Swap Dealers and Major Swap Participants Regulation - Comment Letters

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Comment Letters addressing Swap Dealers and Major Swap Participants Regulation. The letters are grouped according to the rule proposal being addressed. Additionally, certain proposed rules cover multiple swap entities, such as derivatives clearing organizations (DCOs), designated contract markets (DCMs), swap execution facilities (SEFs), and futures commission merchants (FCMs). Such comment letters can be found at Swap Entities Regulation - Comment Letters.

Contents 1 Duties for Swap Dealers and Major Swap Participants 2 Registration of Swap Dealers and Major Swap Participants 3 Conflicts of Interest for Swap Dealers, Major Swap Participants, Futures Commission Merchants, and Introducing Brokers 4 Required Compliance Policies, Designation of Chief Compliance Officer 5 Reporting, Recordkeeping, and Daily Trading Records Requirements for Swap Dealers and Major Swap Participants 6 Further Defining “Swap Dealer,” “Major Swap Participant” and “Eligible Contract Participant” 7 Business Conduct Standards for Swap Dealers and Major Swap Participants 8 Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants 9 Confirmation, Reconciliation, and Compression Requirements, Swap Dealers and Major Swap Participants 10 Swap Trading Relationship Documentation for Swap Dealers and Major Swap Participants 11 Orderly Liquidation Termination Provision in Swap Trading Relationship Documentation 12 Margin Requirements for Uncleared Swaps 13 Capital Requirements for SD/MSPs 14 Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants 15 References

Duties for Swap Dealers and Major Swap Participants

At its November 10, 2010 meeting, the Commodity Futures Trading Commission (CFTC) proposed a rule regarding the establishment and governance duties of swap dealers and major swap participants.^[1] The proposal requires swap dealers and major swap participants to establish risk management programs, monitor trading, establish business continuity and disaster recovery systems, disclose information and make it available for inspection by the commission; and adopt anti-competitive trading and clearing practices.

Registration of Swap Dealers and Major Swap Participants

At its November 10, 2010 open meeting, the CFTC approved a proposed rule regarding the registration of swap dealers and major swap participants.^[2] The proposal would require SDs, MSPs, and their affiliates to become members of a registered futures association. It would also prohibit SDs and MSPs from association with a person who is subject to a statutory disqualification.

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

The Conflicts of Interest proposal, which was approved at the CFTC Open Meeting, November 10, 2010, is intended to create partitions within such entities between individuals involved with research or analysis and those involved with trading and clearing activities, by regulating supervision, compensation, and other business arrangements.^[3]

Required Compliance Policies, Designation of Chief Compliance Officer

At its November 10, 2010 meeting, the Commodity Futures Trading Commission (CFTC) proposed a rule regarding the establishment and compliance policies of swap dealers, major swap participants, and futures commission merchants (FCMs).^[4] The proposal requires swap dealers and major swap participants to name a "chief compliance officer" (CCO) who would be responsible for establishing and maintaining certain compliance programs and functions.

Reporting, Recordkeeping, and Daily Trading Records Requirements for Swap Dealers and Major Swap Participants

The CFTC proposed rules on reporting, recordkeeping, public information and daily trading records requirements for swap dealers and major swap participants, at the December 1, 2010 Open Meeting. According to the proposal, swap dealers and major swap participants will be required to retain and submit transaction and position information for all swap activities, and maintain business, audit, financial, and daily trading execution records.^[5]

Also, swap dealers and major swap participants will be required to report in accordance with previous rule proposals on real-time reporting and general swap data rules from the November 19, 2010 Open Meeting.

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

The commission proposed rules further defining “swap dealer,” “major swap participant” and “eligible contract participant”, at the CFTC Open Meeting, December 1, 2010. These definitions were coordinated with those of the Securities and Exchange Commission (SEC), which approved the joint resolution on December 3, 2010.^[6]

The definitions of swap-realted terms "swap dealer," "major swap participant," "security-based swap," hedging or mitigating "commercial risk," "substantial counterparty exposure," "financial entity," and "highly leveraged," are explained in full detail on the Swaps Definitions Regulation page.

Business Conduct Standards for Swap Dealers and Major Swap Participants

According to the proposal, which was approved at the CFTC Open Meeting, December 9, 2010 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.^[7]

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

According to the proposal, which was approved at the SEC Open Meeting, June 29, 2011 security-based swap (SBS) dealers and major SBS participants will 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."^[8]

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

At its December 16, 2010 open meeting, the CFTC approved a rule proposal regarding the confirmation, portfolio reconciliation, and portfolio compression requirements for swap dealers and major swap participants.^[9] The proposal specifies requirements and procedures such as the generation of transaction confirmations, swap term sheets, the resolution of discrepancies, and the processes for compression and offset of positions.

Swap Trading Relationship Documentation 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.^[10]

Orderly Liquidation Termination Provision in Swap Trading Relationship Documentation

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.^[11]

Margin Requirements for Uncleared Swaps

At its April 12, 2011 open meeting, the CFTC approved a rule proposal that established margin requirements for uncleared swap transactions for SD-MSPs. Under the CFTC Proposal, margin requirements will vary depending upon the counterparty of the SD/MSP.

Capital Requirements for SD/MSPs

At its April 27, 2011 open meeting, the CFTC approved a rule proposal that established minimum capital requirements for SD-MSPs. Under the CFTC Proposal, capital requirements will vary depending upon the of the SD/MSP's business.

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

At its October 12, 2011 open meeting, the SEC approved a rule proposal that defines SEC registration procedures for security-based swap dealers and security-based swap participants.

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 Fourth Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on March 7, 2011.
5. ↑ Open Meeting on Sixth Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on February 16, 2011.
6. ↑ Open Meeting on Sixth Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on February 16, 2011.
7. ↑ Open Meeting on Seventh Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on March 21, 2011.
8. ↑ SEC Proposes Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants. SEC. Retrieved on June 29, 2011.
9. ↑ Open Meeting on Eighth Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on March 2, 2011.
10. ↑ Open Meeting on Ninth Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on March 21, 2011.
11. ↑ Open Meeting on Tenth Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on March 21, 2011.