Swap Dealers and Major Swap Participants Regulation

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Gavel.png FINAL RULES: Registration of Swap Dealers and Major Swap Participants
Business Conduct Standards for Swap Dealers and Major Swap Participants with Counterparties
Reporting, Recordkeeping, and Daily Trading Records Requirements for Swap Dealers and Major Swap Participants
Duties for Swap Dealers and Major Swap Participants
Conflicts of Interest for Swap Dealers, Major Swap Participants, Futures Commission Merchants, and Introducing Brokers
Designation of Chief Compliance Officer and Preparation of Annual Compliance Report
CFTC/SEC Joint Final Rule on Swap Entity Definitions
CFTC/SEC Joint Final Rule on Swap Product Definitions
CFTC Final Rule: Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants
CFTC Final Rule: Protection of Counterparties to Uncleared Swaps; Treatment of Securities in a Portfolio Margining Account in a Commodity Broker Bankruptcy
Dodd-Frank Timeline, Duties for Swap Dealers and Major Swap Participants
Final Rule Issue Effective Date Compliance Date
April 3, 2012 June 4, 2012 October 12, 2012
Dodd-Frank Timeline, Registration of Swap Dealers and Major Swap Participants
Final Rule Issue Effective Date Compliance Date - Swap Dealers Compliance Date - Major Swap Participants
January 19, 2012 March 19, 2012 January 1, 2013 October 12, 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
Dodd-Frank Timeline, Required Compliance Policies
Final Rule Issue Effective Date Compliance Date, Non-Covered Firms Compliance Date, Covered Firms
April 3, 2012 June 4, 2012 September 30, 2012 March 31, 2013
Dodd-Frank Timeline, Reporting, Recordkeeping, and Daily Trading Records Requirements for Swap Dealers and Major Swap Participants
Final Rule Issue Effective Date No-action Relief, Valuation
April 3, 2012 June 4, 2012 June 30, 2014
Dodd-Frank Timeline, Further Defining “Swap Dealer,” “Major Swap Participant” and “Eligible Contract Participant”
Final Rule Issue Effective Date Compliance Date
May 23, 2012 July 23/Dec. 31, 2012 October 12, 2012
Dodd-Frank Timeline, Swap Product Definitions
Final Rule Issue Effective Date Compliance Date
August 13, 2012 October 12, 2012 October 12, 2012
Dodd-Frank Timeline, Business Conduct Standards for Swap Dealers and Major Swap Participants
Final Rule Issue Effective Date Compliance Date (Extended)
February 17, 2012 April 17, 2012 May 1, 2013
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, Swap Trading Relationship Documentation for Swap Dealers and Major Swap Participants
Proposal Date Comment Deadline Final Rule Issue
February 8, 2011 June 3, 2011 August 27, 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
Dodd-Frank Timeline, Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, CFTC
Proposal Date Comment Period Reopened New Comment Deadline
May 12, 2011 July 12, 2012 September 14, 2012
Dodd-Frank Timeline, Dual and Multiple Registration of SD/MSP APs
Proposal Date Final Rule Issue Effective Date
June 15, 2012 April 8, 2013 June 7, 2013
Dodd-Frank Timeline, Protection of Collateral of Counterparties to Uncleared Swaps
Proposal Date Final Rule Issue Effective Date
December 3, 2010 November 6, 2013 January 6, 2014
Dodd-Frank Timeline, Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants, SEC
Proposal Date Comment Deadline Reopened Comment Period Deadline
July 18, 2011 August 29, 2011 July 22, 2013
Dodd-Frank Timeline, Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants, SEC
Proposal Date Comment Deadline Reopened Comment Period Deadline
October 24, 2011 December 19, 2011 July 22, 2013

The Commodity Futures Trading Commission CFTC has issued numerous rulemakings under Dodd-Frank regarding swap dealers and major swap participants (SD/MSPs) at several meetings between 2010 and 2012. The issues discussed were: duties; registration; conflicts of interest; required compliance policies; reporting and recordkeeping; further defining “swap dealer,” “major swap participant” and “eligible contract participant”; business conduct standards, confirmation; confirmation, reconciliation and compression; swap trading relationship documentation; orderly liquidation termination; and margin requirements for uncleared swaps.

The Securities and Exchange Commission (SEC) has also issued several rulemakings regarding security-based swap dealers and major swap participants (SB-SD/MSPs). Topics for which rules have been proposed but not finalized include business conduct standards, registration, and swap entity definitions (joint rule with CFTC). The final rulemaking on swap entity definitions, also issued jointly between the CFTC and SEC, was issued on April 18, 2012.

