Swap Dealers and Major Swap Participants Regulation - Duties - Comment Letters

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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

Comment Letters addressing the duties of swap dealers and major swap participants.

Securities Industry and Financial Markets Association - January 24, 2011[edit]

Duties for Swap Dealers and Major Swap Participants
January 24, 2011

SIFMA offers several suggestions to the Commission. Among these, they propose that:

  • a bank registrant having a prudential regulator be permitted to comply with the Commission’s risk management requirements, on a substitute compliance basis, through compliance with the risk management requirements of its prudential regulator
  • the Commission’s oversight of consolidated risk management programs should be limited to the elements applicable to the registrant itself and to the risks to the registrant that may arise from the activities of its affiliates.
  • the Commission modify Proposed Rule 23.600(c)(1)(i) to permit trading supervisors to approve limit exceptions, subject to notification of risk management supervisors and subject to the scope of their own authority.
  • the Commission distinguish trading personnel who provide prices to clients for the purposes of soliciting or executing transactions from control or other independent personnel who are engaged in price verification for financial control or other non-transactional valuation purposes
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Managed Funds Association - January 18, 2011[edit]

Duties for Swap Dealers and Major Swap Participants
January 18, 2011

This comment letter addresses the following Rule Proposals: Implementation of Conflicts of Interest Policies and Procedures by Swap Dealers and Major Swap Participants; Regulations Establishing and Governing the Duties of Swap Dealers and Major Swap Participants; Designation of a Chief Compliance Officer; Required Compliance Policies; and Annual Report of a Futures Commission Merchant, Swap Dealer, or Major Swap Participant.

From the Comment Letter:

"MFA urges the Commission to adopt rules and guidance that effectively clarify the rights and obligations of market participants. We believe that greater guidance will clarify the lines between permissible and impermissible conduct and allow market participants to develop proper internal controls. To that end, we recommend that:

  • With respect to the Proposed Duties Rules, the Commission clarify that the rule does not impose any new (a) fiduciary obligations or duties (i.e., duties beyond those to which participants in the futures and derivatives markets would otherwise be subject to by agreement or by operation of common law) or (b) supervisory duties on market participants;
  • With respect to the Proposed Conflicts Rules, the Commission establish a clear separation between the research and trading departments, so that the criteria for clearing membership are objective and risk-based; and
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Federal Home Loan Banks - January 18, 2011[edit]

Duties for Swap Dealers and Major Swap Participants
January 18, 2011

The FHLBanks argue that while the Internal Business Conduct Proposed Rules "constitute prudent business practices and may reduce systemic risk when applied to entities that are not currently regulated, we think that they are highly duplicative and, accordingly, unreasonable for entities that are already subject to extensive prudential regulation." More specifically, the FHLBanks state:

  • Internal business conduct standards should not apply to limited swap dealers that are subject to regulation by a prudential regulator
  • Internal business conduct standards should only apply to the swap dealing activities of limited swap dealers
  • In no event should internal business conduct standards imposed on limited swap dealers duplicate regulations already imposed by prudential regulators for such entities
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Working Group of Commercial Energy Firms - January 24, 2011[edit]

Duties for Swap Dealers and Major Swap Participants
January 24, 2011

From the comment letter:

Among other suggestions, the Working Group of Commercial Energy Firms recommends that the Commission redraft several proposed regulations to read as follows:

  • Each swap dealer and major swap participant shall establish, document, maintain and enforce a system of risk management policies and procedures designed to monitor and manage the risks associated with the swaps activities of such swap dealer or major swap participant.
  • The Risk Management Program may take into account swaps-related risks posed by affiliates and take an integrated approach to risk management at the consolidated entity level to the extent the Chief Compliance Officer or other senior officer deem necessary to enable effective risk and compliance oversight of the business trading unit.
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Better Markets - January 24, 2011[edit]

Duties for Swap Dealers and Major Swap Participants
January 24, 2011

From the comment letter:

Better Markets addresses several key areas that are not, but must be, covered in the Proposed Rules. These areas include:

  • The Proposed Rule provides that the risk management unit of each SDand MSP, responsible for monitoring risk, must be independent from the business trading unit. The safeguards set forth in the Proposed Rules must be expanded to effectively ensure the independence of risk management units.
  • While counterparty risk is discussed, it appears that the Proposed Rules do not address the largest class of counterparties to SDs and MSPs: futures commission merchants ("FCMs"). There is no question that SDs and MSPs are exposed to the credit risk of the FCMs with whom they enter into contracts. These entities must be treated as counterparties by the Proposed Rules.
  • The Proposed Rules require that policies and procedures take into account the SD's or MSP's risk associated with daily liquidity needs.e However, these provisions ignore the single largest liquidity risk to which SDs and MSPs are commonly exposed: credit triggers in Credit Support Annexes requiring immediate funding of collateral theretofore foregone by counterparties under specified circumstances (most often credit rating downgrades)... Policies and procedures must continuously measure the magnitude of this risk, changes to its probability of occurrence and availability and adequacy of liquid reserves to address the consequences of a trigger event.
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MetLife - January 24, 2011[edit]

Duties for Swap Dealers and Major Swap Participants
January 24, 2011

MetLife comments that "rules for swap dealers and MSPs need not and should not be the same. In addition, compliance rules should allow for flexibility in the organization structure utilized. Compliance rules should also provide registrants flexibility to develop their compliance programs and the deferral of time for compliance with compliance rules is imperative." Specifically, MetLife argues "the requirement of establishing a risk management program should be prudently and appropriately limited to cover only swap related business activity."

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References[edit]

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