Adaptation of CFTC Regulations to Incorporate Swaps - Comment Letters

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Dodd-Frank Timeline, Amendments to Adapt Certain CFTC Regulations to the Dodd-Frank Act
Final Rule Issue, Bunched Orders Final Rule Issue, Adaptations Final Rule Issue, Recording of Transactions
April 9, 2012 October 16, 2012 January 2, 2013

Comment letters addressing the adaptation of CFTC regulations to incorporate swaps.

Futures Industry Association - August 8, 2011

Adaptation of CFTC Regulations to Incorporate Swaps
August 8, 2011

From the comment letter:

"The nature and scope of the obligations that would be imposed on Commission registrants and non-registrant members of DCMs and SEFs under the proposed amendment is unclear and, in one case, simply impossible to meet. Moreover, the Commission has substantially underestimated the potential costs that Commission registrants would incur in complying with the recording requirement.

FIA also opposes the proposed amendment to Rule 1.31, which would require Commission registrants to maintain paper records in their original form for a period of at least five years. The Commission has provided no support for such a dramatic reversal of policy. Further, the Commission has failed to provide any meaningful estimate of the potential costs that Commission registrants would incur in complying with the proposed record retention requirement."

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National Futures Association - August 8, 2011

Adaptation of CFTC Regulations to Incorporate Swaps
August 8, 2011

In their comment letter, the NFA addresses the following concerns:

  • First, if, as the Commission states, its intent is to harmonize Commission Regulation 1.35 with proposed Regulation 23,202 (a)(1), the record keeping rule for swap dealers, the broad application of the proposed amendments to Regulation 1.35 would seem to have the opposite effect.
  • Secondly, the Commission’s estimate of the costs of recording and retaining all oral communications in any way related to the execution of an order focuses exclusively on the costs of procuring and operating an appropriate recording system. The release does not address the industry wide costs of retaining those recordings for five years under the standards proposed by the Commision.
  • Finally, [the NFA] note that the Commission indicates that the proposed amendments to Regulation 1.35 are intended to address Commission case law finding that tape recordings of customer telephone conservations made by registered firms are beyond the scope of Regulation 1.35… While the NFA recognizes that audio recordings are useful to the Commission in enforcement proceedings, they believe that this can be accomplished without "imposing sweeping new obligations on all registered FCMs, RFEDs, and IBs."
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Minneapolis Grain Exchange - August 8, 2011

Adaptation of CFTC Regulations to Incorporate Swaps
August 8, 2011

MGEX explains that there are several pitfalls in adopting 1.35 as proposed. "First, the language is overbroad and vague" and "the scope of the communication which leads to an executed trade needs additional clarification." In addition, "the proposed rulemaking is duplicative, costly and potentially impractical. It is duplicative in that each set of communication – be it oral or written – needs to be preserved and cataloged, even if the substance of the written and oral versions are identical."

"Finally, MGEX believes that there are members who may not trade enough to justify the extreme costs related to the proposed data collection. As a result, these members may effectively be pushed off exchanges based on a cost/benefit analysis. MGEX suggests having a threshold before requiring these heavy burdens apply to these low volume members."

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IntercontinentalExchange - August 4, 2011

Adaptation of CFTC Regulations to Incorporate Swaps
August 4, 2011

In their comment letter, ICE argues that:

  • The Commission’s proposal to require all participants on a SEF or DCM to record all pre-execution trade information is unnecessary and duplicative
  • The requirement will serve as a large surtax on exchange transactions and will cause end users to take transactions away from Swap Execution Facilities or Designated Contract Markets, defeating the Dodd/Frank Wall Street Financial Reform and Consumer Protection Act’s (“Dodd/Frank”) transparency objectives
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Swaps & Derivatives Market Association - August 8, 2011

Adaptation of CFTC Regulations to Incorporate Swaps
August 8, 2011

From the comment letter:

"The SDMA supports the proposed rules which take proven elements from the futures markets and apply them to the cleared swap markets. Allowing customers to effect efficient and low latency transactions is critical to ensure the success of the cleared swap market.

Using bunched trades promotes execution and operational efficiency. Bunched trades can be allocated on a post trade basis, as they are today in both bilateral and exchange traded environments.

The necessity of maintaining risk controls mandates that bunched trade allocation can be complete by the end of the trading day. In order for this process to maintain the integrity of trades and not create undue latency, bunched trades must be treated like all trades with an immediate confirmation of trade detail at point of execution and upon real time acceptance into clearing. By utilizing existing technology, the monitoring of risk and the management of margin is consistent across vertically designed execution and clearing venues as well as horizontally designed systems thus allowing for the application of efficient work flow such as post-execution trade allocations."

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CME Group - August 8, 2011

Adaptation of CFTC Regulations to Incorporate Swaps
August 8, 2011

In their comment letter, CME Group explains:

  • The proposed oral recordkeeping requirements would be unduly burdensome to covered intermediaries and have not been shown to be necessary
  • If the Commission chooses to proceed, it should clarify several aspects of theproposed oral recordkeeping requirements
  • The proposed amendments to rule 1.31(a) also need clarification
  • The Commission's proposals lack an adequate cost-benefit analysis
  • The proposed amendments to “Open Contracts” do not accurately reflect market realities
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National Introducing Brokers Association - August 8, 2011

Adaptation of CFTC Regulations to Incorporate Swaps
August 8, 2011

The letter from the NIBA addresses Regulation 1.35(a), that will require introducing brokers to "record all oral communications thatlead to the execution of transactions in a commodity interest or cash commodity." NIBA suggests that the requirement "effectively does away with the stigma and burden of the NFA requirement on the disciplined firms by imposing an overbroad burden on all IBs and APs, most of which run their businesses in accordance with the rules." NIBA further argues:

  • the provision will hurt small IBs who must invest heavily into new technology in order to comply
  • the provision will effectively cut off all communication between brokers and customers while the broker is out of the office.
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National Council of Farmer Cooperatives - August 8, 2011

Adaptation of CFTC Regulations to Incorporate Swaps
August 8, 2011

From the comment letter:

"NCFC is concerned with this [Regulation 1.35] proposal because it would not only add swaps to the new recordkeeping requirements, but also would extend the new recordkeeping requirements to cash purchase and forward cash contracts entered into by any member of a designated contract market (DCM)...the proposed change to 1.35(a) would require those elevators to record, among other things, all oral communications that lead to execution of cash transactions with farmers.

"We do not believe that requiring this additional information to be recorded and maintained is necessary to achieve the stated goals in the cash commodity markets. Additionally, we do not believe the intent of the Dodd-Frank Act was to subject cash purchases and forward cash contracts to the additional new recordkeeping requirements proposed under regulation 1.35."

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Environmental Markets Association- July 21, 2011

Adaptation of CFTC Regulations to Incorporate Swaps
July 21, 2011

"In this letter, the EMA supplements the arguments advanced in its prior comment letter. The EMA argues that regulations cannot expand the authority granted to the CFTC by the statute, and notes that the paths potentially proposed by the CFTC could lead to CFTC jurisdiction over all intangible personal property, which is not provided by Dodd-Frank. The EMA notes the very broad definition of the word “physical” in current CFTC regulations certainly encompasses Environmental Commodities. We then show that Environmental Commodities satisfy the requirements of “physical” within the meaning of Dodd-Frank. Finally, the EMA notes that the exception to the definition of “swap” of Section 1a47(B) does not swallow the rule of what may be a “swap” in the first place under Section 1a47(A)."

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