In late 2011, the CFTC began issuing final rules pertaining to SD/MSPs. As of September 2012, the CFTC had finalized all rules except those pertaining to uncleared swaps, margin and capital requirements. Aside from the definitions rules, which were approved jointly with the CFTC, the SEC has not finalized any rules. Topics for which a final rulemaking has been issued can be found in the alert box at the top of the page. Summaries and links can also be found below.

For a comprehensive timeline of swap regulation, visit the Topics Related to Swaps Regulation page.

Descriptions of each rule can be found below, along with links to the final rule, rule as it was originally proposed, and links to related comment letters submitted by market participants.

CFTC Open Meetings

Duties for Swap Dealers and Major Swap Participants

The Duties proposal requires swap dealers and major swap participants to:

  • Establish risk management programs that must take into account all relevant risks;
  • Monitor trading through staff training, trade supervision, and establish early warning, testing, compliance, and annual audit systems;
  • Establish business continuity and disaster recovery systems;
  • Disclose information and make it available for inspection by the commission; and
  • Adopt appropriate policies concerning anti-competitive trading or clearing practices.[1]
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Note: the SD/MSP Duties Final Rule approved at the CFTC Open Meeting, February 23, 2012


Registration of Swap Dealers and Major Swap Participants

The SD-MSP registration proposal would require:

  • The establishment of a process for the registration of swap dealers and major swap participants;
  • Swap dealers and major swap participants to become and remain members of a registered futures association;
  • Subject affiliates of swap dealers and major swap participants to these requirements; and
  • The prohibition of a swap dealer or major swap participant from association with a person who is subject to a statutory disqualification.[2]
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Note: the final rule on SD/MSP registration approved at the CFTC Open Meeting, January 11, 2012


Conflicts of Interest for Swap Dealers, Major Swap Participants, Futures Commission Merchants, and Introducing Brokers

The Conflicts of Interest proposal is intended to create partitions within such entities between individuals involved with research or analysis and those involved with trading and clearing activities, by:

  • placing restrictions on non-research personnel influencing the content of research reports;
  • prohibiting the supervision of research analysts by trading and clearing personnel;
  • prohibiting from a research analyst's compensation his or her contribution to trading or clearing activities;
  • prohibiting the exchange, or offer of exchange, of favorable research for business or compensation; and
  • requiring full disclosure of potential conflicts of interest.[3]
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Note: the SD/MSP/FCM Conflicts of Interest Final Rule approved at the CFTC Open Meeting, February 23, 2012


Required Compliance Policies, Designation of Chief Compliance Officer

According to the proposal, each swap dealer, major swap participant, and futures commission merchant must appoint a "chief compliance officer" (CCO), who should have an "appropriate background," must register with the commission, and will be responsible for:

  • establishment of compliance policies;
  • resolution of conflicts of interest;
  • ensuring compliance of the registrant with the compliance policies, rules, and regulations;
  • identifying noncompliance issues; and
  • establishment of procedures for the remediation of such noncompliance issues.
  • preparation and submission of an annual report on compliance policies and their effectiveness.

The CCO shall report to the board of directors and senior officers of the entity.

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Note: the Compliance Policies and CCO Duties Final Rule approved at the CFTC Open Meeting, February 23, 2012


Protection of Collateral of Counterparties to Uncleared Swaps

Requirements of the rule:

  • (SDs) and (MSPs) must notify their counterparties that such counterparties have "a right to require that any initial margin which they post to guarantee uncleared swaps be segregated at an independent custodian;"
  • The custodian must be and "independent third party;"
  • There must be in place a signed custody agreement;
  • Such segregated funds may be invested according to existing CFTC rules governing futures customers; and
  • Final rule will reflect new rules regarding, among other things, protection of funds before and after commodity broker bankruptcies.
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Reporting, Recordkeeping, and Daily Trading Records Requirements for Swap Dealers and Major Swap Participants

According to the proposal, swap dealers and major swap participants will be required to retain and submit:[4]

  • transaction and position information for all swap activities;
  • recordkeeping rules such as basic business records, minutes from the entity's governing body, audit reports, financial records, and records of all data submitted to swap data repositories'
  • daily trading execution records, including pre-and post-execution data, as well as any hedges or offsetting positions.
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Note: the SD/MSP Reporting, Recordkeeping, and Daily Trading Records Requirements approved at the CFTC Open Meeting, February 23, 2012

Further Defining “Swap Dealer,” “Major Swap Participant” and “Eligible Contract Participant”

The SEC and CFTC each approved proposals that would further define a series of terms related to the swaps market, including “swap dealer,” “security-based swap dealer,” “major swap participant,” “major security-based swap participant” and “eligible contract participant.”[5] For more information, see Swaps Definitions Regulation.

