Section 731 of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Commodity Exchange Act (the “CEA”) by adding Section 4s(h), which provides the Commodity Futures Trading Commission (the “CFTC”) with both mandatory and discretionary rulemaking authority to impose business conduct standards on swap dealers (“SDs”) and major swap participants (“MSPs”) in their dealings with counterparties. On February 17, 2012, the CFTC published final external business conduct standards under subpart H of Part 23 of its regulations, requiring compliance with such standards by October 15, 2012.

Nonetheless, since compliance with the external business conduct standards under subpart H is not required until a person is registered with the CFTC as a SD or MSP, as applicable, and since no entity will be required to register as a SD or MSP until December 31, 20121 and February 28, 2013,2 respectively, this October 15 compliance date applies only to persons who voluntarily file an application for registration as a SD or MSP prior to the applicable deadline for submission of such applications. Similarly, with respect to MSPs, the deferred compliance date discussed below (January 1, 2013) applies only to persons who voluntarily file such an application prior to the applicable deadline.

On August 27, 2012, the CFTC published final rules (the “Final Rules”) pursuant to Sections 4s(h), 4s(i) and 8a(5) of the CEA, which, among other things, set forth certain standards for documentation of swap trading relationships between SDs, MSPs, and their counterparties. The compliance date for these swap trading relationship documentation rules is January 1, 2013. In the adopting release accompanying the Final Rules (the “Release”), the CFTC defers the compliance dates for certain provisions of subpart H (the “Deferred Compliance Provisions”) until January 1, 2013 in order to align the compliance dates for the provisions of subpart H that involve documentation with the compliance date for the swap trading relationship documentation rules.

The Deferred Compliance Provisions are:

  • all of the provisions of Section 23.402, which include:
    • rules requiring SDs and MSPs to have written policies and procedures to ensure compliance and prevent evasion under Section 23.402(a);
    • “know your counterparty” rules under Section 23.402(b);
    • true name and owner rules under Section 23.402(c);
    • reasonable reliance on representations rules under Section 23.402(d);
    • manner of disclosure rules under Section 23.402(e);
    • disclosures in a standard format rules under Section 23.402(f);
    • record retention rules under Section 23.402(g);
  • rules requiring confidential treatment of counterparty information under Section 23.410(c);
  • rules requiring verification of counterparty eligibility under Section 23.430;
  • the following provisions of Section 23.431 relating to disclosures of material information:
    • disclosure of material risks and material characteristics of a swap, and of any conflicts of interest that a SD or MSP may have in connection with a swap under Sections 23.431(a); and
    • scenario analysis under Section 23.431(b) [and the associated exception under Section 23.431(c) from this requirement for transactions initiated on designated contract markets or swap execution facilities where the SD or MSP does not know the identity of the counterparty prior to execution];
  • clearing disclosure rules under Section 23.432;
  • the following provisions of Section 23.434 relating to recommendations to counterparties (i.e., institutional suitability):
    • the requirement under Section 23.434(a)(2) that a SD have a reasonable basis to believe that a recommended swap or swap trading strategy is suitable for the counterparty;
    • the safe harbor from this requirement under Section 23.434(b), and the associated provisions of Section 23.434(c) regarding counterparty representations deemed sufficient to satisfy this safe harbor;
  • requirements for SDs acting as advisors to “Special Entities”3 under Section 23.440;
  • requirements for SDs and MSPs acting as counterparties to Special Entities under Section 23.450.

In the Release, the CFTC clarifies that compliance with all other provisions of subpart H will continue to be required by October 15, 2012. However, as noted above, since compliance with the external business conduct standards under subpart H is not required until a person is registered with the CFTC as a SD or MSP, as applicable, and since no entity will be required to register as a SD or MSP until December 31, 2012 and February 28, 2013, respectively, this October 15 compliance date applies only to persons who voluntarily file an application for registration as a SD or MSP prior to the applicable deadline for submission of such applications.