UK: CFTC Adopts Final Rules On Regulatory And Real-Time Reporting; Extends Effective Date For Dodd-Frank Provisions

Introduction

On December 20, 2011, the US Commodity Futures Trading Commission (the CFTC or Commission) held an open meeting where it approved two final rules and one final order promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Both final rules were adopted with unanimous votes and the order was adopted via seriatim vote the day before the meeting. The two rules address how swap data will be reported to regulators and separately to the public; the order clarifies when Dodd- Frank provisions will become effective.

Summary

The first rule adopted on December 20 establishes recordkeeping requirements and a regulatory reporting regime for the swaps market (the Regulatory Reporting Rule). The second final rule establishes a reporting regime for the public dissemination of swap transaction data in real-time (the Real-Time Rule). Both rules affect swap dealers (SDs), major swap participants (MSPs), swap counterparties that are neither SDs nor MSPs, swap data repositories (SDRs), swap execution facilities (SEFs), designated contract markets (DCMs), and derivatives clearing organizations (DCOs). The Commission was also scheduled to vote on a final order extending the temporary relief which was granted on July 14, 2011 from certain provisions of the Commodity Exchange Act (CEA) that otherwise would have taken effect on July 16, 2011 (i.e., the effective date of Dodd- Frank). However, the Commissioners voted in favor of that order via seriatim on December 19, 2011. The rules have not yet been published in the Federal Register but are available on the Commission's website.¹

Opening Statements by Commissioners

The Commissioners all expressed their support for the two final rules in their opening statements. Commissioners Sommers and O'Malia, who voted against the proposed real-time reporting rule, both explained that many of their concerns with the proposed rule were addressed in the final Real-Time Rule which allowed them to vote in favor of this final rule.

Final Rule on Swap Data Recordkeeping and Reporting Requirements

This final rule will provide the Commission with its first insight into the true size and depth of the swaps market. While the Commission has historically collected data on physical commodity futures and option contracts traded on DCMs and recently finalized a rule requiring certain large swaps traders to report information about their positions,² the Commission has never been able to collect a comprehensive data set regarding the swaps market as a whole. The reporting aspect of the rule divides swap data into two categories: creation data (which includes the primary economic terms and confirmation data), and continuation data (which relates to changes occurring during a swap's lifecycle).

Recordkeeping Requirements.³ The recordkeeping requirements are largely unchanged from the proposed rule. In general, the final rule will require SEFs, DCMs, DCOs, and swap counterparties (including non-SD/MSP counterparties) to keep all records required by certain other rules (which, except for the DCO rule,⁴ have not yet been finalized) in a manner that is readily accessible via real-time electronic access during the life of the swap and for two years thereafter, and in a manner that is retrievable within three business days for two years following that time. The final rule will also require SDRs to maintain all records required by Part 49⁵ for fifteen years. These records must be readily accessible to the SDR and the Commission via real time electronic access for five years following the termination of a swap and in a manner that is retrievable within three business days for ten years thereafter.

Reporting Creation Data.⁶ In an attempt to ensure that regulatory reporting is performed by the entity which has the easiest, fastest, and cheapest access to the data, the Commission changed several aspects of the creation data reporting requirements from the proposal. In the final rule, the SEF or DCM will have sole responsibility for reporting all creation data for any swap execution on a SEF or DCM. This varies from the proposed rule, where swap counterparties were partially responsible for reporting the primary economic terms and DCOs were responsible for reporting all confirmation data for any cleared swap.

The final rule provides different procedures for the regulatory reporting of off-facility swaps depending on whether the swap is: (i) subject to mandatory clearing; (ii) not subject to mandatory clearing where the reporting counterparty is an SD or MSP; or (iii) not subject to mandatory clearing where the reporting counterparty is a non-SD/MSP. In general, the reporting counterparty (as determined by Rule 45.8) is responsible for reporting the primary economic terms to an SDR unless the swap is submitted for clearing (voluntarily or otherwise) within certain reporting deadlines established by the rule. Contrary to the proposed rule, these reporting deadlines differ based on whether the non-reporting counterparty is an SD or MSP (by providing more time for transactions with non-SD/MSP counterparties) and are phased-in so as to be longer during the first year of reporting than the second or third. DCOs are generally tasked with reporting confirmation data, unless the swap is not cleared or not accepted for clearing, in which case the reporting counterparty must fulfill this obligation.

