In 39 days, the financial markets will adopt a new "Grey List" - aka "Watch List" or "Gray List."  This grey list will include a myriad of derivatives markets and securities.

"Grey List" Defined.  A list of securities selected for special surveillance by a brokerage, exchange or regulatory organization; firms on the list are often takeover targets, companies planning to issue new securities or stocks showing unusual activity.

Yes, on July 16th, more than 100 derivatives provisions of the Dodd-Frank Reform Act go into effect - it's a Saturday, but someone, somewhere must be trading derivatives - even though final rules are not yet in place. 

Causing Concerns.   The holdup with implementing Dodd-Frank not only causes concern that a large swath of the financial system might be thrown into legal gray areas, but that it might disrupt the $583 trillion derivatives market and spark a new wave of lawsuits.  That, according to WSJournal reporters Deborah Solomon and Victoria McGrane.  [C-I Note:  Lawyers probably are "licking their chops" over the prospects of a "new wave of lawsuits."]   The 100 derivates provisions cover such areas as:

• Registrations.  All security-based swaps, such as CDS's, must be registered with the SEC, leading to confusion over who is the issuer of a 2-party transaction.
• Internal Controls.  Swap dealers must satisfy new business-conduct requirements such as verifying those on the other side of a trade, and name a chief compliance office ("CCO").
• No Exemption.  An exemption allowing certain nonfinancial companies to use OTC derivative for hedging is repealed, apparently blocking those firms from using the products.  The CFTC has said it may take steps to help the affected firms. 

2010 Expectations vs. 2011 Reality.   The CFTC and the SEC were supposed to finish rules creating a new regulatory framework for trading and clearing derivatives by 7/21, the anniversary of when the law's signing.  The vast majority of the rules won't be complete by then.  The law dictates that a host of provisions related to the rules go into effect 360 days after the law's passage, which is 7/16.  Both regulators are well aware of the problem and will provide necessary clarification and guidance to ensure that the deadline will "not be an event at all" for market participants.  A SEC spokeserson "ditto'd" those remarks. 

In the worst case, some believe that certain derivatives - i.e., swaps - could enter legal limbo.  That's because Dodd-Frank repeals parts of a 2000 law that says swaps, which are contracts to exchange one asset or liability for another in the future, don't have to be traded on exchanges or other open platforms.  The new law says most of them do, though certain customized swaps can still be traded OTC;  regulators, however, haven't finalized the rules governing the new regime. 

Which brings the legality of some trades after July 16 into question - according to some in the legal community.  Some market participants worry that even if regulators say OTC swaps aren't illegal, people might still bring lawsuits seeking to declare trades null and void. 

And then this from Rep. Frank Lucas (Rep - OK), Chairman of the House Agriculture Committee:  "Despite whether the regulators act, these contracts won't be protected from the trial bar. This could prove hugely disruptive to businesses."   He and other Republicans support legislation to delay the deadline for most Dodd-Frank derivatives provisions - though it's doubtful that plan would pass in the Democrat-controlled Senate.

And let's not forget that regulators haven't made final the rules that will determine who qualifies as a swap dealer.  

For the complete story, go to:  [Wall Street Journal, 6/7/11, "Clock Ticking .." - may require subscription to access]