Category: Swap Data Repository

Regulatory Adjustment to New CFTC Ruling on Cross-Border Swaps

The impacts of the Commodities Futures Trading Commission’s (CFTC) response to cross-border swaps are yet unknown. With a 75 day period of guidance in addition to the implementation of the final ruling, this unprecedented move by the CFTC may deeply impact the market.

On Friday, July 12th, the CFTC voted 3-1 in favor of instituting final guidelines for regulating cross-border bilateral swaps. Gary Gensler, in his opening statement said that “Even though we oversee, here at the CFTC, a complex and sometimes difficult to understand market […] the questions the American people are looking for us to answer are simple: Have we lowered risk? Have we brought transparency to these markets? […] This is why reform matters.”

The presenters of the cross-border rules also went on to define certain aspects of the bill. When discussing the definition of “US-Person,” they widened the definition to include natural born US citizens, businesses with principal or primary stations in the United States and funds if they were majority owned by US Citizens. Other important aspects of these guidelines include ‘unfettered’ access to other counties’ data. According to the meeting, the CFTC has set up relationships for substituted compliance with Australia, Canada, Japan, and the EU, with ongoing talks with some entities in Switzerland and Hong Kong.

The full proceedings are available on the CFTC’s website.

DTCC Sues CFTC over “Anti-Competitive Swap Trading Data Rules”

The Depository Trust & Clearing Corp. (DTCC) sued the Commodity Futures Trading Commission (CFTC) on Friday claiming that the derivatives regulator made “anti-competitive rules,” regarding swap trading data, that favor two rival companies.

The lawsuit filed by the DTCC, a financial services group that deals with post-trade transactions, was made in response to the CFTC’s March ruling to allow CME Group Inc. (CME) and Intercontinental Exchange, which are both exchanges that clear trades, to send client data to their own proprietary data warehouses.

CME and IntercontinentalExchange sought the ruling on the grounds that they were best positioned to manage the data and risk on behalf of their customers.

The DTCC, who runs its own data warehouse, argued that the ruling was anti-competitive because it violates the Dodd Frank Act’s requirement for a more transparent and robust compliance regime for swap transaction execution, clearing, and data reporting.

In a statement given to Bloomberg Businessweek, Larry Thomson, DTCC’s general counsel, said, “By approving these rules, CFTC changed its original adherence to the pro-competitive principles of Dodd-Frank and instead sanctioned anticompetitive behavior that allowed these clearing houses to require reporting of cleared swap data to their captive swap data repository.”

The DTCC’s argument is that it is unfair for these exchanges to send data to their own data repositories. The DTCC want clients to have a choice of where their data goes because that would be in the spirit of the Dodd Frank Act.

The DTCC also voiced their displeasure in a statement given to Reuters, saying, “The commission failed to properly consider the anticompetitive effects of (the rules), and did not comply with the legally required administrative or cost-benefit analysis procedures.”

 

CFTC Announces Mandatory Clearing of Swaps

Today, the CFTC announced today that swap dealers, major swap participants, and private funds active in the swaps market, are required to begin clearing certain index credit default swaps (CDS) and interest rate swaps that they entered into on, or after March 11, 2013.

The CFTC stated in a press release, that the Dodd-Frank Act amended the Commodity Exchange ACT (CEA) to require the clearing of specific swaps. The Dodd-Frank act also requires the Commission to determine whether a swap is required to be cleared by either a Commission-initiated review, or a submission from a DCO for the review of a swap, or group, category, type, or class of swap.

The clearing requirement determination does not apply to those who are eligible to elect an exception from clearing because they are non-financial entities hedging commercial risk.

CFTC Chairman Gary Gensler stated in a press release, “Central clearing lowers the risk of the highly interconnected financial system. It promotes competition in and broadens access to the market by eliminating the need for market participants to individually determine counterparty credit risk, as now clearinghouses stand between buyers and sellers.”

The clearing requirement applies to newly executed swaps, as well as changes in the ownership of a swap. Market participants electing an exception from mandatory clearing under section 2(h)(7) of the CEA do not have to comply with the reporting requirements for electing the exception until September 9, 2013.

Read More.

CFTC’s Gensler Touts ‘Historic’ Changes with Futurization of Swaps

U.S. Commodity Futures Trading Commission (CFTC) head Gary Gensler touted the benefits of “futurization” in a speech delivered at the CFTC today. Chairman Gensler used his address to note the CFTC’s shift to implementation, away from broader rule-making, and also to hint at the upcoming regulatory calendar for swaps rules.