Reporting Continuation Data.⁷ Continuation data reporting is meant to ensure that SDRs have data regarding all changes to the primary economic terms of each swap, including changes to a swap's valuation. The Commission originally proposed requiring continuation data in the form of "lifecycle" data, which would only be reported upon the occurrence of certain events, or "snapshot" data, which would require daily reporting, depending on a swap's asset class. Under the final rule, however, continuation data for any swap may be reported via either the lifecycle or the snapshot reporting method. Continuation data for cleared swaps is reported by the DCO, though SD and MSP reporting counterparties must also report valuation data.

Data Standards.⁸ The Regulatory Reporting Rule provides SDRs with flexibility to use and require a variety of data standards to receive data reported to them. The Commission opted for this method over some requests that there be a uniform reporting format or data standard. The Commission stated that this flexibility is intended to allow a more cost-effective application of evolving data standards.

Selection of SDR.⁹ All data related to a given swap during the life-cycle of the swap must be reported to the same SDR, so the rule sets forth how the SDR for a swap's first report is selected. The SDR for any swap will be selected by whichever party or entity submits the primary economic terms data to an SDR. Therefore, for swaps executed on a SEF or DCM, the SEF or DCM will select the SDR because they will make the first report by reporting the primary economic terms. Even if a party were to report a swap to an SDR before the SEF or DCM, the SDR chosen by a SEF or DCM would be the relevant SDR under the rule.¹⁰ For off-facility swaps, the reporting counterparty makes the first report (unless the swap is accepted for clearing before it is reported by the reporting counterparty and within the reporting deadline for primary economic terms data, in which case the DCO makes the first report).

Unique Identifiers.¹¹ The Regulatory Reporting Rule will require the creation and use of three types of unique identifiers: (i) unique swap identifiers (USIs); (ii) legal entity identifiers (LEIs); and (iii) unique product identifiers (UPIs). The USI will be created through a "first-touch" approach, so that the USI is created by SEFs and DCMs for facility-executed swaps, by SDs and MSPs for off-facility swaps in which they are the reporting counterparty, and by SDRs for off-facility swaps between non-SD/MSP counterparties. The LEI must be issued under, and conform to, ISO Standard 17442 which was developed by the International Organization for Standardization, but the Commission has not yet designated a "utility" to provide market participants with LEIs. Until the LEI utility has been designated, registered entities and swap counterparties must use the counterparty identifier created and assigned by an SDR. The Commission also has not yet developed a UPI designation or classification system. Until such a system is established, registered entities and swap counterparties must use their internal product identifier or a product description used by the SDR.

Allocation Issues.¹² Several commenters to the proposed rule identified potential complications arising from reporting and assigning a USI to swaps entered into by a firm that acts on behalf of several clients and allocates its side of the swap among the several clients. The final Regulatory Reporting Rule addresses these comments by requiring two sets of reports for allocated swaps. First, the reporting entity must report the primary economic terms of the swap to an SDR, identifying the swap as an allocated swap and utilizing the LEI of the agent instead of the LEIs of the individual clients. Within eight hours of execution, the agent must inform the reporting counterparty of the identity of each client who is the actual counterparty. Second, the reporting counterparty must create a new USI for each individual swap resulting from allocation and report the following to the SDR: (i) an indication that the swap is a post-allocation swap; (ii) the USI of the original transaction; (iii) the USI of the post-allocation swap; (iv) the LEI of the actual counterparty; and (v) the LEI of the agent.

Use of Third Parties.¹³ Under the Regulatory Reporting Rule, swap counterparties and registered entities (e.g., SEFs and DCMs) are free to contract with third parties to facilitate regulatory reporting. However, the reporting entity remains fully responsible for reporting swap data in a timely and accurate manner.

Final Rule on Real- Time Reporting of Swap Transaction Data

The Real-Time Rule will require swaps data to be reported to a real-time disseminator as soon as technologically practicable after execution. The real-time disseminator must then publicly disseminate the data as soon as technologically practicable after receiving the data unless a time delay applies. Time delays will apply to block trades, large notional swaps, and swaps without an established minimum block size. Because no swap will initially have a minimum block size, a time delay will initially apply to any swap which requires real-time reporting (i.e., until the block sizes are established).

