loss of a defaulting customer.) At a CFTC roundtable held on October 22 some swaps market participants raised a concern that if they are forced to clear swaps on a clearing organization through FCMs, they will have exposure to other customers of that FCM that they do not currently incur through the use of tri-party collateral custody arrangements with their bilateral swaps counterparties. Such market participants advocate that the CTFC mandate that FCMs and swaps clearinghouses offer an "individually segregated swaps customer account" to insulate each swaps customer from the risk of the failure of another swaps customer of the same FCM impacting the collateral of non-defaulting customers. In response, clearinghouses represented at the roundtable pointed out that the adoption of such individually segregated accounts could significantly raise the margin requirements for clearing swaps by anywhere from 50-100% and could require a large increase in the amount of default fund contributions required by clearing organizations of their clearing members, thus significantly raising the costs of clearing. Other industry representatives at the roundtable cautioned against the potential moral hazard that would be introduced by individualized segregated accounts. The roundtable illustrates the difficult issues raised by the transfer of bilateral OTC derivatives to a multilateral cleared environment, and also illustrates that there is "no free lunch" if swaps customers wish to avoid the risk of mutualized risk sharing, someone will have to pay for the costs of providing such insurance. The CFTC is expected to vote on and publish a proposed rule regarding the treatment of swaps customer funds and collateral on November 19.

• Private Equity and Banks.

On November 4th, Reuters reported that the Federal Reserve Board appears more willing to consider private equity ownership of banks. Private Equity.

• Strongest Banks May be Allowed to Raise Dividends.

On November 4th, Reuters reported that the Federal Reserve Board is expected to allow the most well-capitalized banks to raise their shareholder dividend payments. Dividends.

• FASB Requests Comment on Proposal Regarding the Accounting for Repos.

On November 3rd, FASB issued an Exposure Draft soliciting comments on its proposal to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. Comments should be submitted on or before January 15, 2011. FASB Press Release.

• GOP Agenda.

On November 3rd, Reuters reported that Republican leaders of the House anticipate proposing changes to the Dodd-Frank Act in the areas of derivatives, credit rating agency liability and the Consumer Financial Protection Bureau. Hearings on how regulatory agencies are implementing the Dodd-Frank Act are also promised. The extent of the changes, however, may be limited. GOP Agenda. See also New York Times. On November 4th, Reuters reported that Republican leaders are positioning themselves to lead key House committees. Committees.

• FDIC Sues Officers and Directors of Failed Bank.

On November 1st, Reuters reported that the FDIC has sued 11 former officers and directors of Heritage Community Bank for negligence and breach of fiduciary duty. Lawsuit.

• Bond Insurer May File for Bankruptcy.

On November 1st, Reuters reported that bond insurer Ambac Financial Group Inc. may file for bankruptcy before the end of the year. Bankruptcy.

• Federal Reserve Establishes Office of Financial Stability Policy and Research.

On November 4th, the Federal Reserve Board established the Office of Financial Stability Policy and Research and appointed Board economist J. Nellie Liang as its director. The office will develop and coordinate staff efforts to identify and analyze potential risks to the financial system and the broader economy, including through the monitoring of asset prices, leverage, financial flows, and other market risk indicators; follow developments at key institutions; and analyze policies to promote financial stability. It will also support the supervision of large financial institutions and the Board's participation on the Financial Stability Oversight Council. Federal Reserve Board Press Release.

• North Korea Sanctions Regulations.

On November 4th, the Treasury Department's Office of Foreign Assets Control issued regulations with respect to North Korea to implement Executive Order 13466 of June 26, 2008, and Executive Order 13551 of August 30, 2010. OFAC intends to supplement this action with a more comprehensive set of regulations, which may include additional interpretive and definitional guidance and additional general licenses and statements of licensing policy. The regulations are effective immediately. 75 FR 67912.

• Treasury Targets Pakistan-Based Terrorist Organizations.

On November 4th, the Treasury Department targeted the financial and support networks of Pakistan-based terrorist organizations Lashkar-e Tayyiba and Jaish-e Mohammed. Treasury designated Azam Cheema, Hafiz Abdul Rahman Makki, Al Rehmat Trust and Mohammed Masood Azhar Alvi. The designations prohibit U.S. persons from engaging in any transactions with these individuals and entity and freeze any assets the designees have under U.S. jurisdiction. Treasury Department Press Release.

• AIG Restructuring.

On November 1st, the Treasury Department provided an update regarding the federal government's involvement with AIG. AIG will use the proceeds from its sale of one unit and the IPO from a second to repay the loan extended to AIG by the Federal Reserve Bank of New York and to repurchase a substantial amount of the FRBNY's preferred interests in certain AIG subsidiaries. AIG will then draw up to $22 billion in remaining Troubled Asset Relief Program funds from the Treasury Department to restructure its governmental obligations. After the restructuring, the Treasury Department will own 92.1 percent of AIG, which equates to approximately 1.66 billion shares of common stock in the company. Based on the market closing price of AIG on October 29, 2010, these shares are worth approximately $69.5 billion. Treasury Department Press Release.

• Comment Requested on DCO Application.

On November 4th, the CFTC requested comment on New York Portfolio Clearing's application for registration as a derivatives clearing organization. Comments should be submitted on or before December 2, 2010. CFTC Release No. PR5933-10.

• Investment of Customer Funds and Funds Held in Account for Foreign Futures and Foreign Options Transactions.

On November 3rd, the CFTC published for comment proposed amendments to its regulations regarding the investment of customer segregated funds for domestic futures, and funds held in an account subject to Commission Regulation 30.7 for foreign futures. The proposed amendments address: permitted investments, the liquidity requirement, the removal of rating requirements, and concentration limits including asset-based, issuer-based, and counterparty concentration restrictions. The proposed amendments also include revisions to the acknowledgment letter requirement for investment in a money market mutual fund, revisions to the list of exceptions to the next-day redemption requirement for MMMFs, the application of customer segregated funds investment limitations, and the elimination of the option to designate a depository for Regulation 30.7 accounts. Comments should be submitted on or before December 3, 2010. 75 FR 67642.

• Prohibition of Market Manipulation.

On November 3rd, the CFTC published for comment proposed rules implementing the new anti-manipulation authority in section 753 of the Dodd-Frank Act. The proposed rules expand and codify the CFTC's authority to prohibit manipulation. Comments should be submitted on or before January 3, 2011. 75 FR 67657.

• Process for Review of Swaps for Mandatory Clearing.

On November 2nd, the CFTC published for comment proposed rules concerning procedures for determining the eligibility of derivatives clearing organizations to clear swaps; for the submission of swaps by DCOs to the CFTC for a determination of a clearing requirement; for CFTC-initiated reviews of swaps; and for staying a clearing requirement while the clearing of a swap is reviewed. Comments should be submitted on or before January 3, 2011. 75 FR 67277.

• Statutory Framework for SEFs and SDRs.

On November 2nd, the CFTC published for comment proposed rules implementing a new statutory framework for certification and approval procedures for new products, new rules and rule amendments submitted to the CFTC by registered entities such as Swap Execution Facilities and Swap Data Repositories. Comments should be submitted on or before January 3, 2011. 75 FR 67282.

• Prohibition of Certain Trading Practices.

On November 2nd, the CFTC published for comment proposed amendments implementing the Dodd-Frank Act's prohibition against certain trading practices deemed disruptive of fair and equitable trading. Comments should be submitted on or before January 3, 2011. 75 FR 67301.

• Position Reports for Certain Physical Commodity Swaps.

On November 2nd, the CFTC published for comment proposed reporting regulations designed to implement and enforce aggregate position limits for certain physical commodity derivatives. The Dodd-Frank Act authorizes the CFTC to adopt regulations establishing aggregate position limits for designated contract market physical commodity futures contracts and swaps that are economically equivalent to such contracts. Comments should be submitted on or before December 2, 2010. 75 FR 67258.

• Open Meeting.

