Swaps Review Regulation - Comment Letters

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Dodd-Frank Timeline, Process for Review of Swaps for Mandatory Clearing
Final Rule Issue Effective Date Compliance Date
November 2, 2010 September 26, 2011 September 26, 2011
Dodd-Frank Timeline, Process for Review of Swaps for Mandatory Clearing; Technical Amendments, SEC
Final Rule Issue Effective Date Compliance Date
June 28, 2012 August 13, 2012 December 10, 2012

Comment letters addressing the process for submissions for review of swaps (CFTC) and security-based swaps (SEC) for mandatory clearing and notice filing requirements for clearing agencies.

CFTC Comment Letters

Alternative Investment Management Association - December 23, 2010

Process for Review of Swaps for Mandatory Clearing
Decemeber 23, 2010

From the comment letter:

"The Alternative Investment Management Association (‘AIMA’) appreciates the Commodity Futures Trading Commission’s (the 'Commission') invitation to comment on the proposed rulemaking in relation to the process for the review of swaps for mandatory clearing, implementing Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the 'Dodd-Frank Act').

"An important element of such implementation will be a workable regime for reviewing which swaps should be subject to the mandatory clearing requirements, and we are keen to ensure that as many swaps are possible are subject to the clearing requirements, to increase the risk-reducing benefits of the regime, but that categories of swaps are not required to be cleared if they would increase risks at derivative clearing organizations ('DCOs') and thus create new risks to financial stability."

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International Swaps and Derivatives Association - December 22, 2010

Process for Review of Swaps for Mandatory Clearing
Decemeber 22, 2010

From the comment letter:

"An ineffective DCO risk management framework could have systemic implications and could deter market participants from transacting in the relevant swap(s). The inappropriate imposition of mandatory clearing requirements could also adversely affect liquidity in the relevant swap(s) and similarly deter use of otherwise optimal risk management products. While sound, centralized clearing affords clear benefits, it should be noted that centralized clearing also entails increased operational and collateral costs. As a result, it is important that the Commission strike an appropriate balance in evaluating the relevant statutory standards applicable to a mandatory clearing determination, and weigh the relevant factors and market impacts with great care."

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Intercontinental Exchange - December 30, 2010

Process for Review of Swaps for Mandatory Clearing
Decemeber 30, 2010

From the comment letter:

"An ineffective DCO risk management framework could have systemic implications and could deter market participants from transacting in the relevant swap(s). The inappropriate imposition of mandatory clearing requirements could also adversely affect liquidity in the relevant swap(s) and similarly deter use of otherwise optimal risk management products. While sound, centralized clearing affords clear benefits, it should be noted that centralized clearing also entails increased operational and collateral costs. As a result, it is important that the Commission strike an appropriate balance in evaluating the relevant statutory standards applicable to a mandatory clearing determination, and weigh the relevant factors and market impacts with great care."

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LCH.Clearnet - December 31, 2010

Process for Review of Swaps for Mandatory Clearing
Decemeber 31, 2010

From the comment letter:

The Group does not believe that a DCO should be required to include the information required to support the determination of whether a Swap should be subject to a mandatory clearing obligation, firstly because we believe that the determination that a DCO may clear a Swap should be separate from and independent of any determination that a Swap should be subject to a mandatory clearing obligation. Secondly, it is the Group‟s view that a DCO will not always have access to the information required to support the determination of a mandatory obligation for a Swap...Finally, we believe that requiring that a DCO provide [certain] information...may have a detrimental effect on competition, since to the extent that this information is available, larger DCOs may be better equipped to source it than smaller DCOs."

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CME Group - January 3, 2011

Process for Review of Swaps for Mandatory Clearing
January 3, 2011

From the comment letter:

  • "...the Commission must decide, in response to a DCO's required submission, whether a DCO should be allowed to clear a given swap or group, category, type or class of swaps. Second, the Commission must determine whether to apply DFA's mandatory clearing requirement to a given swap or group, category, type or class of swaps."
  • "Because these two determinations should be considered separate, the Commission should require a DCO to address only its own ability to clear a swap in its submission for permission to clear. The Commission should also provide additional guidance in its proposed regulation in order to make the DCO swap submission process more clear and efficient."
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Sungard - December 16, 2010

Process for Review of Swaps for Mandatory Clearing
December 16, 2010

The comment letter requests that the CFTC clarify five aspects of the proposed rule. including:

