Swap Dealers and Major Swap Participants Regulation - Swap Trading Relationship Documentation Requirements - Comment Letters

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Dodd-Frank Timeline,Swap Trading Relationship Documentation for Swap Dealers and Major Swap Participants
Proposal Date Final Rule Issue Effective Date
February 8, 2011 September 11, 2012 November 13, 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

Comment letters addressing the swap trading relationship documentation requirements and orderly liquidation provisions of swap dealers and major swap participants.

ISDA/SIFMA - April 8, 2011

Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants
Orderly Liquidation Termination Provision in Swap Trading Relationship Documentation for Swap Dealers and Major Swap Participants
April 8, 2011

From the comment letter:

"...we are deeply concerned that the Commission’s proposal relating to valuation models and methods reflects fundamental misunderstandings of the processes by which swaps are negotiated and transacted, the nature of swap valuations and the causes of valuation disputes.

If adopted in their current form, the Proposed Rules would require parties to lock in negotiated methods for valuation at the initiation of a swap. Even were this requirement to be adopted in a greatly simplified form, we would think it would be wholly impractical—it could not be accomplished in the ordinary course by willing counterparties...And while a simple form of the valuation requirements would be impractical, in its current form, the proposed requirement--that the parties must agree on a valuation methodology that can survive the loss of any input to the valuation--is wholly unworkable."

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Managed Funds Association - April 11, 2011

Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants
April 11, 2011

Summary of key points from the comment letter:

  • "The Proposed Rules, coupled with other proposed regulations concerning swap documentation, will disadvantage customers in negotiating swap documentation with SDs and MSPs."
  • Valuation proposals are unnecessary, an "extremely time consuming and almost impossible task," and may force firms to compromise their proprietary valuation methodologies.
  • "Given the benefits of anonymity offered in central clearing, MFA is unclear why a requirement to record each party‟s clearing firm should be included in the final rules."
  • "We strongly believe that market participants need to and do value legal certainty in their trading contracts and that the existence of defects in documentation required by existing regulation must not permit one party or the other to void a contract. Therefore, we believe that it is imperative that the Commission affirmatively clarify that defects in required regulatory documentation do not render a contract void or voidable by one of the parties."
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American Benefits Council/Committee on Investment of Employee Benefit Assets - April 11, 2011

Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants
Orderly Liquidation Termination Provision in Swap Trading Relationship Documentation for Swap Dealers and Major Swap Participants
April 11, 2011

Summary of key points from the comment letter:

  • SDs and MSPs should not be permitted to enforce their policies and procedures as having the force of law over plans or other end-users.
  • Plans need the ability to negotiate customized swaps and a general desire for swap standardization should not prevent that.
  • A deadline for documentation compliance could give SDs a basis for imposing one-sided documentation on plans.
  • All swaps terms should be agreed upon in writing on or before a trade.
  • Proposed rules should make clear that plans are not required to post initial margin or allow rehypothecation.
  • Swap valuation methods should be objective and transparent, and contractually agreed upon valuation dispute procedures should not be overridden.
  • Orderly liquidation rules should not go beyond the corollary FDIC.


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Freddie Mac - April 11, 2011

Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants
April 11, 2011

In the comment letter, Freddie Mac expresses it concerns that the the proposal "imposes potentially unnecessary and unworkable burdens on the swap valuation and collateral administration process for bilateral swap transactions not subject to centralized clearing. The letter further posits that the proposal could "result in commercially unreasonable valuations or the inability to produce valuations at all."

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Markit - April 11, 2011

Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants
April 11, 2011

From the comment letter:

Markit believes that:

  • agreeing on a “complete” methodology for valuing a swap would often require an almost unworkable amount of detail and may be impossible in some circumstances, thus the Commission should require such agreements to be detailed only to the extent that it is practicable;
  • the Commission should not implicitly prevent and instead should explicitly permit parties, such as swap dealers (“SDs”), major swap participants (“MSPs”) and end-users, to delegate determinations regarding inputs, fallbacks, and valuation methods to independent third parties because of the benefits these parties could provide to counterparties and the flexibility this approach creates in dealing with unforeseeable future events;
  • the Commission should clarify that the proposed requirement that valuation methodologies be “independently verifiable” is merely meant to guide parties in designing their agreements;
  • recent transaction prices are not always the best indicator of current swap values and the Commission should not assign primacy to any input into the valuation of swaps; and
  • SDs and MSPs should have the choice to use qualified independent third parties for valuation services even for cleared swaps, and the Commission also should not implicitly prevent and should explicitly permit the counterparties to exercise their choice should they wish to delegate this obligation to a qualified independent third party.
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Financial Services Roundtable - May 13, 2011

Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants
Orderly Liquidation Termination Provision in Swap Trading Relationship Documentation for Swap Dealers and Major Swap Participants
May 13, 2011

Summary of key points from the comment letter:

  • The Commission’s proposal with respect to documenting valuation procedures is not workable in its current form and should be deferred pending further study.
  • Swap counterparties should not be required to modify their documentation with retroactive effect.
  • The proposed rules regarding credit support arrangements underestimate the time, expense and complexity of such negotiations.
  • The proposed auditing rules are overly prescriptive and a deviation from the Commission’s long-time policy of establishing principles-based requirements.
  • Swap dealers and major swap participants should not have responsibility for confirming the availability of the end-user exception for their counterparties.
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CME Group - April 11, 2011

Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants
Orderly Liquidation Termination Provision in Swap Trading Relationship Documentation for Swap Dealers and Major Swap Participants
April 11, 2011

In the comment letter, CME Group highlights two issues regarding the proposal:

  • The proposal, as written, appears to assume a "principal" model for all cleared swaps, rather than an "agency" model, such as the clearing house model used bt CME Group and other DCOs.
  • The proposal requires the swap dealer or major swap participant to obtain and retain the name of the clearing member and, if known, the name of the customer. This requirement is inconsistent with the anonymity principle inherent in the agency model.
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References

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