CFTC Proposes Streamlined Swap Dealer Reforms

The CFTC proposed amendments to simplify business conduct and documentation requirements for swap entities.

The CFTC outlined four areas of reform in its notice of proposed rulemaking:

• Intended to be Cleared ("ITBC") Swaps. 
  • The CFTC proposed exempting ITBC swaps from several CFTC rules, as their brief bilateral risk is quickly shifted to the clearinghouse. The exemptions include:
    • Rule 23.402 ("General Provision");
    • Rule 23.430 ("Verification of counterparty eligibility");
    • Rule 23.432 ("Clearing disclosures");
    • Rule 23.434 ("Recommendations to counterparties-institutional suitability");
    • Rule 23.440 ("Requirements for swap dealers acting as advisors to Special Entities");
    • Rule 23.450 ("Requirements for swap dealers and major swap participants acting as counterparties to Special Entities"); and
    • Rule 23.451 ("Political contributions by certain swap dealers"). 
  • The CFTC also proposed eliminating Rule 23.504 ("Swap trading relationship documentation") for ITBC swaps, noting that once cleared or voided, risk shifts to the clearinghouse and the bilateral relationship ends.
• Prime Brokerage. The CFTC proposed defining "Prime Broker Arrangement" and "Qualified Prime Broker Arrangement" under Rule 23.401 ("Definitions") and exempting prime brokers from Rule 23.431 ("Disclosures of material information") pre-trade disclosures, requiring upfront disclosures instead to maintain competitive pricing and centralized credit management.
• Eliminations. The CFTC proposed eliminating Rule 23.431's ("Disclosures of material information") pre-trade mid-market mark and scenario analysis requirements, citing their limited use, low value, lack of Dodd-Frank mandate, and potential to delay execution.
• Daily Mark Alignment. The CFTC proposed revising the daily mark definition for uncleared swaps under Rule 23.431(d)(2) ("Disclosures of material information") to align with margin and reporting valuations, reducing duplication and enabling a single standardized process.

The CFTC stated that the amendments codify longstanding no-action relief and reduce compliance burdens that offer little counterparty benefit. The CFTC added that by narrowing obligations where risk is absorbed by clearinghouses or market structure—and by harmonizing with SEC rules—the changes streamline oversight without weakening customer protections.