  • when a DCO can begin listing a new swap for clearing;
  • the effect of the "presumption of eligibility" for similar swaps;
  • the eligibility of a DCO to clear pre-enactment swaps;
  • the definition of what "considered submitted" means in CEA 2(h)(2)(B)(ii); and
  • the rules for mandatory clearing of pre-enactment swaps.
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Freddie Mac - January 3, 2011

Process for Review of Swaps for Mandatory Clearing
January 3, 2011

The comment letter urges the CFTC to consider the following recommendations:

  • Clarified treatment for good faith clearing failures; i.e., the requirement that a swap be submitted for determination of a swap for clearing, but no requirement for termination or "unwinding" of a swap that fails to clear; and
  • Equal input for stakeholders - a requirement that DCOs pre-submit a clearing proposal and offer a "meaningful opportunity to comment to all stakeholders, rather than merely to the DCO's own members."
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American Benefits Council - January 3, 2011

Process for Review of Swaps for Mandatory Clearing
Provisions Common to Registered Entities
January 3, 2011

From the comment letter:

"While our members understand the need for efficiency, we are strongly opposed to the Commission adopting any clearing requirement that covers a group, category, type, or class of swaps unless the Commission reviews each swap within the group, category, type, or class and determines that each swap should be cleared. The Act specifies factors that must be considered by the Commission in adopting a clearing requirement and the first factor that must be considered is "significant outstanding notional exposures, trading liquidity, and adequate pricing data." These factors are only meaningful for specific types of swap contracts. For example, a liquid market in certain interest rate swaps does not result in liquidity for all interest rate swaps."

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Financial Services Roundtable - January 3, 2011

Process for Review of Swaps for Mandatory Clearing
January 3, 2011

Six areas of concern from the comment letter:

  • The categorization of swaps for purposes of determining clearing capacity, authority to clear, and mandatory clearing requirements;
  • The potential effects of capacity constraints on DCOs and the markets;
  • Timing issues related to the effectiveness of designation of swaps as subject to mandatory clearing and to stays of the clearing requirement;
  • Potential adverse effects on liquidity related to the interplay between exchange trading requirements and mandatory clearing determinations;
  • The effect of mandatory clearing on swaps between affiliates; and
  • Transition issues related to amendments, novations and assignments of swaps entered into prior to the determination of a mandatory clearing requirement.
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Coalition for Derivatives End-Users - January 3, 2011

Process for Review of Swaps for Mandatory Clearing
January 3, 2011

From the comment letter:

"The Coalition believes that end-users should not be subject to clearing requirements and, to the extent that some subset of end-users is so subjected, the clearing requirements must not create undue risks or jeopardize the ability of the end-users to secure efficient pricing when they transact."

"The financial and systemic benefits achieved by mandatory clearing and by the trading requirement are similar, but not identical. The Coalition is supportive of increased price transparency for highly liquid swaps, and believes that the trading requirement could benefit end users and the market overall in those cases. If a swap is not sufficiently liquid and is made subject to the trading requirement, however, end-users could be forced to transact in a venue that is not well-suited for achieving efficient execution or market pricing."

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SEC Comment Letters

ABA Securities Association, et al. - September 8, 2011

Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies
September 8, 2011

The following organizations submit the comment letter:

  • ABA Securities Association (ABASA)
  • American Council of Life Insurers
  • Financial Services Roundtable
  • Futures Industry Association (FIA)
  • Institute of International Bankers
  • International Swaps and Derivatives Association (ISDA)
  • Securities Industry and Financial Markets Association (SIFMA)

The letter advocates the need for inter-affiliate swaps to be addressed in the proposed rules. Among other reasons, it is suggested that the SEC should provide a more consistent definition for "affiliate" and that inter-affiliate swaps aide risk management at a global level.

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Managed Funds Association - March 24, 2011

Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies
March 24, 2011

From the comment letter:

"The reform process currently underway runs the risk of stalling because many of the proposed regulations are too focused on achieving 100% reform, and because there is no clear blueprint of interim milestones for industry participants to meet the key reform objectives. Let’s start working on things that can be achieved now, in 2011. With the infrastructure and industry efforts in place, we are certain there is a way forward that is consistent with broad, timely implementation of the Dodd-Frank Act.

To that end, we believe the first two priorities should be: (i) expanding the use of central clearing for liquid (“clearable”) contracts; and (ii) having trade repositories receive data on both cleared and bilateral swaps. These changes would provide substantial benefits to the markets by enhancing price transparency and competition for the most liquid swap transactions. In addition, reforms, such as broad industry clearing and trade repository data, will lay the groundwork for future reforms (e.g., electronic trading and trade transparency) that will provide regulators the data they need (e.g., regarding liquidity and pricing) to promulgate effective rules, oversee the markets and monitor for market risks."

