Swap Dealers and Major Swap Participants Regulation - Confirmation, Reconciliation, and Compression Requirements - Comment Letters

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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

Comment Letters addressing the Confirmation, Reconciliation, and Compression Requirements of swap dealers and major swap participants.

Managed Funds Association - February 28, 2011

Confirmation, Reconciliation, and Compression, Swap Dealers and Major Swap Participants
February 28, 2011

MFA requests that before the Commission publishes final rules related to the confirmation of swaps, portfolio reconciliation and portfolio compression, "that the Commission evaluate the operational abilities of market participants to meet the requirements. We believe that market participants have notable differences in their resources and experiences with respect to post-trade exercises. Thus, we believe that it would best serve the Commission’s goals and prevent disruptions of the swap markets, if the Commission provided market participants additional time to design, test and implement measures to meet the new requirements."

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International Swaps and Derivatives Association - February 28, 2011

Confirmation, Reconciliation, and Compression, Swap Dealers and Major Swap Participants
February 28, 2011

ISDA offers their suggestions regarding the Proposed Rules. Specifically:

  • The proposed rules for confirmation place an unnecessary burden upon the inception of transactions, and they require substantially more than is necessary to create an initial record of a legally binding agreement. ISDA urges the Commission to consider that requiring more formality than necessary may actually increase risk in the swap markets because it may lead to, among other things, needless disputes and operational lapses.
  • In light of the Proposed Reconciliation Requirement, ISDA respectfully reminds the Commission that portfolio reconciliation is not meant to be a replacement for the confirmation process, which is focused on identifying discrepancies in trade terms, but is rather a means of identifying the source of a collateral dispute. Portfolio reconciliation, intrinsically, is only the first step in the dispute resolution framework represented by the DR Drafts. The primary purpose of portfolio reconciliation has been to be an initial phase in a multi-step process to keep collateral flowing; helping to ease disputes by identifying their causes and giving parties acting in good faith a commercially reasonable timeframe to find the appropriate resolution.
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Freddie Mac - February 28, 2011

Confirmation, Reconciliation, and Compression, Swap Dealers and Major Swap Participants
February 28, 2011

From the comment letter:

"Freddie Mac supports the Commission's goals to reduce systemic risk, increase transparency and promote market integrity. Freddie Mac is concerned, however, that the Proposal, in many instances, would impose arbitrary and unrealistic time deadlines for transaction processing and requirements for transactional consolidation that may be difficult and costly to implement. Such deadlines would:

  1. increase operational risks for end-users and hedging parties, like FreddieMac;
  2. sacrifice transactional accuracy and effective resolution of trade disputes in favor of speed of transactional processing; and
  3. effectively force end-users and hedging parties to conform to the policies and procedures of market professionals."
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BlackRock - February 28, 2011

Confirmation, Reconciliation, and Compression, Swap Dealers and Major Swap Participants
February 28, 2011

BlackRock "understands and supports the CFTC's goals in the Proposed Rule. However we do not believe that proposed rule 23.503 goes far enough in reducing operational risk and increasing operational efficiency. Specifically, we would recommend that (i) the CFTC require SDs and MSPs to engage in bilateral and multilateral compression exercises with non-SD/MSP counterparties if the counterparties choose to do so, and (ii) that the CFTC promote compression of substantially similar, but not fully offsetting, swaps... We would request the CFTC (i) require SDs and MSPs to engage in bilateral and multilateral compression exercises with non-SD/MSP counterparties if the counterparties choose to do so, and (ii) promote compression of substantially similar, but not fully offsetting, swaps."

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Federal Home Loan Banks - February 28, 2011

Confirmation, Reconciliation, and Compression, Swap Dealers and Major Swap Participants
February 28, 2011

In their comment letter, the FHLBanks offer the following suggestions to the Commission:

