On May 18, 2012, the Commodity Futures Trading Commission (“CFTC”) adopted final regulations to be codified in 17 C.F.R. Part 46 to implement certain swap data recordkeeping and reporting obligations (“Final Rule”) established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The Final Rule pertains to “pre-enactment swaps,” which are swaps entered into prior to July 21, 2010, the date of enactment of the Dodd-Frank Act, and “transition swaps,” which are swaps entered into on or after July 21, 2010 but prior to the applicable Compliance Date, as described below. Together, the two categories of swaps are referred to as “historical swaps.”

Background

The CFTC previously issued final rules in January 2012 establishing data recordkeeping and reporting requirements that also will become enforceable upon the Compliance Dates discussed below. See 17 C.F.R. Part 45. Those rules generally require the retention and reporting to a swap data repository of certain data relating to terms of a covered swap, both upon creation of the swap and throughout the term of the swap.

In interim final rules issued in October 2010 and December 2010, the CFTC directed all swap counterparties to retain information and data then in existence relating to pre-enactment swaps and transition swaps, respectively. On April 25, 2011, the CFTC issued a Notice of Proposed Rulemaking (“NOPR”) regarding data recordkeeping and reporting for all historical swaps. The Final Rule largely mirrors the text of the proposed rule described in the NOPR.

Effective Date and Compliance Dates

The Final Rule has not yet been published in the Federal Register, but will become effective 60 days after publication. The Final Rule provides three separate Compliance Dates for different categories of swaps and swap market participants.

  • Compliance Date 1: Swap dealers and major swap participants must comply with the requirements in the Final Rule with respect to credit swaps and interest rate swaps no later than 60 days after issuance of the final “products definition” rule further defining the term “swap.” The final products definition rule is expected to be issued in the mid-summer of 2012.
  • Compliance Date 2: Swap dealers and major swap participants must comply with the requirements in the Final Rule with respect to equity swaps, foreign exchange swaps, and other commodity swaps on or before 90 days after Compliance Date 1.
  • Compliance Date 3: Counterparties that are neither swap dealers nor major swap participants must comply with the requirements in the Final Rule with respect to all swaps on or before 90 days after Compliance Date 2, which means that their compliance would not be required until 240 days after issuance of the final products definition rule.  

Recordkeeping for Historical Swaps

The Final Rule provides for differing obligations depending on whether the swap at issue expired or otherwise terminated prior to April 25, 2011 (the date the CFTC issued the NOPR), or continued in existence on or after that date. Moreover, for those swaps that expired or otherwise terminated prior to April 25, 2011, the recordkeeping requirements depend on whether the swap is a pre-enactment swap or a transition swap.

Historical Swaps in existence on or after April 25, 2011. All swap counterparties must keep records of all primary economic terms (“PET”) pertaining to each historical swap that had not terminated or expired as of April 25, 2011, including contract type, start and end dates, price, and other terms as specified in the table appended to the Final Rule. All swap counterparties are also required to retain all confirmations executed with respect to such swaps, all master agreements governing such swaps (including any modifications or amendments), and all credit support agreements (or other similar agreements) relating to such swaps. In addition, as to any historical swap that has not expired or been terminated as of the applicable Compliance Date described above, each counterparty must retain all records in accordance with the ongoing swap recordkeeping requirements in 17 C.F.R. Part 45, which generally includes changes to PET occurring during the term of the swap. Swap dealers and major swap participants must maintain required records in electronic form unless the records were originally created and maintained exclusively in paper form. Non-swap dealers and non-major swap participants may keep records in either electronic or paper form.

Historical Swaps that expired or terminated prior to April 25, 2011. With respect to historical swaps that had expired or otherwise terminated as of April 25, 2011, the data retention requirements in the Final Rule depend on whether the swap is a pre-enactment swap or a transition swap.

  • Pre-enactment Swaps: Each counterparty must retain information and documents that it possessed on or after October 14, 2010.
  • Transition Swaps: Each counterparty must retain information and documents that it possessed on or after December 17, 2010.  

Retrieval and Inspection of Historical Swap Records

Historical Swaps in existence on or after April 25, 2011. All records that are required to be retained must be quickly retrievable. With respect to historical swaps that remained in existence on or after April 25, 2011, swap dealers and major swap participants generally must ensure that each record that is required to be retained be accessible through real-time electronic access throughout the life of the swap and for two years following termination or expiration. While the regulations allow swap dealers and major swap participants to maintain records in paper form if the records were originally created and maintained exclusively in that form, the Final Rule contains no express exception to the requirement of real-time electronic access with respect to records kept in paper form. For the remaining three years of the retention period, the records must be retrievable within three business days. For counterparties that are not swap dealers or major swap participants, each record must be retrievable within five business days throughout the retention period.