The CFTC will hold an Open Meeting on November 10, 2010 to consider whether to propose rules concerning: the registration of foreign boards of trade; the registration of swap dealers and major swap participants; the implementation of whistleblower provisions; the duties of swap dealers and major swap participants; conflict-of-interest policies and procedures by futures commission merchants, introducing brokers, swap dealers and major swap participants; and the designation of a Chief Compliance Officer, required compliance policies and annual reports of futures commission merchant, swap dealers and major swap participants. CFTC Release No. PR5932-10.

• CFTC Names Enforcement Director.

On November 1st, the CFTC announced the appointment of a former federal criminal prosecutor, David Meister, as Director of Enforcement. CFTC Press Release. See also Reuters.

• Regulation SHO.

On November 4th, the SEC extended to February 28, 2011, the date for compliance with the Commission's new short sale rule. The extension was granted to give certain exchanges additional time to modify their market opening, reopening, and closing procedures for securities covered by the rule, and to provide additional time to market participants for programming and testing of systems for implementation. SEC Release No. 34-63247; SEC Press Release.

• Risk Management Controls for Brokers or Dealers with Market Access.

On November 3rd, the SEC approved new Rule 15c3-5 under the Securities Exchange Act of 1934. The rule requires brokers or dealers with access to trading securities directly on an exchange or alternative trading system, including those providing sponsored or direct market access to customers or other persons, and broker-dealer operators of an ATS that provide access to trading securities directly on their ATS to a person other than a broker or dealer, to establish, document, and maintain a system of risk management controls and supervisory procedures reasonably designed to systematically limit the financial exposure of the broker or dealer that could arise as a result of market access; and ensure compliance with all regulatory requirements that are applicable in connection with market access. The Rule effectively prohibits giving customers "unfiltered" sponsored access -- access without the application of any pre-trade filters or controls -- by requiring the controls and procedures to be under the "direct and exclusive control" of the broker-dealer with market access (except for a limited exception to allow reasonable allocation of certain controls and procedures to another registered broker-dealer). The sponsoring broker-dealer will also be required to regularly review the effectiveness of its controls and procedures, and promptly address issues, and will be required to perform and document, at least annually, a review of its activities relating to market access to ensure the overall effectiveness of the controls and procedures. The sponsoring broker-dealer's Chief Executive Officer will be required to certify annually that the controls and procedures comply with the Rule and that the required review has been conducted. The new rule will be effective 60 days after publication in the Federal Register, which is expected during the week of November 8. SEC Release No. 34-63241; SEC Press Release.

• Prohibition against Fraud, Manipulation and Deception in Connection with Security-Based Swaps.

On November 3rd, the SEC published for comment a new rule under the Securities Exchange Act of 1934 intended to prevent fraud, manipulation, and deception in connection with the offer, purchase or sale of any security-based swap, the exercise of any right or performance of any obligation under a security-based swap, or the avoidance of such exercise or performance. Comments should be submitted within 45 days after publication in the Federal Register, which is expected during the week of November 8. SEC Release No. 34-63236; SEC Press Release.

• Proposed Rules for Implementing the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934.

On November 3rd, the SEC published for comment proposed rules and forms implementing the whistleblower program established by the Dodd-Frank Act. Comments should be submitted on or before December 17, 2010. SEC Release No. 34-63237; SEC Press Release. See also Aguilar Remarks; Paredes Remarks; Walter Remarks. On October 29th, the SEC issued a report on the whistleblower program required by the Dodd-Frank Act. The Commission has created a $450 million fund from which to pay whistleblowers whose information leads to a successful SEC enforcement action. SEC Annual Report on Whistleblower Program.

• President's Working Group Report on Money Market Fund Reform.

On November 3rd, the SEC requested comments on the President's Working Group on Financial Markets' report concerning money market mutual fund reforms. Comments should be submitted on or before January 10, 2011. SEC Release No. IC-29497; SEC Press Release.

• The Flash Crash.

On November 5th, Bloomberg reported the comments of Gregg Berman, Senior Advisor to the Director, Division of Trading and Markets, at the meeting of the CFTC-SEC Advisory Committee on Emerging Regulatory Issues. Berman said the evidence does not suggest that traders were trying to profit by overwhelming exchanges on May 6, 2010. Quote Stuffing. Reuters reported that Berman anticipates that the SEC will implement new limit up/limit down rules after the temporary circuit breakers, designed to prevent future "flash crashes," expire. CFTC Chairman Gary Gensler asked whether new rules for algorithmic and high-frequency trading were needed. New Rules.