Futurization of Swaps

Gensler’s speech took place at a public roundtable that met to discuss the ongoing “futurization” of the swaps market. Futurization implies that swaps are becoming more like futures and securities in terms of reporting, oversight, and market access via regulatory changes that require clearing.

From Gensler’s address:

For the first time, the public will benefit from the greater access to the markets and the risk reduction that comes with central clearing. Required clearing of interest rate and credit index swaps between financial entities begins in March.

For the first time, the public is benefiting from seeing the price and volume of each swap transaction. This post-trade transparency builds upon what has worked for decades in the futures and securities markets. The new swaps market information is available free of charge on a website, like a modern-day ticker tape.

Gensler also discussed the public benefit of oversight and new rules affecting record keeping and business conduct.

For the first time, the public will benefit from specific oversight of registered swap dealers. As of the end of this week, there will be 71 provisionally registered swap dealers. They are subject to standards for sales practices, recordkeeping and business conduct to help lower risk to the economy and protect the public from fraud and manipulation.

CFTC Swaps Agenda

Gensler also noted that the CFTC is actively working on transparence rules for swap execution facilities (SEF’s).

Looking ahead, to further enhance liquidity and price competition, the CFTC must finish the pre-trade transparency rules for swap execution facilities, as well as the block rules for swaps. It is also critical that we preserve the pre-trade transparency that has been at the core of the futures market.

Read the speech here.

CFTC on Futures as the Future of Swaps

The U.S. Commodity Futures Trading Commission (CFTC) will publicly discuss the “futurization” of the swaps market on January 31. The “futurization of swaps” is quickly shaping up to be a hot-button issue in early 2013. The CFTC’s discussion will purportedly revolve around the following:

  1. general industry views and concerns regarding the conversion of swaps to futures in each asset class;
  2. clearing and different margin requirements for swaps and futures;
  3. transaction-related matters including appropriate block rules for swaps and futures; and
  4. the effect of the conversion of swaps to futures on end-users.

CFTC and the Futurization of Derivatives, Swaps

The “futurization of swaps” is part of an ongoing conversation about the futurization of derivatives.

Spurred by new and pending CFTC regulation that favors transparent prices, clearing, and standardized electronic trading, large banks are opening up to futures contracts. The move to futures is likely by design, as regulators continue to bring rules that will increase the relative expense of OTC swaps, thus making futures even more attractive by comparison.

The push toward futures has been led by large entities like IntercontinentalExchange (ICE) and CME Group, the largest derivatives exchange in the U.S. Yet “futurization” is also the result of uncertainty surrounding new rules that could mandate how swaps are traded on non-exchange platforms called swap execution facilities (SEFs).

Nevertheless, the idea of a rush toward futures—as opposed to the regulatory push to “futurize” swaps—may be slightly overstated at the moment. As Kim Taylor, president of CME clearing said recently customers transitioning to futures, “Right now they tend to be smaller players.”

Further, the customizability of swaps against futures contracts might make the more palatable to investors in the face of potential fluctuations in interest rates or energy prices.

CFTC Event this Friday

The CFTC’s event will be held in the Conference Center at the CFTC’s headquarters at Three Lafayette Centre, 1155 21st Street, N.W., Washington, DC. The discussion will be open to the public with seating on a first-come, first-served basis.

Read more.

CFTC Extends Review Period for Controversial Swaps Rule

Update:

The U.S. Commodity Futures Trading Commission (CFTC) is extending the review period for Rule 1001. Chicago Mercantile Exchange (CME) and DTCC have threatened legal action against the CFTC depending on the outcome of the rule.

From the CFTC’s Statement Today:

The Commodity Futures Trading Commission (CFTC) is extending the time period for which it is reviewing a request from the Chicago Mercantile Exchange Inc. (CME) for approval of a rule (Rule 1001) submitted pursuant to section 40.5 of the Commission’s regulations.  The proposed rule raises novel or complex issues that the Commission has determined require additional time to review. The review period is being extended 45 days to expire on March 6, 2013.

