Swap Execution Facilities - A Comparison of CFTC and SEC Rule Proposals

Summary of the final rule, which will repeal and replace CEA Part 35, generally permitting the transaction of swaps in an agricultural commodity subject to all rules and regulations applicable to any other swap:

• New Part 35 will permit the transaction of swaps in an agricultural commodity subject to all provisions of the CEA – and any rule, regulation, or order thereunder – applicable to all other swaps.
• New Part 35 will also explicitly provide that swaps in an agricultural commodity may transact on a swap execution facility (SEF) and/or Designated Contract Market Regulation|designated contract market]] (DCM) to the same extent that any other swap may transact on a SEF and/or DCM.
• At the August 4 meeting, the Commission only finalized the agricultural swaps piece of the proposed rules (repealing and replacing Part 35). The commodity options final rule was approved at a CFTC Open Meeting, April 18, 2012. more>

The Commodity Futures Trading Commission participated in the joint rulemaking with the SEC on the reporting requirements, and also proposed its own rules on certain compliance aspects for CPOs and CTAs. These rules were finalized in February 2012. more>

The Commodity Futures Trading Commission participated in the joint rulemaking with the SEC on the reporting requirements, and also proposed its own rules on certain compliance aspects for CPOs and CTAs. These rules were finalized in February 2012. more>

• Requirements for Processing, Clearing, and Transfer of Customer Positions
• Risk Management Requirements for Derivatives Clearing Organizations
• General Regulations and Derivatives Clearing Organizations
• Information Management Requirements for Derivatives Clearing Organizations
• Financial Resources Requirements for Derivatives Clearing Organizations more>

• violates bids or offers;
• demonstrates intentional or reckless disregard for orderly execution; or
• is of the character of, or is commonly known to the trade as, “spoofing” (bidding or offering with the intent to cancel the bid or offer before execution). more>

Additionally, at its January 11, 2012 open meeting, the CFTC approved its final rules on the protection of cleared swaps customer collateral in the case of a broker bankruptcy.

Finally, at its February 23, 2012 open meeting, the CFTC approved its final rules on certain internal business conduct standards for swap dealers, major swap participants and futures commission merchants. These rules include conflicts of interest and compliance responsibilities. more>

As of December 2011, five rulemakings have been finalized, including:

• Implementing Amendments to the Investment Advisers Act - Hedge Fund Registration,
• Registration and Reporting Exemptions,
• SEC final rule on private fund systemic risk reporting, and
• Family Offices
• Net Worth Standard for Accredited Investors more>

• the implementation of minimum quoting requirements by market makers;
• restrictions on co-location and direct access;
• liquidity rules such as penalties for rapid order cancellation; and
• a request for further study and potential regulatory changes. more>

• Office of the Comptroller of the Currency, Treasury (OCC);
• Board of Governors of the Federal Reserve System (Fed);
• Federal Deposit Insurance Corporation (FDIC);
• Farm Credit Administration (FCA); and
• Federal Housing Finance Agency (FHFA)

The Act requires that such rules include appropriate requirements with respect to disclosure, record keeping, capital and margin, reporting, business conduct, documentation, and any other standards or requirements as Federal regulatory agencies shall determine to be necessary. more>

The SEC has issued two rule proposals regarding the security-based swap data repositories (SDRs) and the reporting and dissemination of swap data through Regulation SBSR. Neither rulemaking has been finalized. more>

In late 2011, the commission began issuing final rules pertaining to SD/MSPs. Topics for which a final rulemaking has been issued can be found in the alert box at the top of the page. Summaries and links can also be found below. more>

Under Dodd-Frank, the SEC will have jurisdiction over "security-based" swaps, and the CFTC will have jurisdiction over all other swaps, except for a category known as "mixed swaps" which may have both security-based and non-security-based components. For mixed swaps, the two agencies will have joint oversight responsibilities.

Swaps definitions fall into two categories. "Entity definitions" detail which firms and individuals fall are considered to be subject to dealer and swap participant rules. "Product definitions" detail the types of transactions that are considered to be swaps, security-based swaps, and mixed swaps, and also which products may be exempt from agency oversight. more>

The document proposes which entities will be subject to the prohibitions, and explains the types of financial transactions that will be exempt from the bans. The proposal seeks comment from the public and market participants on 394 questions on such topics as definitions of banking entities, exemptions, types of activities covered under the rule, and compliance considerations. The deadline for public comment was originally set for January 13, 2012, but on December 23, 2011, the House Financial Services Committee requested a 30-day extension to February 13, 2012. The Dodd-Frank Act mandates that the rule become effective on July 21, 2012, followed by a two-year compliance transition. more>

At an open meeting on May 25, 2011, the SEC issued its final rule under which the whistleblower, in order to be eligible, must "voluntarily provide the SEC with original information that leads to the successful enforcement by the SEC of a federal court or administrative action in which the SEC obtains monetary sanctions totaling more than $1 million.” more>

Additionally, one of the provisions of the Dodd-Frank Act required the FDIC to establish rules regarding the orderly liquidation of any systemically important financial company encountering a default. more>

Summary of the final rule, which will repeal and replace CEA Part 35, generally permitting the transaction of swaps in an agricultural commodity subject to all rules and regulations applicable to any other swap:

• New Part 35 will permit the transaction of swaps in an agricultural commodity subject to all provisions of the CEA – and any rule, regulation, or order thereunder – applicable to all other swaps.
• New Part 35 will also explicitly provide that swaps in an agricultural commodity may transact on a swap execution facility (SEF) and/or Designated Contract Market Regulation|designated contract market]] (DCM) to the same extent that any other swap may transact on a SEF and/or DCM.
• At the August 4 meeting, the Commission only finalized the agricultural swaps piece of the proposed rules (repealing and replacing Part 35). The commodity options final rule was approved at a CFTC Open Meeting, April 18, 2012. more>

Under Dodd-Frank, the SEC will have jurisdiction over "security-based" swaps, and the CFTC will have jurisdiction over all other swaps, except for a category known as "mixed swaps" which may have both security-based and non-security-based components. For mixed swaps, the two agencies will have joint oversight responsibilities.

Swaps definitions fall into two categories. "Entity definitions" detail which firms and individuals fall are considered to be subject to dealer and swap participant rules. "Product definitions" detail the types of transactions that are considered to be swaps, security-based swaps, and mixed swaps, and also which products may be exempt from agency oversight. more>

The document proposes which entities will be subject to the prohibitions, and explains the types of financial transactions that will be exempt from the bans. The proposal seeks comment from the public and market participants on 394 questions on such topics as definitions of banking entities, exemptions, types of activities covered under the rule, and compliance considerations. The deadline for public comment was originally set for January 13, 2012, but on December 23, 2011, the House Financial Services Committee requested a 30-day extension to February 13, 2012. The Dodd-Frank Act mandates that the rule become effective on July 21, 2012, followed by a two-year compliance transition. more>

Additionally, at its January 11, 2012 open meeting, the CFTC approved its final rules on the protection of cleared swaps customer collateral in the case of a broker bankruptcy.

Finally, at its February 23, 2012 open meeting, the CFTC approved its final rules on certain internal business conduct standards for swap dealers, major swap participants and futures commission merchants. These rules include conflicts of interest and compliance responsibilities. more>