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Note: the CFTC/SEC Joint Final Rule on Swap Entity Definitions approved at the CFTC Open Meeting, April 18, 2012


Business Conduct Standards for Swap Dealers and Major Swap Participants with Counterparties

According to the proposal, certain activities will be prohibited and certain duties will be imposed on SDs/MSPs in their dealings with counterparties. The general policies and procedures to ensure compliance and prevent evasion of the Act and proposed rules are:

  • Diligent supervision;
  • “Know your counterparty” and “true name and owner” of counterparty; and
  • Record retention requirements.[6]
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Note: The CFTC Final Rule: Business Conduct Standards for Swap Dealers and Major Swap Participants with Counterparties was approved at the CFTC Open Meeting, January 11, 2012

Confirmation, Portfolio Reconciliation, and Portfolio Compression Requirements for Swap Dealers and Major Participants

According to the proposal, each swap dealer and major swap participant must:

  • ensure that, prior to entering into a swap with a counterparty, the parties have agreed in writing to all terms governing their trading relationship;
  • include in its swap trading relationship documentation written documentation in which the parties agree on the methods, procedures, rules, and inputs for determining the value of each swap at any time from execution to the termination, maturity, or expiration of the swap;
  • create a record containing certain items of information whenever its submits a swap for clearing to a registered derivatives clearing organization (DCO); and
  • perform an annual audit of the required swap trading relationship documentation to ensure compliance.[7]
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Note: The CFTC Final Rule: Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants was approved in seriatim on August 27, 2012


Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants

According to the proposal, each swap dealer or major swap participant also would be required to include in its swap trading relationship documentation written documentation in which the parties agree on the methods, procedures, rules, and inputs for determining the value of each swap at any time from execution to the termination, maturity, or expiration of the swap. The regulations also would require swap dealers and major swap participants to notify the commission of swap valuation disputes that have not been resolved within set time periods.[8]

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Note: The CFTC Final Rule: Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants was approved in seriatim on August 27, 2012


Orderly Liquidation Termination Provision in Swap Trading Relationship Documentation for Swap Dealers and Major Swap Participants

Summary of the proposal:

  • Documentation must include language that both counterparties understand the orderly liquidation procedures,
  • The FDIC is given one (1) business day in which to transfer positions to a qualified third party,
  • The non-defaulting counterparty may not be allowed to liquidate the swap holding, as the FDIC will have until 5:00 pm on the one business day in which to seek a qualified third party to which the swap can be transferred.[9]
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Note: The CFTC Final Rule: Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants was approved in seriatim on August 27, 2012


Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants

Under the CFTC Proposal, margin requirements will vary depending upon the counterparty of the SD/MSP:

  • The rules would not impose margin requirements on commercial end users, defined under the proposed rules as non-financial entities.
  • For trades between two SD/MSPs, each party must collect and pay initial and variation margin.
  • For trades between a SD/MSP and a financial entity, the SD/MSP must collect, but not pay, margin.
  • For trades with a non-financial entity ("commercial end-user"), no margin is required, but rather a counterparty credit agreement must be arranged and abided by.
  • Calculation of margin would entail the use of a margin model from a derivatives clearing organization (DCO), prudential regulator, or other model approved by the commission.
  • Margin must be posted in the form of an approved asset class, and would be required to be held at a third-party custodian.[10]
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'Parts 1, 23, and 140 Capital Requirements of Swap Dealers and Major Swap Participants

Under the CFTC Proposal:

SD/MSPs that are also FCMs must hold the greater of:

  • $20 million;
  • if the FCM is a retail foreign exchange dealer, the amount required by rules governing retail foreign exchange dealers;
  • 8 percent of the risk margin required for customer and non-customer exchange-traded futures positions and over-the-counter (OTC) swap positions that are cleared by a clearing organization;
  • the amount of adjusted net capital required by a registered futures association of which the FCM is a member; and
  • for an FCM that also is registered as a securities broker or dealer, the amount of net capital required by SEC rules.

SD/MSPs not FCMs, but are nonbank subsidiaries of U.S. bank holding companies:

  • the same rules that apply to the bank holding company, generally an 8 percent of total capital to risk-weighted assets ratio, of which:
    • half, or 4 percent, is in the form of Tier 1 capital, and
    • a minimum of $20 million of Tier 1 capital.