Transactions Subject to Real-Time Public Dissemination.¹⁴ Swap transactions will need to be reported and publicly disseminated in real-time if they are: (1) executed as an arm's-length transaction between two parties and result in a corresponding change in the market risk position between the two parties; or (2) a termination, assignment, novation, exchange, transfer, amendment, conveyance, or extinguishment of rights or obligations of a swap that changes the pricing of the swap. In order to be reportable, then, initial transactions must create a change in market risk between the parties, and life-cycle events must result in a change of price for the swap.

The Commission noted that this is a change from the proposed rule, which required public reporting of a wider range of swaps. This change is intended to ensure that certain inter-affiliate swaps and life-cycle events are not required to be reported. Specifically, if an inter-affiliate swap merely moves risk within an entity without creating credit exposure to the other party, it would not be required to be reported because it is not an arm's-length transaction and does not result in a change in the market risk between the parties. As an example, the final rule states that a transaction between wholly-owned subsidiaries of the same parent would not need to be publicly disseminated. As one Commissioner noted, however, the rule does not explain how swaps between entities that are partially controlled by the same parent would be treated. Lifecycle events will not have to be reported unless they affect the price of a swap.

Real-Time Reporting Required for Bespoke Swaps.¹⁵ Although many commenters argued that the Commission should not require real-time reporting for uncleared or bespoke swaps, the final rule will require real-time reporting and public dissemination for all swaps as long as they are reportable swaps as defined above. This includes enduser to end-user swaps. While real-time reporting is required of these swaps, the Commission granted certain bespoke swaps and swaps between certain counterparties a longer reporting delay than others, as explained below.

One exception from this requirement relates to off-facility swaps in the "other asset class" (i.e., swaps not in the interest rate, credit, forex, or equity asset classes). For these swaps, realtime reporting will initially only be required for: (i) swaps that reference one of 28 enumerated contracts (which correspond to the Reference Contracts in the final position limits rule); (ii) swaps that are "economically related" to such contracts; and (iii) swaps that reference Brent Crude Oil. The Commission plans to adopt rules regarding real-time reporting for the remaining swaps in the "other asset class" at a later date. Until that time, the Real-Time Rule does not require real-time reporting of such swaps.¹⁶ Time Delays for Public Dissemination.¹⁷ The Real-Time Rule establishes two types of time delays: (1) interim time delays applicable to all swaps (including non-block trades); and (2) time delays which will apply to blocks and large notional off-facility swaps. The Real- Time Rule does not establish the size for block trades (this aspect of the proposed rule will be re-proposed), but does specify the time delays that will apply to block trades and large notional swaps.

Until block sizes are established, all swaps (including nonblocks) will be subject to certain time delays. Once block sizes are established, non-block swaps must be reported and disseminated as soon as technologically practicable. Until block sizes are established, all swaps executed on a SEF or DCM will be subject to a 30 minute dissemination delay during the first year and 15 minutes during the second year. For offfacility swaps, this interim time delay varies based on: (i) whether or not the swap is subject to mandatory clearing; (ii) whether one, both, or none of the counterparties are SDs or MSPs; and (iii) the swap's asset class. The time delays for these off-facility swaps range from 30 minutes to 48 business hours after execution (during the first year after mandatory compliance) depending on these factors. For swaps where at least one counterparty is an SD or MSP, however, the longest delay is 4 hours after execution. These time delays are all reduced during the second year after mandatory compliance. Once block sizes are established, they will be subject to similarly-varying time delays based on the same factors.

Implementation.¹⁸ The final rule sets forth a schedule for phasing-in the reporting requirements, which varies between asset classes, and delays mandatory real-time reporting for reporting counterparties who are non-SD/MSPs for six months. This implementation schedule must be read in conjunction with the time delays set forth above to determine when and how quickly public dissemination is required. For example, during the first year, SEF-executed swaps on interest rates must be publicly disseminated within 30 minutes of execution beginning on the compliance date, SEF-executed swaps on foreign exchange products must be reported within 30 minutes of execution beginning 90 days after the initial compliance date, and offfacility swaps between two non-SD/ MSP counterparties in any asset class must be reported within 48 hours of execution beginning 180 days after the initial compliance date. The Commission published a chart demonstrating the interaction between the time delays and phased implementation of the final rule.¹⁹

Foreign Exchange (Forex) Swaps and Forex Forwards May Be Exempted.²⁰ The final rule clarifies that, if the Treasury Department determines that forex swaps and forex forwards should not be regulated as swaps, they will not be subject to real-time reporting requirements. However, they would not be excluded from regulatory reporting obligations even if the Treasury Department makes such determination.

