CFTC Revisits Dodd-Frank Rule Making for Swaps

The CFTC proposed relief from business conduct and documentation requirements applicable to swap dealers and major swap participants.

The CFTC amendments would "provide exceptions to compliance with such requirements when executing swaps that are: (1) intended by the parties to be cleared contemporaneously with execution; or (2) subject to prime broker arrangements that meet certain qualifying conditions." The proposed amendments would supersede no-action positions issued by the Commission’s Market Participants Division.

The following is a list of the primary exemptions and forms of relief that would be provided, along with the conditions for their availability.

1. Relief for Intended to be Cleared (ITBC) Swaps

This proposal introduces a broad set of exemptions from the External Business Conduct Standards and Swap Trading Relationship Documentation ("STRD") requirements for swaps that are intended to be cleared contemporaneously with execution ("ITBC Swaps").

Conditions for a Swap to be an "ITBC Swap"

As defined in the proposed Section 23.401(d), a swap must meet the following conditions to qualify as an ITBC Swap:

• At least one party to the swap is a swap entity.
• The swap is a type accepted for clearing by a registered Derivatives Clearing Organization ("DCO") or an Exempt DCO.
• The parties intend for the swap to be cleared contemporaneously with execution.
• Both parties are either clearing members of the relevant DCO or have an agreement with a clearing member (like an "FCM") to clear that type of swap. For an Exempt DCO, the parties must be eligible to clear the swap under the terms of the Commission's exemption order.
• The swap entity does not require the counterparty to enter into a breakage agreement as a condition of execution.
• The swap is submitted for clearing as quickly as technologically practicable.
• If the swap is executed on a Designated Contract Market (DCM), Swap Execution Facility (SEF), or Exempt SEF and is rejected from clearing, it must be void ab initio.

Available Relief for ITBC Swaps

If a swap meets the conditions above, the following relief would be available:

• Know Your Counterparty (Section 23.402(b) and (c)): Swap entities would be exempt from the "know your counterparty" and "true name and owner" requirements for all ITBC Swaps.
• Counterparty Eligibility Verification (Section 23.430): Swap entities would be exempt from verifying a counterparty's Eligible Contract Participant (ECP) and Special Entity status for:
  • Anonymous ITBC Swaps ("A-ITBC Swaps").
  • ITBC Swaps initiated on a DCM, SEF, or Exempt SEF.
• Pre-Trade Disclosures (Section 23.431(a)): Swap entities would be exempt from disclosing material risks, characteristics, incentives, and conflicts of interest for:
  • A-ITBC Swaps.
  • ITBC Swaps executed on a DCM, SEF, or Exempt SEF.
• Clearing Notification (Section 23.432): The requirement to notify a counterparty of its right to clear a swap would not apply to:
  • A-ITBC Swaps.
  • ITBC Swaps executed on a DCM, SEF, or Exempt SEF.
• Suitability for Recommendations (Section 23.434): A swap dealer would be exempt from the suitability requirements when recommending a swap or strategy for:
  • A-ITBC Swaps.
  • ITBC Swaps executed on a DCM, SEF, or Exempt SEF.
• Special Entity Requirements (Sections 23.440 & 23.450):
  • The heightened duties when advising a Special Entity (§ 23.440) would not apply to A-ITBC Swaps or ITBC Swaps initiated by a Special Entity on a DCM/SEF/Exempt SEF where the swap dealer does not know the counterparty's Special Entity status.
  • The requirement to have a reasonable basis to believe a Special Entity has a Qualified Independent Representative (QIR) (§ 23.450) would not apply to A-ITBC Swaps or any ITBC Swap initiated on a DCM/SEF/Exempt SEF.
• Political Contribution "Pay-to-Play" Rule (Section 23.451): The prohibition on entering into swaps with a governmental Special Entity after a political contribution would not apply to:
  • A-ITBC Swaps.
  • Swaps initiated on a DCM, SEF, or Exempt SEF (the current anonymity condition is proposed to be removed).
• Swap Trading Relationship Documentation (STRD) (Section 23.504): The requirement to have STRD in place would not apply to any ITBC Swap.

2. Relief for Qualified Prime Broker Arrangements

The proposal provides relief from certain pre-trade disclosure requirements for swap dealers acting as prime brokers (PB/SDs) in "Qualified Prime Broker Arrangements."

Conditions for a "Qualified Prime Broker Arrangement"

As defined in the proposed Section 23.401(g), the arrangement must meet these conditions:

• The PB/SD and its counterparty (the "PB Counterparty") have a written agreement defining the type, parameters, and limits of potential transactions ("Permitted PB Transactions").
• The PB Counterparty has received all required pre-trade disclosures (Section 23.431(a)) from the Prime Broker except for the price of the transaction.
• The Prime Broker has received a written acknowledgement from the PB Counterparty confirming receipt of the disclosures and that the Prime Broker has no further disclosure obligations for that transaction unless requested.
• The Prime Broker maintains records of the arrangement and acknowledgement.

Available Relief

• Pre-Trade Price Disclosure (Section 23.431(a)): If an arrangement meets the conditions above, the PB/SD would be exempt from providing the pre-trade disclosure of the price for a Permitted PB Transaction.

3. Proposed Elimination of Certain Requirements

The proposal would eliminate the following requirements for all swap entities, regardless of the transaction type.

• Pre-Trade Mid-Market Mark (PTMMM) Requirement (Section 23.431(a)(3)(i)): The proposal would eliminate this requirement in its entirety. The Commission said it preliminarily believes it provides no utility and may delay execution.
• Scenario Analysis Requirement (Section 23.431(b)): The proposal is to eliminate in its entirety the requirement for a swap entity to provide a scenario analysis upon a counterparty's request. The Commission preliminarily believes it provides no utility to counterparties.

4. Other Specific Relief

• Definition of "Statutory Disqualification" for QIRs (Section 23.450(a)(2)): The existence of "grounds" for disqualification would no longer be sufficient to disqualify a registrant from acting as a QIR unless the Commission has actually acted to refuse, revoke, condition, or restrict their registration 
• Definition of "Contribution" in Pay-to-Play Rule (Section 23.451(a)(1)(iii)): The proposal would remove the word "Federal" from the definition of contribution as it relates to transition or inaugural expenses, aligning the CFTC rule with SEC and MSRB rules.