Confirmation, Portfolio Reconciliation, Portfolio Compression and Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants; Final Rule (CFTC - Fed. Reg. Version)
The CFTC is adopting regulations to implement certain provisions of Title VII of the Dodd-Frank Act. Section 731 of the Act added a new Section 4s(i) to the Commodity Exchange Act, which requires the CFTC to prescribe standards for swap dealers (SDs) and major swap participants (MSPs) related to the timely and accurate confirmation, processing, netting, documentation, and valuation of swaps. These regulations set forth requirements for swap confirmation, portfolio reconciliation, portfolio compression, and swap trading relationship documentation for SDs and MSPs.
Effective Date: November 13, 2012.
Compliance Dates: Specific compliance dates are discussed in the Supplementary Information. In addition, the CFTC agreed to delay certain of the implementation dates for subpart H of part 23.
Related Releases: 75 FR 81519 (Confirmation, Portfolio Reconciliation, and Portfolio Compression Requirements for SDs and MSPs; Proposed Rule); 76 FR 6708 (Orderly Liquidation Termination Provision in Swap Trading Relationship Documentation for SDs and MSPs; Proposed Rule); 76 FR 6715 (Swap Trading Relationship Documentation Requirements for SDs and MSPs; Proposed Rule); 76 FR 25274 (Reopening and Extension of Comment Periods for Rulemakings Implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act).
Cross-References: Dodd-Frank Section 731 (Registration and regulation of SDs and MSPs); Commodity Exchange Act Section 4s(i) (Registration and regulation of SDs and MSPs - Documentation standards).
Subpart I (Swap Documentation) is added to Part 23 to read as follows (click on each rule listed below to view the text of the adopted rule):
- 23.500 (Definitions)
- 23.501 (Swap confirmation)
- 23.502 (Portfolio reconciliation)
- 23.503 (Portfolio compression)
- 23.504 (Swap trading relationship documentation)
- 23.505 (End user exception documentation)
Lofchie Comment: The final rules as to the required elements of trading documentation have been revised significantly from the CFTC's original proposals. This is greatly to the good, as the proposals were simply and wholly unworkable, and their requirements could not possibly have been met. (Cadwalader had represented both ISDA and SIFMA in the preparation of their joint comment letter on two of the three proposal releases that were revised and adopted in this release.)Even where the CFTC did not affirmatively amend its rule proposals, in several cases the adopting release contains interpretative language to the same effect. The CFTC also made what I would call corrections to its prior proposals regarding the treatment of confirmations and the inclusion of bankruptcy-related language in swap documentation. Beyond that, the CFTC amended various of its proposed requirements as to trade compression and the handling of valuation disputes to make them less prescriptive.Given the tremendous improvements made between the proposed rules and the final rules, it may be ungenerous to comment critically on the final rules. Nonetheless . . .As a starting matter, I wonder if the final rules should not instead have been a re-proposal. First, the original version of the rules was so unworkable that I am not sure the public has really had a chance to comment on something that is more realistic. Second, the re-proposal has very significant timing requirements which I think deserve market comment. Third, just taking a quick look at the CFTC's cost estimates for implementation of the rules, I suspect that these costs are far greater than the CFTC has estimated. (It was impossible for the public to comment on costs in the original proposal because the requirements in that proposal could not have been achieved at any cost.) Further, I think the CFTC continues to underestimate the costs that the economy will bear as a result of hundreds of thousands of documents having to be revised multiple times rather than just once. I note that the CFTC estimates a cost of approximately $100 million to implement the requirements in this release. But, if the actual costs were several multiples or more higher, then perhaps it would mean that the compliance dates for various rules should be better harmonized to reduce costs. More substantively, I continue to believe that the CFTC oversteps in prescribing rules as to privately negotiated contracts. For example, the adopted rules would require that all swap agreements require valuations based "to the maximum extent practicable" on other recent trades, third-party valuations or other objective measures. While this language seems innocuous, I think it is extremely ambiguous ultimately and thus creates legal risk. What is the maximum extent practicable? How recent does a recent trade have to be? And how similar? Is third party the same as objective? In any case, I think the CFTC proposals in this version should be the subject of public comment. Market participants should review these rule requirements closely, as they will have a significant impact on documentation, procedures and costs.I also note that the very extensive changes made between the proposed rules and the final rules belie the assertion that swap dealers could be in a position to implement the final rules quickly, as they have had time to prepare on the basis of the proposed rules. However, any firm that has geared up to change its documentation on the basis of the proposed rules will have spent an enormous amount of time and effort for no purpose whatsoever.
View rule release here: 77 FR 55903.Additional Materials: CFTC Press Release; Chairman Gensler's Statement of Support.