Reporting Party and Limited Use of Third Parties. For swaps executed on a SEF or DCM, the SEF or DCM will report the swap to an SDR and the swap counterparties have no responsibility or power to control such reporting. This includes off-facility block trades executed pursuant to the rules of a SEF or DCM. For off-facility swaps not executed pursuant to the rules of a SEF or DCM, the Real-Time Rule maintains the proposed hierarchy for determining the reporting party, but also permits the parties to agree that either one should be the reporting party.

The final rule has several limitations on the use of third-party providers for realtime reporting.²¹ For swaps executed on or subject to the rules of a SEF or DCM, the parties cannot opt to use a third-party provider to transmit data to an SDR; instead, the SEF or DCM is solely responsible for reporting such transactions to an SDR. However, SEFs and DCMs may enter into a contractual relationship with third party service providers to transmit transaction data to an SDR. For off-facility swaps, the rule appears to permit parties to use third parties to transmit swap data to an SDR.²² Notably, however, unlike the proposed rule, the final rule explicitly eliminates the ability for third-party providers to act as real-time disseminators. Therefore, SEFs, DCMs, and counterparties can only send data to an SDR for public dissemination (even if they use a third party for transmitting such data to the SDR). Nonetheless, the Commission stated that SDRs can "ensure public dissemination" by contracting with a third-party to "assist in public dissemination."²³

Anonymity of the Parties.²⁴ Many commenters urged the Commission to protect the anonymity of the parties to a swap and prevent trading ahead and other types of manipulation. In response, the Real-Time Rule does not require public dissemination of the actual underlying asset(s) for swaps in the "other" asset class which are not: (i) one of the 28 enumerated contracts described above; (ii) economically related to such contracts; (iii) swaps that reference Brent Crude Oil; or (iv) executed on a SEF or DCM. For all other contracts, including any reportable swap in the interest rate, credit, equity, and forex asset classes, SDRs must publicly disseminate the actual underlying asset(s).

Final Order Regarding the Effective Date for Swap Regulation

On December 19, 2011, the Commission issued an Order amending an earlier order which, among other things, extended the effective date for certain self-effectuating provisions of Dodd- Frank while the Commission and the SEC continued their rulemaking process. The December 19 Order provides temporary exemptive relief by: (1) extending the potential latest expiration date of the earlier exemptive relief from December 31, 2011 to July 16, 2012; and (2) adding provisions to account for the repeal and replacement (as of December 31, 2011) of Part 35 of the CFTC's regulations.

Extension of Relief. On July 14, 2011, the Commission granted exemptive relief from certain provisions of the CEA which would have become effective on July 16, 2011 (Dodd-Frank's general effective date) until December 31, 2011 (the July 14 Order). Regarding provisions of the CEA which reference terms which have yet to be defined by the CFTC and SEC, the December 19 Order re-extends this relief until the earlier of: (i) July 16, 2012; or (ii) the effective date of the applicable final rule defining the relevant terms. Regarding other provisions of the CEA which derive from self-effectuating provisions of Dodd-Frank, the December 19 Order re-extends this relief until the earlier of: (i) July 16, 2012; or (ii) such other compliance date as may be determined by the Commission.

Part 35 Exempt and Excluded Commodities. In the July 14 Order, the Commission stated that transactions in exempt or excluded commodities, which were addressed in Part 35 of the CFTC's regulations,²⁵ and persons offering or entering into them would generally be temporarily exempt from provisions of the CEA, notwithstanding the fact that certain requirements in Part 35 may not have been met.²⁶ Under the July 14 Order, this relief was to expire upon the earlier of: (1) the repeal, withdrawal or replacement of Part 35; or (2) December 31, 2011. In order to ensure that certain markets can continue operating, the December 19 Order re-extends the exemptive relief available under the July 14 Order. Additionally, because the Commission recently promulgated a rule which repealed Part 35 on December 31, 2011,²⁷ the Commission amended the July 14 Order to explicitly incorporate by reference Part 35 to ensure that all transactions fully meeting the requirements of Part 35 prior to December 31, 2011 will continue to be exempted from certain provisions of the CEA.