All retained records may be inspected by the CFTC, the United States Department of Justice, the Securities and Exchange Commission, or any representative of a prudential regulator as authorized by the CFTC. If requested to do so, a counterparty must produce records to a requesting agency at the counterparty’s expense. Swap dealers and major swap participants must produce records of historical swaps in existence on or after April 25, 2011 in the form requested – electronic, hard copy, or both – by the authorized government agency, unless the requested records were originally created and maintained exclusively in paper form. All records retained by other entities (i.e., non-swap dealers and non-major swap participants) are to be provided in the form in which they are kept.

Historical Swaps that expired or terminated prior to April 25, 2011. Records that are required to be maintained for historical swaps that expired or terminated prior to April 25, 2011 must be retrievable within five business days throughout the life of the swap and for at least five additional years from the final termination of the swap if requested by the CFTC or another governmental entity. All such records are to be provided in the form in which they are maintained. The same retrieval requirements apply to all market participants with regard to historical swaps that expired or otherwise terminated prior to April 25, 2011.

Reporting of Historical Swaps

Similar to the recordkeeping requirements, there are differing reporting obligations depending on whether the swap at issue was terminated or otherwise expired prior to April 25, 2011, or continued in existence on or after that date. For those swaps that terminated or expired prior to April 25, 2011, the reporting requirements differ depending on whether the swap is a pre-enactment swap or a transition swap.

Determining Reporting Counterparties. The method to determine the counterparty responsible for reporting historical swaps to a swap data repository is the same method as set forth in Part 45 for non-historical swaps. The higher-ranked counterparty on the following list is the reporting counterparty: (i) swap dealer, (ii) major swap participant, (iii) financial entity, (iv) other counterparty. We previously published an Energy Regulatory Update discussing the CFTC’s entity definitions accessible here. As is the case under Part 45, if both counterparties are the same type of entity, they must decide between themselves which is the reporting counterparty. However, if both parties are not swap dealers or major swap participants and only one counterparty is a U.S. person, then that counterparty must be the reporting counterparty.

The Final Rule addresses scenarios in which the counterparties to historical swaps changed following the execution of the swap:

  • Historical Swaps in existence as of the applicable Compliance Date: The counterparties to the swap as of the applicable Compliance Date described above shall apply the ranking method discussed above to determine as between themselves the reporting counterparty.
  • Historical Swaps that expired or terminated as of the applicable Compliance Date: The counterparties at the time of expiration or termination shall apply the ranking method discussed above, unless one counterparty was a swap dealer or major swap participant as of the applicable Compliance Date.

All counterparties to historical swaps in existence on or after April 25, 2011 have an obligation to obtain a legal entity identifier, which will be issued by a non-profit organization to be identified by the CFTC. The non-reporting entity must provide the legal entity identifier to the reporting entity.

Historical Swaps in existence on or after April 25, 2011. For historical swaps that had not expired or otherwise terminated as of April 25, 2011, the reporting counterparty is required to report to a swap data repository the PET data, the legal entity identifier of the reporting counterparty, the entity identifier used by the reporting counterparty to identify the non-reporting counterparty, and the internal transaction identifier used to identify the swap. If such swap is uncleared and remains in existence through the Compliance Date applicable to such swap, then the reporting counterparty must report the changes to the original PET data as continuation data under the Part 45 regulations pertaining to ongoing swap reporting requirements. There is no requirement for swap counterparties to report continuation data for historical swaps executed on a Swap Execution Facility or cleared by a Derivatives Clearing Organization because the data will be reported by such facility or organization.

Historical Swaps that expired or terminated prior to April 25, 2011. For historical swaps that expired or terminated prior to April 25, 2011, a counterparty is required to report to a swap data repository no later than the applicable Compliance Date described above, as provided below:

  • Pre-enactment Swaps: Counterparties must report information and documents that the counterparty possessed on or after October 14, 2010.
  • Transition Swaps: Counterparties must report information and documents that the counterparty possessed on or after December 17, 2010. Information may be reported by any method selected by the reporting counterparty.

A reporting counterparty may report any of the information before the Compliance Date if a swap data repository accepting swaps in the asset class is prepared to accept the report.

Click here to link to the Final Rule.