Background

The U.S. Commodity Futures Trading Commission (CFTC) is set to decide on a rule that could embroil swaps regulation in a lawsuit between CME and DTCC. The rule was delayed last week when the CFTC chose to extend the public comment period on an amendment proposed by CME. The amended rule states:

“For all swaps cleared by the Clearing House, and resulting positions, the Clearing House shall report creation and continuation data to CME’s swap data repository for purposes of complying with applicable CFTC rules governing the regulatory reporting of swaps. Upon the request of a counterparty to a swap cleared at the Clearing House, the Clearing House shall provide the same creation and continuation data to a swap data repository selected by the counterparty as the Clearing House provided to CME’s swap data repository under the preceding sentence.”

CFTC, CME, DTCC

CME Group is the country’s largest futures exchange and the operator of the Chicago Mercantile Exchange, the Chicago Board of Trade, and the New York Mercantile Exchange. In October, CME brought a case against the CFTC that challenged the regulatory agency’s ability to enforce reporting rules for swaps trading.  More specifically, CME does not want to be forced to release previously non-public reports on cleared swap transactions to CFTC-mandated swap data repositories (SDRs).

Enter DTCC

This is where DTCC comes into the picture. Although the CFTC eventually granted CME’s request to become an SDR, it had already approved DTCC’s request. If SDRs are challenged in a fundamental way—by allowing CME to function simultaneously as an SDR and a clearinghouse—DTCC stands to lose business.

“DTCC has significant concerns with the potential negative consequences of a judicial challenge or Commission action to remove the necessity for a legal dispute,” DTCC said in a letter to CFTC Chairman Gary Gensler.

Yet CME would prefer to avoid distributing information to a third party. The case, should it develop, will likely hinge on whether the added cost of implementing a third party is necessary and helpful in terms of transparency. CME already functions as a clearinghouse, and so it believes that employing a third party is unnecessary.

Read more.

CFTC Announcement Could Trigger Lawsuit Over Future of Swaps Data

The U.S. Commodity Futures Trading Commission (CFTC) is set to decide on a rule that could embroil swaps regulation in a lawsuit between CME and DTCC. The rule was delayed last week when the CFTC chose to extend the public comment period on an amendment proposed by CME. The amended rule states:

“For all swaps cleared by the Clearing House, and resulting positions, the Clearing House shall report creation and continuation data to CME’s swap data repository for purposes of complying with applicable CFTC rules governing the regulatory reporting of swaps. Upon the request of a counterparty to a swap cleared at the Clearing House, the Clearing House shall provide the same creation and continuation data to a swap data repository selected by the counterparty as the Clearing House provided to CME’s swap data repository under the preceding sentence.”

CFTC, CME, DTCC

CME Group is the country’s largest futures exchange and the operator of the Chicago Mercantile Exchange, the Chicago Board of Trade, and the New York Mercantile Exchange. In October, CME brought a case against the CFTC that challenged the regulatory agency’s ability to enforce reporting rules for swaps trading.  More specifically, CME does not want to be forced to release previously non-public reports on cleared swap transactions to CFTC-mandated swap data repositories (SDRs).

Enter DTCC

This is where DTCC comes into the picture. Although the CFTC eventually granted CME’s request to become an SDR, it had already approved DTCC’s request. If SDRs are challenged in a fundamental way—by allowing CME to function simultaneously as an SDR and a clearinghouse—DTCC stands to lose business.

“DTCC has significant concerns with the potential negative consequences of a judicial challenge or Commission action to remove the necessity for a legal dispute,” DTCC said in a letter to CFTC Chairman Gary Gensler.

Yet CME would prefer to avoid distributing information to a third party. The case, should it develop, will likely hinge on whether the added cost of implementing a third party is necessary and helpful in terms of transparency. CME already functions as a clearinghouse, and so it believes that employing a third party is unnecessary.

Read more.

CFTC Unveils Real-Time Reporting of Swap Transactions and More

The U.S. Commodity Futures Trading Commission (CFTC) today issued a statement announcing real-time public reporting for swap transactions and swap dealer registration.

From the CFTC Chairman Gary Gensler:

“Two of the most significant Dodd-Frank reforms began implementation this week. Real-time reporting brings transparency to the formerly opaque swaps market. Also this week, the largest entities dealing in the swaps market became provisionally registered as swap dealers.”

And more:

“With these historic reforms, the public, for the first time, can see the price and volume of swap transactions, just as it has benefitted from transparency for decades in the securities and futures markets. The public also will benefit as swap dealers now will be subject to common-sense standards for sales practices, recordkeeping and business conduct rules that will help lower risk to the rest of the economy.”

According to the CFTC statement, 65 entities had submitted applications as of Monday, including the “G16” dealers. More applications are expected as the year continues and more entities exceed the $8 billion de minimis threshold.

