CFTC Final Rule: Conflicts of Interest for Swap Dealers, Major Swap Participants, Futures Commission Merchants, and Introducing Brokers

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Gavel.png FINAL RULE: The final rule on conflicts of interest for SDs, MSPs, FCMs and IBs was approved at CFTC Open Meeting, February 23, 2012.
Dodd-Frank Timeline, Conflicts of Interest for Swap Entities, FCMs, IBs
Final Rule Issue Effective Date Compliance Date
April 3, 2012 August 3, 2012 October 12, 2012

At its February 23, 2012 open meeting, the CFTC approved its first set of final internal business conduct standards for swap dealers and major swap participants (SD/MSPs), futures commission merchants (FCMs) and introducing brokers (IBs). Among the provisions is a final rule establishing conflicts of interest policies.

The rules were originally planned to become effective on June 4, 2012. However, on June 1, 2012 the CFTC granted "no-action relief" to the industry until August 3, 2012. Industry participants have voiced concern that the rules will create a "legal nightmare" for brokers who are concerned about daily interactions with clients running afoul of the rules. [1]


Background

Section 731 of the Dodd-Frank Act amended the Commodity Exchange Act by establishing "information partitions" between research and analysis functions and pricing, trading and clearing functions for all SD/MSPs. Section 732 amends the Commodity Exchange Act to implement similar partitions within FCMs and IBs. A proposed rule was approved at an open meeting November 10, 2010.

Final Rule Summary

The final rules restrict or prohibit:

  • non-research personnel from influencing the content of research reports prepared by research analysts employed by the SD, MSP, FCM, or IB,
  • the consideration of a research analyst’s contributions to the trading or clearing business when setting the research analyst’s compensation.
  • the offering of favorable research, or threatening to change research, for existing or prospective counterparties in exchange for business or compensation.

Additionally, the swap entities must disclose whether the research analyst and/or the entity maintains a financial interest in any derivative of a type that the research analyst follows, and the general nature of the financial interest.

Finally, the final rules prohibit the retaliation against any research analyst who produces a research report that may adversely impact certain of the firm’s business activities, and the interference of decisions related to the provision of clearing or the acceptance of clearing customers.

Small Introducing Broker Exemption

Small IBs, which are defined as an IB that has generated, over the preceding 3 years, $5 million or less in aggregate gross revenues from its activities as an IB, have been granted an exemption from the stringent firewall rules, but will still need to "establish structural and institutional safeguards reasonably designed to ensure that the activities of any person within the firm relating to research or analysis of the price or market for any commodity or derivative are separated by appropriate informational partitions within the firm from the review, pressure, or oversight of persons whose involvement in trading or clearing activities might potentially bias the judgment or supervision of the persons."

Plus, small brokers will stiil need to adopt and implement written policies and procedures to ensure compliance. Finally, a small IB will still need to separate their research department from other departments that might bias the research.[2]

Related Documents: Fact Sheet, Q&A, and Final Rule as it Appeared in the Federal Register

Note: The documents embedded below include the entire set of internal business conduct standards rules approved at the CFTC Open Meeting, February 23, 2012.

References

  1. CFTC delays broker conflict-of-interest rule. Reuters. Retrieved on June 15, 2012.
  2. Conflict of Interest Rules. Mark E. Ruddy, NIBA Journal. Retrieved on May 21, 2012.

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