CFTC Final Rule: Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants

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Gavel.png FINAL RULE: issued August 27, 2012; effective November 13, 2012.

NO-ACTION RELIEF: on "material terms" issued June 27, 2013
PROPOSED RULE on "material terms" approved September 15, 2015 Read Proposed Rule

Dodd-Frank Timeline,Swap Trading Relationship Documentation for Swap Dealers and Major Swap Participants
Proposal Date Final Rule Issue Effective Date
February 8, 2011 September 11, 2012 November 13, 2012
Dodd-Frank Timeline, Confirmation, Reconciliation, and Compression, Swap Dealers and Major Swap Participants
Proposal Date Final Rule Issue Effective Date
December 28, 2010 September 11, 2012 November 13, 2012
Dodd-Frank Timeline, Orderly Liquidation Termination Provision in Swap Trading Relationship Documentation
Proposal Date Final Rule Issue Effective Date
February 8, 2011 September 11, 2012 November 13, 2012

On August 27, 2012, the CFTC issued its second round of final rulemakings related to internal business conduct standards for swap dealers and major swap participants (SD/MSPs). Also referred to by the commission as "risk management procedures," the final rule combines three previously proposed rules:

  • Confirmation, Portfolio Reconciliation, and Portfolio Compression Requirements for SD/MSPs View proposed rule;
  • Swap Trading Relationship Documentation Requirements for SD/MSPs View proposed rule; and
  • Orderly Liquidation Termination Provision in Swap Trading Relationship Documentation for Swap Dealers and Major Swap Participants View proposed rule.

The rule passed in seriatim by a vote of 5-0. According to the statement by Chairman Gary Gensler, the rule "promotes crucial back office standards that will reduce risk and increase efficiency in the swaps market." The rule appeared in the Federal Register on September 11, 2012, and will become effective on November 13, 2012.

Summary of the Final Rule

  • Confirmation provisions include:
    • Each SD/MSP transacting a swap with another SD/MSP must execute a confirmation for the swap transaction as soon as technologically practicable, but in any event by the end of first business day following the day of execution.
    • Each SD/MSP transacting a swap with an non-SD/MSP counterparty must send an acknowledgement of the transaction as soon as technologically practicable, but in any event by the end of first business day following the day of execution.
    • Each SD/MSP must establish, maintain, and follow written policies and procedures to ensure compliance with the above.
    • Swap transactions occurring on a designated contract market (DCM), swap execution facility (SEF) or submitted for clearing on a derivatives clearing organization (DCO) shall be deemed to satisfy the above requirements.
  • Portfolio Reconciliation provisions include:
    • Each SD/MSP must agree with its counterparty on the terms of the reconciliation, which may be performed bilaterally or by a qualified third party.
    • For swaps transacted by two SD/MSPs, reconciliation must be performed daily for each portfolio that includes more than 500 swaps, weekly for portfolios containing between 50 and 500 swaps, and quarterly for all others.
    • For swaps with entities other than SD/MSPs, reconciliation must be performed at least once per quarter for all portfolios containing more than 100 swaps at any time during the quarter, and once annually for all others.
  • Portfolio Compression provisions: Each SD/MSP must establish, maintain, and follow written policies and procedures for bilateral offset of swap positions, and for engaging in periodic bilateral and multilateral compression exercises.
  • Swap Trading Relationship Documentation must include:
    • terms addressing payment obligations, default considerations, governing law, valuation dispute resolution;
    • confirmations;
    • credit support arrangements, including any initial and variation margin requirements, types of margin assets accepted, associated haircuts, rehypothecation, and custodial arrangements;
    • documentation in which the parties agree on the process, which may include any agreed upon methods, procedures, rules, and inputs, for determining the value of each swap; and
    • whether either counterparty is an insured depository institution or financial company.
  • For swaps falling under the End user exception from mandatory clearing, documentation must include the name of the counterparty, and a declaration that the counterparty has elected not to clear, is a non-financial entity, is hedging or mitigating commercial risk, and that the counterparty generally meets its financial obligations associated with noncleared swaps.

No-Action Relief, June 2013

On June 27, 2013, the CFTC Division of Swap Dealer and Intermediary Oversight (DSIO) issued a no-action letter relating to the terms that are included in portfolio reconciliations. Specifically, it requested that certain data not be considered "material terms" of the swap:

  • An indication that the swap will be allocated;
  • If the swap will be allocated, or is a post-allocation swap, the Legal Entity Identifier of the agent;
  • An indication that the swap is a post-allocation swap;
  • If the swap is a post-allocation swap, the unique swap identifier;
  • Block trade indicator;
  • Execution timestamp;
  • Timestamp for submission to swap data repository;
  • Clearing indicator;
  • Clearing venue;
  • If the swap will not be cleared, an indication of whether the clearing requirement exception in CEA section 2(h)(7) has been elected;
  • The identity of the counterparty electing the clearing requirement exception in CEA section 2(h)(7).

The letter can be found below.

Note: On September 15, 2015, the CFTC approved a proposed rule that would amend the definition of "material terms" for portfolio reconciliation.

Read proposed rule.png


Related Documents: Federal Register Entry; June 2013 No-Action Letter


References

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