Regulating Fairness: The Dodd-Frank Act's Fair Dealing Requirement for Swap Dealers and Major Swap Participants
59 Pages Posted: 14 Apr 2014 Last revised: 23 Jan 2015
Date Written: June 9, 2014
In the years leading up to the financial crisis of 2008, investment banks used tactics that were misleading and unfair in marketing, selling and dealing in complex swaps and other over-the-counter derivatives. With the Dodd-Frank Act of 2010, Congress amended federal law to direct the futures and derivatives markets’ regulator, the U.S. Commodity Futures Trading Commission (“CFTC”), to promulgate ethical business conduct standards for these swap dealers and major swap participants (“swap entities”), including a regulation requiring swap entities to communicate with counterparties in a fair and balanced manner based on principles of good faith and fair dealing. The CFTC fulfilled this directive by adopting Regulation 23.433 in 2012, but the rule merely mirrors the statutory text and the adopting release does not provide much information about the content of the good faith principles for swap entities. To provide context for the fair dealing rule, this Article examines and analyzes sources referenced in the rule’s adopting release – namely, relevant National Futures Association (“NFA”) guidance and a Senate Report about the causes of the financial crisis. The Article concludes that an excluder conceptualization of good faith and fair dealing, as exemplified by Section 205 of the Restatement (Second) Contracts, would help to specify Regulation 23.433’s strictures. Under an excluder conceptualization of good faith, a list of specific examples of the kinds of communications that would violate Regulation 23.433 – taken from NFA guidance and the Senate report – would clarify the fair dealing rule’s prohibitions for market participants.
Keywords: Dodd-Frank Act, swap dealers, swaps, derivatives, Commodity Exchange Act, financial regulation, contract law, administrative law
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