Now that key Dodd-Frank provisions are in place, derivatives
users that qualify as end users should be aware of the provisions
that affect them and take action to comply.
Key Dodd-Frank Act provisions are now in place. Those
provisions that are likely to affect derivatives users that qualify
as "end users" are summarized below. Businesses
that are not "swap dealers" or "major swap
participants" should be aware of these provisions and take all
necessary steps to comply.
To qualify as an end user under Dodd-Frank, an entity cannot be
a swap dealer or major swap participant. To be a commercial
end user, the entity cannot be a financial entity (defined to
include a swap dealer, major swap participant, commodity pool,
private fund, employee benefit plan, or a person engaged in a
banking or financial business), and it must be using swaps to hedge
or mitigate its commercial risk. Only commercial end users
can elect to have their swaps exempt from the clearing requirements
Only "Swaps" Are Covered
Swaps are defined in Dodd-Frank and pursuant to a joint U.S.
Securities and Exchange Commission (SEC) and U.S. Commodity Futures
Trading Commission (CFTC) release issued on July 10, 2012, to
include any agreement, contract or transaction that provides on an
executory basis for the exchange of one or more fixed or contingent
payments based on the value of one or more interest rates,
currencies, commodities, or the occurrence (or non-occurrence) of
an event or contingency or other transfer of financial risk (but
not ownership). (The statutory definition goes on for several
pages, and the joint release runs for close to 600 pages, so if you
have any questions as to whether you are engaged in swap
transactions, contact your regular lawyer or carefully read the
rules and joint release yourself.) Options are included in
the swap definition. Sales for future delivery intended to be
physically settled (certain forward contracts) are not swaps, and
commodity futures contracts and options on such futures are not
Recordkeeping and Reporting
Swaps entered into prior to, and that remained open on,
July 21, 2010, and swaps entered into after July 21, 2010, are
subject to recordkeeping requirements. Records must be
accessible within three business days and must be kept for five
years after the termination of each transaction. Most
reporting will be done by swap dealers and major swap
participants. End users will be able to rely on their swap
dealer or major swap participant counterparties to do the required
reporting, but if their counterparty is another end user, an
agreement will be required as to which end user will be responsible
for the reporting.
Position limit restrictions for swaps, futures and options
become effective on a phased basis later in 2012 and in 2013.
Position limits apply to designated energy and agricultural
commodity products. There are serious penalties for exceeding
position limits, which cannot be exceeded except for transactions
that qualify as bona fide hedges and for which exemptions
have been granted in advance.
Clearing Requirements/Commercial End User
Swaps are required to be "cleared" if a central
clearing organization is willing to accept such swaps for
clearing. Dodd-Frank provides an exception to the clearing
requirement, however, for a commercial end user that is not a
financial entity. Such a commercial end user may elect not to
clear its swaps that are entered into to hedge its "commercial
risk." Swaps that are entered into for purposes that do
not meet the hedging definition, including speculation and
investment, are not exempt from the clearing requirement. A
commercial end user can choose, at its sole discretion, to have its
trades cleared or not cleared.
Public companies are subject to specific Dodd-Frank
requirements. For example, the end user clearing exemption is
only available to a public company if its board of directors (or an
appropriate board committee) has reviewed and approved its swap
transactions as remaining OTC.
End users that want to enter into swaps that are not centrally
cleared can make an annual statement of their intentions to elect
the exception to clear for one or more swaps.
Major changes in the way in which swaps are documented are
already occurring. Regulations will limit the types of
collateral that can be used (and with what
"haircuts"). End users will be asked to make
additional representations to their swap dealers in order to
satisfy new Business Conduct Standards rules applicable to swap
dealers. Tight timetables are likely to be imposed for trade
A senior SEC lawyer has recently encouraged the private equity and hedge fund communities to consider whether certain practices of private fund managers could subject these firms to SEC registration as broker-dealers.
In November 2012, the U.S. District Court for the Eastern District of New York preliminarily approved a settlement agreement in the In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation.