CFTC Proposed 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: This page refers to the proposed rulemaking on block trade rules. For a summary of the final rule, click here.
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 its February 23, 2012 open meeting, the CFTC approved a proposed rulemaking that would group swaps into separate categories, establish minimum sizes for block trades and large notional off-facility swaps in each category, and protect the identities of swap counterparties in connection with the real-time public reporting of swap transaction and pricing data.[1]

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."[2]

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 have been re-proposed here.

The Proposed Rule

The rule proposes 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]

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

References

  1. CFTC Open Meeting on One Final Rule and One Proposed Rule. CFTC. Retrieved on February 24, 2012.
  2. CFTC "got it wrong" on block trade threshold rule. Risk.net. 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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