  • In response to the CFTC's specific questions, the FHLBanks believe that the confirmation requirements in the Proposed Rule should automatically be satisfied for swap transactions that are executed on a DCM or SEF and/or cleared through a DCA.
  • The Proposed Rule's requirements that counterparties reconcile material terms on a regular basis are duplicative and unnecessary. One of thekey purposes of SDRs is to collect and manage swap data and the FHLBanks believe that SDRs are therefore in the best position to efficiently and effectively detect and manage discrepancies and material terms of a swap transaction.
  • Portfolio compression for parties that are not swap dealers or major swaps participants should be entirely voluntary. The FHLBanks believe that such market participants will in fact engage in trade compression to the extent that they can do so without compromising the internal risk management objectives that give rise to their use of swaps, without adverse accounting consequences and without adversely affecting their credit risk profile with particular counterparties.
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Working Group of Commercial Energy Firms - February 28, 2011

Confirmation, Reconciliation, and Compression, Swap Dealers and Major Swap Participants
February 28, 2011

From the comment letter:

"While the Working Group acknowledges there might be value in standardizing the confirmation process, including the period of time for confirmation of certain swaps, the suggested process set forth in the Proposed Rule does not reflect current practice in the over-the-counter (“OTC”) swap markets. This is particularly true for swaps that are not executed or processed electronically..." In addition, the Working Group explains that the Proposed Rule suggests that reconciliation will also apply to material terms, which are defined as those terms required to be reported under the Commission’s reporting rule (primary economic terms, confirmation terms, daily state data and daily valuation data). The final rules should not require the reconciliation of such terms. A requirement to do so would impose substantial costs on firms in the absence of any immediate need. If the confirmation process works as intended, there should be no need to double or triple check the trade terms (absent a valuation discrepancy with respect to a particular swap). Moreover, firms currently do not have electronic systems that reconcile trade terms, particularly for more complex and highly-customized swaps. Thus, firms will incur additional costs under the Proposed Rule to design, test and implement largely redundant systems."

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CME Group - February 28, 2011

Confirmation, Reconciliation, and Compression, Swap Dealers and Major Swap Participants
February 28, 2011

From the comment letter:

"We urge the Commission to coordinate with the SEC in order to ensure that trade acknowledgment and confirmation requirements for swaps and security-based swaps are comparable, and that required changes to existing trade matching and confirmation practices of regulated securities and derivatives be limited. In particular, with respect to swaps that are executed on a SEF or DCM and that are cleared from the moment of match, electronic confirmations issued by the SEF or DCM should be deemed to incorporate the rules of the SEF or DCM and the applicable DCO with respect to the requirement that an acknowledgment and confirmation contain all of the terms of the swap transaction."

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Asset Management Group of SIFMA - February 28, 2011

Confirmation, Reconciliation, and Compression, Swap Dealers and Major Swap Participants
February 28, 2011

The Asset Management Group of SIFMA believes that:

  • counterparties should retain the right to choose whether to use electronic or non-electronic forms of confirmation.
  • disclosure of non-pricing-related terms of a swap transaction should be made available to an SD/MSP’s counterparties prior to execution to facilitate timely confirmation, except where such terms have been otherwise agreed to.
  • the confirmation should not be required to supersede any preexisting agreements negotiated by the parties.
  • the requirement that swap transactions be confirmed on the same day as execution is too restrictive, particularly for late-day trades, complex or customized uncleared swaps and block trades.
  • some of the other time periods contemplated by the rules are unnecessarily short.
  • the CFTC should explicitly allow counterparties to use existing third-party service providers for portfolio reconciliation.
  • non-SD/MSP market participants should not be required to engage in portfolio compression exercises.
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MetLife - February 28, 2011

Confirmation, Reconciliation, and Compression, Swap Dealers and Major Swap Participants
February 28, 2011

MetLife argues that many of the requirements set forth in the Proposed Rules may be inconsistent with other proposed rules. Specifically, MetLife believes "that the proposed acknowledgment and confirmation procedures create redundancies in the rules promulgated for the centralized clearing and execution of swap transactions through DCOs and SEFs. We believe that such redundancies will ultimately increase the execution costs for swap transactions. Additionally, MetLife believes that the proposed portfolio reconciliation process should be limited in its scope to economic terms that affect transaction valuations. The Proposed portfolio rules fail to provide any compliance enforcement when reconciliation disputes are not addressed in a timely manner or in good faith by one of the parties. Finally, MetLife believes that any mandatory portfolio compression requiring novation netting of swap positions will increase the portfolio risk of many derivatives end users by reducing the hedge effectiveness of certain swap transactions."

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