Despite a CFTC announcement that firms will not be required to register as swap dealers until January 1, other new rules governing information collection and disclosure may leave some of their clients temporarily unable to trade after that date.
Intended to make the OTC swaps market more transparent, the new external business conduct regulations may hurt market participants more than they help them. By requiring swap dealers and major swap participants to collect information about their customers, check whether they are eligible to enter trades and ask them to affirm that they understand the risk involved, the rules impose a significant burden that firms may not be ready shoulder by the compliance date. Because the CFTC only finalized swap definitions on August 13, dealers have only had several weeks to begin amending existing swaps documentation in order to comply with the rules.
If a broker is unable to collect and disclose the required information by January 1, its clients will be barred from trading until it can do so. Adding insult to injury, the disclosures may do little to benefit counterparties.
“They figure they could negotiate all this disclosure on their own, and a lot of this is overkill and extra cost that is going to get passed on to them,” says a U.S.-based lawyer who claims to have worked with buy-side firms on the issue.