SD/MSPs that are neither FCMs nor subsidiaries of a bank holding company

  • tangible net equity equal to $20 million, and
  • additional amounts for market risk and over-the-counter derivatives credit risk.[11]
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Dual and Multiple Associations of Persons Associated With Swap Dealers, Major Swap Participants and Other Commission Registrants

On June 15, 2012, the Federal Register published a rule proposed by the Commodity Futures Trading Commission (CFTC) that clarifies certain supervisory responsibilities of swap dealers and major swap participants.[12] Under the proposal, each swap dealer (SD), major swap participant (MSP), and other Commission registrant with whom an associated person (AP) is associated is required to supervise the AP and is jointly and severally responsible for the activities of the AP with respect to customers common to it and any other SD, MSP or other Commission registrant.


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SEC Meetings

SD-MSP Proposal from the June 29, 2011 SEC Meeting

Business Conduct Standards for Security-Based Swap Dealers and Major Security-Swap Participants

Under the SEC proposal, security-based swap dealers and major security-based swap participants would be required to:

  • "verify whether a counterparty is an eligible contract participant and whether it is a special entity;
  • disclose to the counterparty material information about the security-based swap, including material risks, characteristics, incentives and conflicts of interest;
  • provide the counterparty with information concerning the daily mark of the security-based swap;
  • provide the counterparty with information regarding the ability to require clearing of the security-based swap;
  • communicate with counterparties in a fair and balanced manner based on principles of fair dealing and good faith;
  • establish a supervisory and compliance infrastructure; and
  • designate a chief compliance officer that is required to fulfill the described duties and provide an annual compliance report.

The proposed rules also would require security-based swap dealers to:

  • determine that any recommendations they make regarding security-based swaps are suitable for their counterparties (this proposal is similar to the FINRA rule regarding suitability, including institutional suitability);
  • establish, maintain and enforce policies and procedures reasonably designed to obtain and retain a record of the essential facts concerning each known counterparty that are necessary to conduct business with such counterparty; and
  • comply with rules designed to prevent 'pay-to-play.'"[13]
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SD-MSP Proposal from the October 12, 2011 SEC Meeting

Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants

  • Security-based swap dealers and major swap participants must electronically file Form SBSE to register with the SEC.
  • Security-based swap entities that are already registered with the CFTC may file the shorter form, Form SBSE-BD, in order to register with the SEC.

"In addition, the proposed rule would require the security-based swap entities to:

  • Promptly update their forms if the forms become inaccurate.
  • Have a knowledgeable, senior officer provide a certification as to the firm’s financial, operational and compliance capabilities to the Commission within a specified timeframe.
  • Obtain and retain certain information from each of its associated persons that are involved in effecting security-based swaps, and have its Chief Compliance Officer certify that no such associated person is 'statutorily disqualified.'

The proposed rule also would also require each security-based swap entity that resides outside the U.S. to:

  • Identify a U.S. agent who can accept legal documents on behalf of the company.
  • Certify and submit an opinion of counsel that the non-U.S. entity is able to provide the SEC with access to its books and records and submit to on-site inspections and examination by the SEC."
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SD-MSP Proposal from the October 17, 2012

Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants

On October 17, 2012, the Securities and Exchange Commission issued a proposed rulemaking regarding margin, collateral and segregation requirements for security-based swap dealers and major swap participants.[14] The proposed rules will determine how much capital dealers in security-based swaps need to hold; when and how these dealers need to collect collateral, or margin, to protect against losses from counterparties; and how these dealers segregate and protect funds and securities held for customers.

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References

  1. Open Meeting on Fourth Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on March 7, 2011.
  2. Open Meeting on Fourth Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on March 7, 2011.
  3. Open Meeting on Fourth Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on March 7, 2011.
  4. Open Meeting on Sixth Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on February 16, 2011.
  5. SEC Proposes Joint Rules with CFTC to Define Swap Related Terms. Securities and Exchange Commission. Retrieved on January 25, 2011.
  6. Open Meeting on Seventh Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on March 21, 2011.
  7. Open Meeting on Eighth Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on March 21, 2011.
  8. Open Meeting on Ninth Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on March 21, 2011.
  9. Open Meeting on Tenth Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on March 21, 2011.
  10. Open Meeting on Thirteenth Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on April 15, 2011.
  11. Open Meeting on Fourteenth Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on July 13, 2011.
  12. Dual and Multiple Associations of Persons Associated With Swap Dealers, Major Swap Participants and Other Commission Registrants. Federal Register. Retrieved on June 15, 2012.
  13. SEC Proposes Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants. SEC. Retrieved on June 29, 2011.
  14. SEC Proposes Rules for Security-Based Swap Dealers and Major Security-Based Swap Participants. SEC. Retrieved on October 17, 2012.

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