On November 20, 2012, the International Swaps and Derivatives Association ("ISDA") requested no-action relief from CFTC Rules 23.502 and 23.504 on behalf of its members that have obligations under such rules. In its request ISDA seeks confirmation that the CFTC's Division of Swap Dealer and Intermediary Oversight will not recommend enforcement action against swap dealers ("SDs") or major swap participants ("MSPs") for failure to comply with Rule 23.502 or Rule 23.504 prior to July 1, 2013.

Rule 23.502 contains swap confirmation, portfolio reconciliation, and portfolio compression requirements for SDs and MSPs. Specifically, the portfolio reconciliation requirements of the rule become effective in two stages: upon registration for SDs and MSPs and mid-March 2013 for others. Rule 23.504 requires SDs and MSPs to enter into Swap Trading Relationship Documentation ("STRD") with provisions governing, among other things, valuation and dispute resolution and to put in place policies and procedures to ensure the SD/MSP enters into STRD prior to or contemporaneously with the entering into of a swap. The STRD requirement is mandatory for swaps among SDs and MSPs and swaps between SDs/MSPs and financial entities; other counterparties may request such documentation from SDs and MSPs. The current STRD compliance dates are January 1, 2013, April 1, 2013, and July 1, 2013 depending on the counterparty that the SD or MSP faces.

According to ISDA, market participants that must comply with the rules face substantial difficulties in meeting the requirements of the rules by the compliance dates. For example, ISDA noted that present portfolio reconciliation requires comparison of not more than 18 data fields, applies only to collateralized transactions, and does not apply to interaffiliate trades. By comparison, the new rule significantly expands the number of data fields, applies to both collateralized and uncollateralized trades, and applies to interaffiliate trades. In ISDA's view there is not sufficient time for SDs/MSPs to comply with the new expansive reconciliation requirements by the current deadline and suggest that July 1, 2013, is a more realistic, yet still demanding, target. With respect to Rule 23.504, ISDA noted that ISDA and its members are working on a protocol for industry-wide use that will amend swap agreements to comply with the requirements of Rule 23.504. ISDA explained that it needs additional time to successfully complete the protocol, allowing time for discussions with members and for the market to absorb recently published ISDA protocols that address other aspects of the Dodd-Frank Act. ISDA noted that the protocol will also help facilitate certain Rule 23.502 requirements and thus necessitates a common compliance date for both rules.

Derivatives Insight