CFTC Final Rule: Procedures to Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades; Further Measures to Protect the Identities of Parties to Swap Transactions

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Gavel.png FINAL RULE: Approved at CFTC Open Meeting, May 16, 2013. Entered Federal Register May 31, 2013. Effective Date July 20, 2013.
Dodd-Frank Timeline, Block Trade Minimum Size, Protection of Identities, CFTC
Proposal Date Final Rule Issue Effective Date
February 23, 2012 May 31, 2013 July 20, 2013

At a May 16, 2013 open meeting, the CFTC approved several final rules related to trade execution. One such rule involves the procedures by which the appropriate size of block trades and large swap transactions may occur outside of the order book of a swap execution facility or designated contract market. The rule entered the Federal Register on May 30, 2013 and will become effective July 20, 2013.

Background

One of the provisions of Title VII of the Dodd-Frank Act is the addition to the Commodity Exchange Act of Section 2(a)(13), which "requires public availability of swap transaction data."

On November 19, 2010, the commission issued its proposed rules for real-time reporting. The proposal included the reporting of data to a "real-time disseminator" such as a swap data repository, or to a third party such as a designated contract market (DCM) or swap execution facility (SEF) "as soon as technologically practicable."

The proposal also included tests to be conducted to determine the appropriate minimum block size for block trades and large notional transactions, a "distribution test" and "social size" test, based a trade's size relative to other trades in its category. The minimum threshold for block transactions would have been the larger of the two. However, after considering the comments from market participants, the commission admitted that they "got it wrong."[1]

The commission issued its final real-time reporting rules at its December 20, 2011 open meeting. The block trade rules were not part of the final rule, but rather were re-proposed at an open meeting held on February 23, 2012.[2]

The rule proposed to:

  • Group swaps into separate swap categories - interest rate, credit, equity, foreign exchange, and other commodity.
  • Establish methodologies for setting minimum block sizes, for block trades and large notional off-facility swaps. The commission would set block sizes for an initial one-year period, in order to give swap data repositories (SDRs) time to gather reliable data from which to assess appropriate block sizes for each category.
  • Prevent disclosure of the identities of swap counterparties, such as anonymity of transactions and positions.

The commission would analyze and use the data from the initial period to establish post-initial appropriate minimum block sizes for each swap category using a "67-percent notional amount calculation." In other words, only trades higher in notional value than 67 percent of the swaps traded would qualify. According to CFTC lawyer Carl Kennedy, according to current data, only the top six percent of interest rate and credit swap transactions are above the "67-percent notional" amount. [3]

Final Block Trade Rules, May 16, 2013

The final rules set forth the methodology for setting block trading sizes for five distinct asset classes, as identified by the CFTC Final Rule: Real-Time Public Reporting of Swap Transaction Data from December 2011.

The rule implements a two-period, phased-in approach. The Commission prescribes appropriate minimum block sizes during an initial period, which would last until registered swap data repositories have collected at least one year of reliable data for each asset class. The Commission then will analyze and use this data to establish post-initial appropriate minimum block sizes for each swap category using a 67-percent notional amount calculation. The Commission will update these post-initial appropriate minimum block sizes no less than once a year.

  • Interest rates: 27 swap categories based on 9 tenor groups and 3 currency categories (super-major currencies, major currencies, and non-major currencies). Minimum block sizes in the initial period are determined using a 50 percent notional amount calculation. In the post-initial period, minimum block sizes are determined using a 67 percent notional amount calculation.
  • Credit derivatives: 18 swap categories based 6 tenor groups and three conventional spread groups (0 to 175 bps, 176 to 350 bps, 351 bps and above). Minimum block sizes in the initial period are determined using a 50 percent notional amount calculation. In the post-initial period, minimum block sizes are determined using a 67 percent notional amount calculation.
  • Foreign exchange: Swap categories would be based on unique currency combinations. For most swaps in the FX asset class that are economically related to a futures contract, minimum block sizes in the initial period are determined based on the block trade size thresholds set by DCMs. All FX swaps that are not economically related to a futures contract can be treated as block trades or large notional off-facility swaps during the initial period and are subject to a time delay for public dissemination. In the post-initial period, appropriate minimum block sizes for most swaps in the FX asset class will be determined using a 67 percent notional amount calculation.
  • Other commodities: Swap categories for swaps based on, or economically related to the major, or "enumerated" physical commodities, which constitute most of the market. Contracts include grains, oilseeds, soft commodities, precious metals and energy contracts. These commodities can be found in an appendix to Part 43 regulations HERE. For the enumerated commodities, initial block sizes will be based on those set by the DCMs on which the futures are traded. For swaps economically related, but that are not subject to a DCM block size minimum, treatment as a block trade or large notional off-facility swap is not available. In the post-initial period, appropriate minimum block sizes for all swaps in the other commodity asset class would be determined using the 67 percent notional amount calculation.
  • Equities: All swaps in the equity asset class are grouped into the same category because these swaps are not treated as block trades or large notional off-facility swaps.

For transactions above the minimum block size, if the parties choose to have their transaction treated as a block trade, they would need to notify the registered DCM or SEF. The DCM or SEF would then notify the registered swap data repository.

Finally, the rule establishes measures to protect the identities of swap counterparties and to maintain the anonymity of their business transactions and market positions in connection with the public dissemination of publicly reportable swap transactions. The rule also establishes limits on the public dissemination of certain publicly reportable swap transactions in the other commodity asset class, which have specific delivery or pricing points.

Correction to Federal Register Document, July 16, 2013

On July 16, 2013, a correction was inserted into the Federal Register that replaces the set of tables in Part 43 Appendix F. The new tables fix errors in certain contract descriptions. The tables:

  • Define super-major, major and non-major currencies; and
  • Set the 50 percent notional block thresholds for interest rate, credit, foreign exchange, and other swaps. In the case of interest rate and credit swaps, the units are subdivided into several tenors.

The table, which can be found in the related documents below, replaces pages 32942-32944 with pages 42436-42439

Related Documents: Fact Sheet, Q&A, Final Rule as it Appeared in the Federal Register, and July 16, 2013 Correction

References

  1. CFTC "got it wrong" on block trade threshold rule. Risk.net. Retrieved on February 24, 2012.
  2. CFTC Open Meeting on One Final Rule and One Proposed Rule. CFTC. Retrieved on February 24, 2012.
  3. CFTC Votes to Re-Propose Dodd-Frank Block Trade Regulation. Bloomberg BusinessWeek. Retrieved on February 24, 2012.

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