Applicability to Agricultural Swaps. The recent rule which repealed Part 35 as of December 31, 2011 adds new § 35.1, which generally permits persons to transact agricultural swaps subject to the laws applicable to all other swaps. While the Part 35 in effect prior to December 31, 2011 permitted certain persons to transact exempt and excluded commodities on exempt commercial markets ("ECMs") and exempt boards of trade ("EBOTs"), respectively, the Commission clarified that the December 19 Order does not permit agricultural swaps to transact on ECMs or EBOTs. Instead, only exempt and excluded commodities can continue to trade on ECMs and EBOTs under the new Order.

Footnotes

^{1 Available at http://www.cftc.gov/PressRoom/ Events/opaevent_cftcdoddfrank122011 (last visited Dec. 30, 2011).}

^{2 See Large Trader Reporting for Physical Commodity Swaps, 76 Fed. Reg. 43851 (July 22, 2011).}

^{3 See Regulatory Reporting Rule, pp. 220-223.}

^{4 See Derivatives Clearing Organization General Provisions and Core Principles, 76 Fed. Reg. 69334, 69446 (to be codified at 17 C.F.R. § 39.20) (Nov. 8, 2011).}

^{5 See Swap Data Repositories: Registration Standards, Duties and Core Principles, 76 Fed. Reg. 54538, 54580 (to be codified at 17 C.F.R. § 49.12) (Sept. 1, 2011).}

^{6 See Regulatory Reporting Rule, pp. 224-235.}

^{7 See id. at 235-239.}

^{8 See id. at 114-115.}

^{9 See id. at 261-265.}

^{10 See id. at 261-262.}

^{11 See id. at 73-101.}

^{12 See id. at 77.}

^{13 See id. at 108.}

^{14 See Real-Time Rule, pp. 17-18.}

^{15 See id. at 18-21.}

^{16 See id. at 153.}

^{17 See id. at 215-222.}

^{18 See id. at 146-153.}

^{19 See http://www.cftc.gov/ucm/groups/public/@ newsroom/documents/file/phasein_realtime.pdf (last visited Dec. 30, 2011).}

^{20 See Real-Time Rule, pp. 21-22.}

^{21 None of the restrictions or permissions regarding the use of third parties appear in the actual final rule, but only in the preamble accompanying the rule.}

^{22 The preamble explicitly states that reporting parties to off-facility swaps which are uncleared should be able to use third parties for such services, see Real-Time Rule, p. 55, and later states that "allowing reporting parties to contract with third parties should allay concerns regarding the potential disproportionate cost burden placed on end-users. See id. at 57. However, the rule does not explicitly address the use of third party service providers for bilaterally-executed and voluntarily cleared swaps.}

^{23 See Real-Time Rule, p. 64.}

^{24 See id. at 95-96.}

^{25 Part 35 exempted "swap agreements," from most of the provisions of the CEA if: (1) they were entered into by "eligible swap participants" (ESPs); (2) they were not part of a fungible class of agreements standardized as to their material economic terms; (3) the credit-worthiness of any party having an actual or potential obligation under the swap agreement would have been a material consideration in entering into or determining the terms of the swap agreement, including pricing, cost, or credit enhancement terms; and (4) they were not entered into or traded on a multilateral transaction execution facility. See 17 C.F.R. 35.1 et seq.}

^{26 I.e., the transactions were exempt notwithstanding the fact that: (1) the transaction may be executed on a multilateral transaction execution facility; (2) the transaction may be cleared; (3) persons offering or entering into the transaction may be eligible contract participants as defined in the CEA (prior to the enactment of the Dodd-Frank Act); (4) the transaction may be part of a fungible class of agreements that are standardized as to their material economic terms; and/or (5) no more than one of the parties to the transaction is entering into the transaction in conjunction with its line of business, but is neither an eligible contract participant nor an ESP, and the transaction was not and is not marketed to the public.}

^{27 See Agricultural Swaps, 76 Fed. Reg. 49291 (Aug. 10, 2011).}

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