Swap Entities Regulation - Comment Letters

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Dodd-Frank Timeline, DCO,DCM,SEF Conflicts of Interest Mitigation
Proposal Date Comment Deadline Final Rule Proposal
October 18, 2010 June 3, 2011 First Qtr. 2012
Dodd-Frank Timeline, DCO,DCM, SEF Governance Standards, Additional Requirements
Proposal Date Comment Deadline Final Rule Issue
January 6, 2011 June 3, 2011 TBA; 2013
Dodd-Frank Timeline-Provisions Common to Registered Entities
Proposal Date Final Rule Issue Effective/Compliance Date
November 2, 2010 July 27, 2011 September 26, 2011
Dodd-Frank Timeline, Requirements for Processing, Clearing, and Transfer of Customer Positions
Proposal Date Final Rule Issue Effective Date
December 13, 2010 October 18, 2011 January 9, 2012
Dodd-Frank Timeline, Proposed Rule on Registration of Intermediaries
Proposal Date Final Rule Issue Effective Date
March 9, 2011 August 28, 2012 October 29, 2012
Dodd-Frank Timeline, Clearing Agency Standards for Operation and Governance, SEC
Proposal Date Final Rule Issue Effective Date Reopened Comment Period Deadline
March 16, 2011 November 2, 2012 January 2, 2013 July 22, 2013
Dodd-Frank Timeline, Ownership Limitations and Governance Requirements for SBS Entities, SEC
Proposal Date Comment Deadline Reopened Comment Period Deadline
October 26, 2010 April 29, 2011 July 22, 2013

This page contains comment letters submitted to the CFTC and SEC regarding proposed rulemakings concerning swap entities such as derivatives clearing organizations (DCOs), designated contract markets (DCMs), and swap execution facilities (SEFs).

Comment letters related to rulemakings pertaining to a single type of entity can be found under the entity's comment page:

Rules pertaining to multiple entities can be found below.

Requirements for DCMs, DCOs, and SEFs Regarding the Mitigation of Conflicts of Interest, from CFTC Open Meeting, October 1, 2010

In this proposed rule, three areas of decision making in which the governing body of a DCO may encounter conflicts of interest are identified:

  • whether a swap contract is capable of being cleared;
  • the minimum criteria that an entity must meet in order to become a swap clearing member; or
  • whether a particular entity satisfies such criteria.

For DCMs and SEFs, areas of potential conflict of interest were identified as issues regarding "balancing the advancement of commercial interests and the fulfillment of self-regulatory responsibilities, including with respect to determinations on access." To mitigate potential conflicts of interest, the commission proposed:

  • structural governance requirements specifying the composition of Boards of Directors, risk management and regulatory oversight committees; and
  • ownership and voting rights specifying an that an individual member may not own more than 20% of ownership or voting equity.
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Provisions Common to Registered Entities, from CFTC Open Meeting, October 26, 2010

The proposed rule implements changes to "Part 40" as directed by the Dodd-Frank Act. These changes include:

  • new entities created by Dodd-Frank, namely swap execution facilities and swap data repositories;
  • a streamlining of the comment periods, review periods, and implementation dates for rule changes;
  • a requirement that "systemically important" derivatives clearing organizations (SIDCOs)provide the CFTC with advance notice of rule changes; and
  • a prohibition on the listing, trading, or clearing of certain "excluded commodities" or contracts based upon unlawful activities.
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Governance Requirements for DCOs, DCMs, and SEFs; Additional Requirements Regarding the Mitigation of Conflicts of Interest, from the CFTC Open Meeting, December 9, 2010

Under the proposed rule, the Commission would proposes the following regulations:

  • Each DCO must report to the Commission when its board rejects a recommendation from or supersedes an action of the Risk Management Committee.
  • Each DCM or SEF must report to the Commission when its board rejects a recommendation from or supersedes an action of the Regulatory Oversight Committee or the Membership or Participation Committee.
  • Each DCO, DCM, or SEF must implement programs and monitor existing and potential conflicts of interest.
  • Each DCO, DCM, or SEF must prescribe limits on the use or disclosure of non-public information by owners, members of the board, members of any committee, officers or other employees and make certain information on governance arrangements available to the public.
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Requirements for Processing, Clearing, and Transfer of Customer Positions, from the CFTC Open Meeting, February 24, 2011