• SEC Amicus Brief.

On November 5th, the SEC posted its amicus brief in Janus Capital Group, Inc. v. First Derivatives Traders, 09-525 (S.Ct.). The SEC and the U.S. Solicitor General argue that the investment adviser for a group of mutual funds can be held primarily liable under Section 10(b) of the Exchange Act for having made misleading statements in fund prospectuses even though the prospectuses were issued in the names of the funds and the misleading statements were not expressly attributed to the adviser. Amicus Brief. See also Questions Presented; Opinion Below.

• SEC to File Amended Complaint to Address Extraterritoriality Issues.

On November 1st, Reuters reported that the court overseeing the SEC's lawsuit against Fabrice Tourre, a former Goldman Sachs executive, will allow the agency to file an amended complaint to address the Supreme Court's decision in Morrison v. National Australia Bank, where the Supreme Court limited the extraterritorial reach of Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5. Tourre is accused of creating and selling a collateralized debt obligation without disclosing that the hedge fund selecting the assets held by the CDO intended to buy credit default swaps against the underlying assets. Tourre asserts that the SEC's case must be dismissed because the sole investor was a German bank. Amended Complaint.

• Amendments Regarding ETNs and Futures-Linked Securities Are Approved.

On October 28th, the SEC approved the Chicago Board Options Exchange's proposal to permit the trading of options on leveraged (multiple or inverse) exchange-traded notes, and to broaden the definition of "Futures-Linked Securities." SEC Release No. 34-63202.

• Proposed Program for the Allocation of Regulatory Responsibilities Regarding Regulation NMS.

On November 2nd, the SEC published a proposed program for the allocation of regulatory responsibilities relating to Regulation NMS Rules. FINRA would assume examination and enforcement responsibility relating to Regulation NMS compliance by those who are members of both FINRA and a participating exchange. Covered Regulation NMS Rules would not include the application of any rule of a participating exchange or FINRA, or any rule or regulation under the Exchange Act, to the extent that it pertains to violations of insider trading activities, because such matters are covered by a separate multiparty agreement. The participating exchanges and FINRA would retain full responsibility for surveillance and enforcement with respect to trading activities or practices involving its own marketplace. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of November 8. SEC Release No. 34-63230.

• Funding and Liquidity Risk Management Practices.

On November 1st, the Financial Industry Regulatory Authority issued a Regulatory Notice on funding and liquidity risk management practices. FINRA expects broker-dealers to develop and maintain robust practices to prepare for adverse circumstances. Broker-dealers affiliated with holding companies should undertake these efforts at the broker-dealer level, in addition to their planning at the holding-company level. FINRA Regulatory Notice 10-57.

• NASDAQ Proposes Additional Listing Criteria for Commodity Stockpiling Companies.

On October 28th, the NASDAQ Stock Market proposed additional criteria for listing commodity stockpiling companies that have indicated that their business plan is to buy and hold commodities. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of November 8. SEC Release No. 34-63207.

• NASDAQ OMX PHLX Proposes Remote Specialists.

On October 27th, the SEC provided notice of NASDAQ OMX PHLX's proposal to amend Exchange Rule 501 (Specialist Appointment), Rule 506 (Allocation Application), Rule 507 (Application for Approval as an SQT or RSQT and Assignment in Options), Rule 1014 (Obligations and Restrictions Applicable to Specialists and Registered Options Traders), and Rule 1020 (Registration and Functions of Options Specialists), to allow certain exchange members to act as option specialists that are not physically present on the option trading floor. The exchange also proposes to amend Options Floor Procedure Advices A-7 (Responsibility to Cancel), A-10 (Specialist Trading With Book), B-3 (Trading Requirements), and E-1 (Required Staffing of Options Floor), to conform them with the proposed rule changes. Comments should be submitted on or before November 23, 2010. SEC Release No. 34-63192.

• Additional Listing Criteria Proposed for Commodity Stockpiling Companies.

