INTRODUCTION

The CFTC just released (less than 7 hours before the deadline) CFTC Letter No. 13-10 providing no action relief from the reporting requirements of Parts 43, 45, and 46 for non-swap dealer, non-major swap participant counterparties. By our count, there are now nine different reporting deadlines.

As an introductory item, non-swap dealer banks or other financial entities that have reporting obligations (such as hedge funds or insurance companies) should all be aware that the swap reporting requirements for new interest rate swaps and credit swaps begins April 10, 2013.

AN OVERVIEW OF LETTER 13-10

The extent and timing of the relief provided by CFTC Letter 13-10 is a function of several factors:

  •  The classification of the counterparty as a financial entity (as defined under Section 2(h)(7)(C)(i)  of the Commodity Exchange Act) 
  • The asset class of the swap - foreign exchange*, interest rate, credit, equity  and other commodity - that is subject to the reporting requirement
  • The particular type of reporting obligation (Part 43 real time reporting, Part 45 "regular" reporting, Part 46 historical swap reporting)
  • The "new" compliance date

* CFTC Letter No. 13-10 uses the term "foreign exchange swaps" (which is a defined term in §1a(25) of the CEA) as one of the asset classes. We assume that this is referring to all "foreign exchange transactions" that fall under the reporting requirements, inclusivie of foreign exchange swaps and foreign exchange forwards that have been excluded from the definition of a "swap" pursuant to the determination by the Secretary of the Treasury. The final rule release for Part 45 uses the term "foreign exchange transactions."

There were also, of course, certain policy reasons offered in support of the relief.  So, put another way, CFTC  Letter 13-10 can be thought of as consisting of answers to the following questions:

Who is the reporting counterparty?

What type of swap is being reported?

Where in the CFTC's rulebook can the particular reporting obligation be found?

When do the reporting obligations become effective under the deferred compliance schedule?

Why was the relief issued?

To help you make sense of it all, we have developed the following - "The Who, What, Where, When and Why" Table for CFTC Letter 13-10.

Click here to view table.

And, what is the WHY?

The CFTC staff acknowledged that the development of swap data reporting systems has encountered more technological and operational challenges than expected and that reporting compliance has been more difficult for equity swaps, FX swaps, and other commodity swaps. However, the CFTC staff claimed that financial entities (such as non-swap dealer banks) were more likely to have pre-existing technological capability to develop swap reporting systems.

NO RELIEF FROM RECORDKEEPING REQUIREMENTS

CFTC Letter 13-10 did not afford any relief from the recordkeeping requirements under Parts 43, 45 or 46 of the CFTC rules.

And, as a practical item, since Part 45 recordkeeping obligations begin April 10, 2013, non-swap dealer, non-major swap participant counterparties must obtain a CFTC Interim Compliance Identifier by April 10, 2013 (they can do so by going to www.ciciutility.org). 

 AND, FINALLY, WHO IS A FINANCIAL ENTITY?

A "financial entity" has the meaning given to it in Section 2(h)(7)(C)(i) of the Commodity Exchange Act.  By way of non-limiting example, that statutory definition certainly covers banks, insurance companies and hedge funds.  So, it is very clear...for some market participants. 

But, what about a subsidiary of a commercial holding company that manages risk on behalf of the entire commercial, non-financial enterprise by entering into hedging transactions with other non-swap dealers, as well as non-swap dealers? Is that type of "risk management subsidiary" a financial entity or not?  Is its risk management an activity that is "financial in nature under section 4(k) of the Bank Holding Company Act"? How should that type of a risk management subsidiary apply the deadlines in CFTC Letter 13-10?

That question was not addressed by the relief in CFTC Letter 13-10, which can be found here.