MFA also attaches the document "“Framework for the Open Items List from Buy-Side Participants of Actions Required for Buy-Side Access to Clearing" from March 2010 and also a suggested timeline for adoption of the proposed rules.

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CME Group - February 14, 2011

Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies
February 14, 2011

From the comment letter:

  • "The Commission should limit the breadth of the submission required by a clearing agency seeking approval to clear a security-based swap to addressing whether clearing such a security-based swap comports with the Exchange Act Section 17A."
  • "CME requests that the Commission not require clearing agencies to perform an analysis of the 3C(b)(4)(B) factors or factors related to open access in its submission for permission to clear a security-based swap. Rather, the Commission should require a clearing agency to address only its ability to clear the swap at issue while continuing to comply with Section 17A in its submission for approval to clear a security-based swap."
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LCH.Clearnet Group - February 14, 2011

Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies
February 14, 2011

According to the comment letter, LCH.Clearnet Group:

  • "believes it is critically important that the Commission establishes a process for the review and designation of Security-Based Swaps for mandatory clearing and, equally, that it subjects market infrastructures to strict requirements to ensure their safety and robustness;"
  • "believes that the process set out in the Proposing Release is consistent with the Congressional requirement that a clearing agency be eligible to clear Security-Based Swaps, and that before a Security-Based Swap becomes subject to mandatory clearing, the public get to provide input on the contract or class of contracts;" and
  • sets forward additional comments under specific categories, listed below.
  1. The eligibility of a clearing agency to clear security-based swaps.
  2. The submission of security-based swaps to the Commission for review.
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International Swaps and Derivatives Association - February 14, 2011

Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies
February 14, 2011

In the letter, ISDA comments on:

  • "the Commission's review of a security-based swap submission to determine whether to impose a mandatory clearing requirement; and
  • the "stay of the clearing requirement and review by the Commission."

Section 1 of the letter specifically states, "It is important that the Commission strike an appropriate balance in evaluating the relevant statutory standards applicable to a mandatory clearing determination, and weigh the relevant factors and market impacts with great care," and provides definitional considerations for swap-based securities language in the Dodd-Frank Act.

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Options Clearing Corp. - February 14, 2011

Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies
February 14, 2011

In the letter, OCC lends its support, stating, "The Commission's proposal will permit clearing agencies to comply as efficiently as possible with the overlapping regulatory filing requirements by dealing with all three filing requirements that may be triggered by introduction of a single new product or service in a single filing." OCC further requests clarification on the following issues:

  • security-based swap submissions not requiring associated rule changes;
  • independent validation of margin methodology and financial resources;
  • details required in security-based swap submissions;
  • clearing requirements (anti-evasion and Rule 3Ca-2); and
  • advance notices under Title VIII of Dodd-Frank, including material rule changes, advance notice of liquidity arrangements, forwarding advance notices to the Board.
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Consortium of Foreign Banks - February 17, 2011

Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies
February 17, 2011

The letter is addressed to the CFTC, SEC and U.S. Federal Reserve Bank on behalf of 12 foreign banking institutions (Barclays Bank PLC, BNP Paribas S.A., Credit Suisse AG, Deutsche Bank AG, HSBC, Nomura Securities International Inc., Rabobank Nederland, Royal Bank of Canada, Royal Bank of Scotland Group PLC, Societe Generale, The Toronto-Dominion Bank and UBS AG).

The suggested modifications address the following questions, as stated in the comment letter:

  • Who is required to register as a swap dealer and with respect to what activities?
  • How does Title VII apply to limited registrants?
  • When will the Federal Reserve and the Commissions rely on home country requirements for entity-level regulation?
  • How do transaction-level rules apply to foreign banks whose registration is limited to swap dealing activities with U.S. persons?
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Americans for Financial Reform - February 14, 2011

Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies
February 14, 2011

In the comment letter, AFR:

  • "urge[s] the Commission to require clearing agencies to disclose detailed information about the swap or class of swaps it proposes to clear – and also to require the submission of publicly available information regarding the reasons why the clearing organization rejects a given swap or class of swaps for clearing;"
  • "urges the Commission to include in the final rule the proposals that would allow for public comment on a clearing agency’s Security-Based Swap Submission and prevent evasion of the clearing requirement;" and
  • "believes the Commission should avoid excessive dependence on private external validators for assessing the core elements in a Security-Based Swap submission, and should draw on the range of available data and technical expertise represented among the members of the Financial Stability Oversight Council (FSOC) in assessing the effects of clearing and performing market surveillance."
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References

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