On October 28th, the SEC provided notice of NASDAQ Stock Market's filing of a proposed rule change adopting additional criteria for listing commodity stockpiling companies that have indicated that their business plan is to buy and hold commodities. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of November 8. SEC Release No. 34-63207.

• NYSE Amex Proposes Amendments Regarding the Trading of Complex Orders.

On October 27th, the SEC provided notice of NYSE Amex's proposal to update and streamline the rules governing open outcry trading of Complex Orders, including the definition of a Stock/Complex Order, and to adopt new rules to provide for a Complex Order Auction in the Electronic Complex Order rules. The filing also clarifies the minimum trading and quoting increment permissible for Complex Orders. Comments should be submitted on or before November 23, 2010. SEC Release No. 34-63187.

• Proposed Expansion of Eligible Forms of Collateral Is Approved.

On November 1st, the SEC approved the Options Clearing Corporation's proposed expansion of the forms of collateral eligible for incorporation in the System for Theoretical Analysis and Numerical Simulations risk management methodology. SEC Release No. 34-63217.

• Facilitating Shareholder Director Nominations - Effective November 15, 2010.

The SEC is adopting changes to the federal proxy rules to facilitate the effective exercise of shareholders' traditional state law rights to nominate and elect directors to company boards of directors. The new rules will require, under certain circumstances, a company's proxy materials to provide shareholders with information about, and the ability to vote for, a shareholder's, or group of shareholders', nominees for director. In adopting the changes, the SEC indicated that it believes these rules will benefit shareholders by improving corporate suffrage, the disclosure provided in connection with corporate proxy solicitations, and communication between shareholders in the proxy process. The new rules apply only where, among other things, relevant state or foreign law does not prohibit shareholders from nominating directors. The new rules will require that specified disclosures be made concerning nominating shareholders or groups and their nominees. In addition, the new rules provide that companies must include in their proxy materials, under certain circumstances, shareholder proposals that seek to establish a procedure in the company's governing documents for the inclusion of one or more shareholder director nominees in the company's proxy materials. The SEC also adopted related changes to certain other rules and regulations, including the existing solicitation exemptions from its proxy rules and the beneficial ownership reporting requirements. 75 FR 56667.

• SEC Adopts Rule Barring Unfiltered Market Access.

At an open meeting on November 3rd, the Securities and Exchange Commission unanimously approved Rule 15c3-5 under the Securities Exchange Act of 1934, as amended. Briefing.

• SEC Delays Compliance Date for Short Sale Pricing Rule to February 28, 2011.

On November 4, the SEC announced that it was extending the compliance date for its the new short sale pricing rule - Rule 201 under Regulation SHO - from November 10, 2010, to February 28, 2011, in order to enable trading centers and others to prepare for complying with the new rule. Briefing.

• CFTC Chairman Gary Gensler Discusses Proposed Rules Under Title VII, Dodd-Frank Act at Winston & Strawn's DC Office.

Please join us for a discussion of rules implementing Title VII of the Dodd-Frank Act with Gary Gensler, Chairman of the Commodity Futures Trading Commission. Peter Malyshev, of counsel in Winston's corporate practice, will moderate the DC Bar's Off the Record Brown Bag Program on November 18 at Winston & Strawn's Washington, D.C. office. For more information and to register for this event, please click here.

• Winston & Strawn Sponsors SIFMA-CL Fall Compliance & Legal Seminar.

Winston & Strawn is a sponsor of this year's Securities Industry and Financial Markets Association Compliance and Legal Society Fall Compliance and Legal Seminar, which will be held at the Grand Hyatt Hotel in New York City on November 16th. New York financial services attorneys Ed Johnsen and Bob Boresta will be representing the Firm at the seminar. Seminar.

• Winston & Strawn Sponsors Northwestern's 2011 Kellogg Private Equity and Venture Capital Conference.

Winston & Strawn will sponsor Northwestern's 2011 Kellogg Private Equity and Venture Capital Conference to be held February 9 in Chicago. Event.

• Contact Us.

If you have any questions about the information in this Update, or about any financial services matters generally, please click here to see a list of Winston & Strawn professionals.