The statement also explains that the public will be able to access this real-time data through the SDRs’ website.

More to Come

The CFTC also stated that more reporting of swap transaction is forthcoming over the next several months. Forex, equity, and physical commodity swaps are first in line, with reporting expected to begin in February. Other market participants are expected to begin in April.

More from Gensler:

“This week’s implementation of transparency and oversight reforms begins to fulfill key goals of the Dodd-Frank Act. They are an historic change for the markets that will benefit the public and the economy at large. This achievement is a real testament to the dedication and excellence of the CFTC staff working as a team and with other regulators, both domestic and international. I also would like to thank Commissioners Sommers, Chilton, O’Malia and Wetjen for their significant contributions to making the implementation of these reforms now a reality.”

Read more.

CFTC Continues Wave of Relief with Exemption for Foreign-Owned Banks

The U.S. Commodity Futures Trading Commission (CFTC) has issued no-action relief for certain banks owned by non-U.S. swap dealers. The relief for foreign-owned banks comes in a wave of recent swaps-oriented regulatory exemptions and delays.

The letter states that the CFTC’s Division of Swap Dealer and Intermediary Oversight will not recommend enforcement action against any

U.S. bank that is wholly owned by a foreign entity for failure to consider the swap dealing activities of its foreign affiliates, or the U.S. branches of such affiliates, with respect to swap positions executed from and after October 12, 2012, when determining whether such U.S. bank satisfies the de minimis exception to the swap dealer definition and registration requirements, so long as the U.S. bank meets certain conditions specified in the letter.

Congress and Cross-Border Compliance

The relief for foreign-owned banks comes as the CFTC is urged by Congress to establish workable cross-border compliance rules.

“We are very concerned that a lack of coordination between both foreign and domestic regulators could soon lead to a disruption of the derivatives markets,” 14 members of the House of Representatives, from both parties, said in a letter on Thursday.

As it stands, foreign banks will soon be required to abide by the same rules as U.S. entities, including a counting their transactions toward an $8 billion threshold. Crossing the threshold would lead to increased registration costs and monitoring.

Wave of Relief from CFTC

Today’s no-action delay is a part of a wave of relief from the regulator. The CFTC has issued 52 no-action orders this year, with more coming in the month of December than in the whole of 2011.

Yesterday the CFTC issued an interim rule to extended the compliance date for certain business conduct and documentation requirements for swap dealers (SDs) and major swap participants (MSPs). The rule issues separate compliance dates—May 1, 2013 and July 1, 2013—for a variety of these business conduct rules. The agency approved the extension in a 5-0 seriatim vote.

Read more.

CFTC Slowing Down?: More Deferrals for Swaps, Business Conduct Rules

The U.S. Commodity Futures Trading Commission’s (CFTC) Division of Swap Dealer and Intermediary Oversight (DSIO) yesterday issued a time-limited no-action letter that exempts floor trading from counting toward the notional amount of swaps, which could lead to registration requirements and fees for a given entity. The relief expires on July 1, 2013:

More Deferrals and No-Action Letters?

The new delays come as the CFTC is balancing the implementation of recently approved Dodd-Frank Rules. The Commission has signed 51 “no action” letters so far this year, compared with eight last year and nine in 2010, according to the CFTC website.

From the CFTC Statement

“During that limited time period, the Division will not recommend that the Commission take an enforcement action against an entity for failure to include, in its calculation of the aggregate gross notional amount of swaps connected with its swap dealing activity” the CFTC’s no-action letter stated.

The exemption is effective for entities today, provided that:

(1) the entity does not have a registered swap dealer affiliate;

(2) the entity entered into the swap using proprietary funds for its own account; and

(3) the entity complies with the requirements set forth in Commission Regulations

In order to obtain the relief granted by the no-action letter, an entity must file a claim with the DSIO by the end of the year.

CFTC Establishes Compliance Date for Business Conduct and Documentation Rules

The CFTC also approved yesterday interim final rules yesterday. Approved via seriatim in a 5-0 vote, the rules apply for:

Swap dealers (SDs) and major swap participants (MSPs) who would otherwise be required to comply with certain business conduct and documentation requirements found in provisions of subpart F, subpart H, and subpart I to part 23 of the Commission’s Regulations.

In particular, requirements for portfolio reconciliation and swap trading relationship documentation have been deferred until July 1, 2013. Additional rules are deferred until May 1, 2013.

See the statement here.