In this proposed rule, the functions and objectives of Derivatives Clearing Organizations (DCOs), including Core Principle F (Treatment of Funds) are further clarified. In addition, the proposed rule specifies:

  • If a swap is subject to mandatory clearing,the swap dealer or major swap participant must submit the swap for clearing no later than the close of the business day.
  • If the swap is not subject to mandatory clearing, it must, if cleared, be submitted no later than the business day following the swap transaction.
  • Swap Execution Facilities (SEFs) and Designated Contract Markets (DCMs), must submit swaps immediately upon execution.
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Proposed Rule on Registration of Intermediaries, from the CFTC Open Meeting, February 24, 2011

The Dodd-Frank Act has abolished the market category "Derivatives Transaction Execution Facility" (DTEF) and has created a new entity, the Swap Execution Facility (SEF). The act also mandates the identification of swap dealers and major swap participants. To clarify and harmonize regulations regarding SEFs and SD/MSPs, this proposal:

  • deletes all references to DTEFs;
  • add references to Swap Execution Facility, Swap Dealer, and Major Swap Participant where appropriate;
  • expands existing exemptions to include foreign-domiciled and other foreign intermediaries that execute transactions on SEFs; and
  • harmonizes language to improve the consistency of the definitions, and outdated items were modernized to reflect current registration practices.[1]
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CFTC Proposed Rule on Customer Clearing Documentation and Timing of Acceptance for Clearing, from the July 19, 2011 Open Meeting

Customer Clearing Documentation and Timing of Acceptance for Clearing

Under this proposal, certain swap entities - futures commission merchants, swap dealers and major swap participants - would be prohibited from entering into an arrangement with their customers that would disclose the identity of a customer’s original executing counterparty. The entities would be prohibited from:

  • limiting the number of counterparties with whom a customer may enter into a trade;
  • restricting the size of the position a customer may take with any individual counterparty, apart from an overall credit limit for all positions held by the customer;
  • impairing a customer’s access to execution of a trade on terms that have a reasonable relationship to the best terms available; and
  • preventing compliance with specified time frames for acceptance of trades into clearing.
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Clearing Agency Standards for Operation and Governance, from SEC Open Meeting, March 2, 2011

Under the proposed rule, clearing agencies would be required to:

  • "maintain certain standards with respect to risk management and operations;
  • have adequate safeguards and procedures to protect the confidentiality of trading information;
  • have procedures that identify and address conflicts of interest;
  • require minimum governance standards for their boards of directors;
  • designate a chief compliance officer; and
  • disseminate pricing and valuation information if they perform central counterparty services for security-based swaps."
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Ownership Limitations and Governance Requirements for SBS Entities Regarding the Mitigation of Conflicts of Interest, from SEC Open Meeting, October 13, 2010

The ownership limitations proposal would set one of the following alternatives for SBS clearing agencies:

  • "Restrict an individual clearing agency participant from beneficially owning or voting more than 20 percent of any voting interest in the security-based swap clearing agency;
  • Restrict clearing agency participants from beneficially owning or voting more than 40 percent of any voting interest in the security-based swap clearing agency in the aggregate with any other clearing agency participants;
  • The board of directors and any committee that has authority to act on behalf of the board be composed of 35 percent of independent directors;
  • The nominating committee be composed of a majority of independent directors;"

or

  • "Restrict an individual clearing agency participant from beneficially owning or voting more than 5 percent of any voting interest in the security-based swap clearing agency;
  • The board of directors and any committee that has authority to act on behalf of the board be composed of a majority of independent directors;
  • The nominating committee be composed solely of independent directors.
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References

  1. Open Meeting on Twelfth Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on February 26, 2011.

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