CFTC Final Rule: Business Conduct Standards for Swap Dealers and Major Swap Participants with Counterparties

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Gavel.png FINAL RULE: CFTC Final Rule: Business Conduct Standards for Swap Dealers and Major Swap Participants with Counterparties at CFTC Open Meeting, January 11, 2012
Dodd-Frank Timeline, Business Conduct Standards for Swap Dealers and Major Swap Participants
Final Rule Issue Effective Date Compliance Date (Extended)
February 17, 2012 April 17, 2012 May 1, 2013

One of the provisions of the Dodd-Frank Act is an addition to the Commodity Exchange Act of Section 4s(h), which requires the CFTC adopt business conduct standards for swap dealers and major swap participants (SD/MSPs), governing their dealings with counterparties and "special entities" such as government entities, employee benefit plans, and endowments. The final rules require SD/MSPs to follow due diligence and disclosure obligations, and refrain from certain abusive practices. In general, such duties are adapted from industry “best practice” recommendations, self-regulatory organization (SRO) approaches to business conduct standards, and regulatory rules . These duties would not apply to transactions initiated on a designated contract market (DCM) or swap execution facility (SEF) where the SD/MSP does not know the identity of the counterparty prior to execution.

No-action Update, May/June 2013[edit]

Between April 30 and June 27, 2013, the CFTC issued several no-action letters regarding external business conduct standards. These include:

  • Relief for certain transactions executed in accordance with prime brokerage arrangements where the SD has (i) allocated certain obligations under the External Business Conduct Standards to an executing dealer that is also an SD, or (ii) entered into prime brokerage arrangements with executing dealers that are not SDs. VIEW NO_ACTION LETTER
  • Relief from the pre-trade mark (PTM) requirement for any foreign exchange swap, forward or vanilla option that, by its terms, is physically settled, where each currency is one of the BIS 31 Currencies and where the transaction has a stated maturity of one year or less, provided that real-time prices are available electronically and the counterparty agrees in advance that the SD/MSP does not need to disclose a PTM. VIEW NO_ACTION LETTER
  • Relief for SD/MSPs when entering into certain foreign exchange transactions with a settlement cycle of no more than seven local business days (T+7). VIEW NO-ACTION LETTER
  • Relief from certain external business conduct standards and documentation requirements for “Intended-To-Be-Cleared Swaps” (“ITBC Swaps”) swaps which are intended to be submitted for clearing contemporaneously with execution of such swap. The rationale for the letter is the fact that the pre-execution anonymity of the parties, plus the fact that, after clearing the parties have no further ties to the swap, negate the need for such standards and documentation to be in place. VIEW NO-ACTION LETTER.


On December 9, 2010, the CFTC approved a proposed rule on external business conduct standards for SD/MSPs. The proposed rule established a framework for SD/MSP counterparty dealings, including

  • General prohibitions on fraud, record retention, supervision, confidentiality, and abusive practices such as the "front-running" of customer orders
  • Counterparty responsibilities such as:
    • disclosure of risks and potential conflicts of interest,
    • daily mark-to-market, and the option to clear swap on a derivatives clearing organization (DCO),
    • standards for execution, institutional suitability, and "fair and balanced" communication.
  • Duties for any swap dealer acting as "advisor to a special entity" to ensure that the counterparty to the swap has a "responsible person" who understands the risks, the details of the swap, and acts as a fiduciary to the special entity.

Comment letters related to the proposed rulemaking can be viewed HERE.

The Final Rule[edit]

The final rules require:

  • Verification. SDs/MSPs must verify that the counterparty is an eligible contract participant (ECP) and whether the counterparty is a Special Entity.
  • Disclosures of Material Information. SDs/MSPs must ensure that the counterparty is capable of assessing the material risks.
  • Scenario analysis. Prior to entering into a swap that is not made available to trade on a DCM or SEF, an SD (but not MSPs) must notify its counterparty of its right to request and consult on a scenario analysis.
  • Daily mark. For uncleared swaps, SDs/MSPs must provide counterparties with a daily mark-to-market of the swap.
  • Communications—fair dealing. SDs/MSPs must communicate with their counterparties in a fair and balanced manner based on principles of fair dealing and good faith.
  • Recommendations to counterparties—institutional suitability. The final rule includes a "safe harbor" under which a SD may fulfill its suitability obligation if it determines that the counterparty is capable of independent evaluation and the counterparty represents in writing that it is exercising proper judgment, where the counterparty is a "special entity."<ref>Q & A – Business Conduct Standards for Swap Dealers and Major Swap Participants with Counterparties Final Rulemaking. CFTC. Retrieved on January 11, 2012.</ref>

Scenario analysis, "special entity" rules, suitability, and "know your counterparty" rules will apply only to swap dealers, and not to major swap participants.

Related Documents: Fact Sheet, Q&A, and Final Rule as it Appeared in the Federal Register[edit]



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