The Commodity Futures Trading Commission (CFTC) on December 20, 2011 finalized two rules related to swap data reporting, recordkeeping and public dissemination under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). The CFTC has also finalized its extension of temporary exemptive relief for certain swap regulatory requirements.
Real-Time Public Reporting of Swap Transaction Data
Section 727 of the Dodd-Frank Act added new Section 2(a)(13) to the Commodity Exchange Act (CEA), which requires that the CFTC adopt rules to implement a real-time public reporting regime for swap transaction and pricing data. The CFTC has now adopted final rules (Public Reporting Rules) implementing this statutory requirement.1
Under the Public Reporting Rules, transaction and pricing data must be reported to the appropriate swap data repository (SDR), when registered and operational, for (1) any executed swap that is an arm’s-length transaction between two parties that results in a corres-ponding change in the market risk position between such parties, and (2) any termination, assignment, novation, exchange, transfer, amendment, conveyance, or extinguishing of rights or obligations of a swap that changes the pricing of such swap. As such, internal swaps between wholly owned subsidiaries of the same parent and swaps providing portfolio compres-sion, among others, would not be required to be reported under the Public Reporting Rules.
Data on swaps meeting either of the above two criteria must be reported whether the swaps are executed on a regulated trading platform (such as a swap execution facility (SEF), a designated contract market (DCM)), or bilaterally (also referred to as off-facility). For swaps executed on an SEF or DCM, the SEF or DCM must transmit the relevant data to an SDR as soon as technologically practicable after execution.2 In off-facility swap transac-tions, the “reporting party” is responsible for reporting the relevant data to an SDR as soon as technologically practicable after execution. The responsibility for reporting off-facility swaps is as follows:
- If only one party is a swap dealer (SD) or major swap participant (MSP), the SD or MSP is the reporting party.
- If one party is an SD and the other party is an MSP, the SD is the reporting party.
- If both parties are SDs, the SDs must designate which of the two will be the reporting party.
- If both parties are MSPs, the MSPs must designate which of the two will be the reporting party.
- If neither party is an SD or MSP, the parties must designate which of the two (or its agent) will be the reporting party. 3
SDRs are responsible for publicly disseminating the swap transaction and pricing data that they receive from this process as soon as technologically practicable after such data is received, subject to certain provisions and time delays discussed below that are designed to protect market participant anonymity and liquidity.
No data that identifies or facilitates the identification of a party to a swap will be publicly available. However, parties reporting swap data to an SDR must include an actual description of the underlying assets. Such information on the underlying assets will be publicly disseminated for all publicly reportable swap transactions in the interest rate, credit default, equity, and foreign exchange asset classes. With regard to swaps with other underlying commodity assets, the information on the underlying assets will be publicly disseminated for publicly reportable swap transactions involving any of 29 physical commodity contracts — the 28 “enumerated physical commodity contracts” identified in the CFTC’s recently finalized position limits rules4 plus Brent Crude Oil — and publicly reportable swap transactions economically related to one of those physical commodity contracts.
The Public Reporting Rules also place caps, under certain circumstances, on the notional or principal amount of a swap transaction that will be made publicly available. Such caps act to mask from public view the actual size of a transaction above the threshold set by the applicable cap. For interest rate swaps, the amount publicly disseminated for swaps with a term: from zero to two years is capped at $250 million; greater than two years but less than or equal to ten years is capped at $100 million; and greater than ten years is capped at $75 million. With respect to credit default swaps, the cap is set at $100 million. For equity swaps, the cap is set at $250 million. For foreign exchange swaps, the cap is set at $250 million. For other commodity swaps, the cap is set at $25 million.5
The time delay between execution and public dissemination of transaction and pricing data will depend on a number of factors, including the underlying assets, the type of market participant, and the type of execution. Delays during the first year the Public Reporting Rules are in effect will vary from 30 minutes to 48 business hours, but such delays are set to decrease after the first year the Public Reporting Rules are effective.
Compliance dates for the Public Reporting Rules are staggered according to applicable type of market participant and underlying asset. The earliest compliance date is July 16, 2012, when all SEFs, DCMs, SDs and MSPs will be required to start reporting swap transaction data with respect to interest rate and credit default swaps. Those swaps include transactions where only one of the parties is an SD or MSP. Reporting by these same entities on swaps on the remaining types of underlying assets will commence 90 days later. A further 90 days after the second compliance date, reporting by remaining market participants will begin with respect to swaps on underlying assets in any of the five asset classes.
The Public Reporting Rules will have two consequences for asset managers. Swap position data will be publicly available on an anonymous basis for all market participants, including mutual funds, private funds, and separately managed accounts, whereas none of this data was previously available to the public. In addition, regulators such as the CFTC will have access to swap data for market participants on a named-basis. This will allow the CFTC, for example, to aggregate market participants’ swap positions with their on-exchange futures and options positions for position limit com-pliance surveillance purposes. In addition, in any instance where an asset manager is managing a fund or account engaging in off-facility swaps, there may be a narrow set of instances where the asset manager must report the necessary swap data to an SDR or come to an agreement with its swap counterparty as to which entity will do so.
Swap Data Recordkeeping and Reporting Content Requirements
In addition to finalizing rules regarding what swaps must be reported and by whom, the CFTC approved new rules implementing reporting content and record-keeping requirements for certain participants and institutions involved in swap transactions (SDR Report-ing Rules and SDR Recordkeeping Rules, respectively).6
SDR Reporting Requirements The SDR Reporting Rules delineate what swap creation and swap continuation data counterparties must report to an SDR.7 Swap creation data encompasses the primary economic terms (PET) and confirmation data for each swap. Swap continuation data captures any changes to the valuation or PET data of the swap during its existence, as well as all “life cycle event” data or “state data” depending on the reporting method utilized by the reporting party.8
For swaps executed on an SEF or DCM, the SEF or DCM will be required to report the necessary swap creation data to an SDR. Likewise, DCOs that accept an off-facility swap for clearing within the PET data deadline must report the required swap creation data to the appropriate SDR.9 For off-facility swaps that are subject to the mandatory reporting requirement but not accepted for clearing by a DCO, one of the counter-parties must act as the reporting counterparty. This determination is based on the relative status of the counterparties, and follows the same hierarchy as delineated in the Reporting Rules above.
In order to reduce the potential reporting burden on smaller swap participants, non-SD/MSP counterparties — the category for most, if not all, mutual funds, private funds, and separately managed accounts — are only required to report data to SDRs in limited circums-tances. When a swap is executed between non-SD/MSP counterparties on an SEF or DCM, neither counterparty will have any reporting obligations. Similarly, if the swap is executed off-facility but accepted for clearance by a DCO within the deadline for the non-SD/MSP reporting counterparty to submit PET data to an SDR, the DCO will assume the reporting obligations of the non-SD/MSP reporting counterparty. When a DCO accepts an off-facility swap for clearing after the PET deadline, the DCO will be required to provide the confirmation data to an SDR. However, when the swap is executed on an SEF or DCM but is not cleared by a DCO, the non-SD/MSP reporting counterparty will be required to provide continuation data to an SDR for the life of the swap. Finally, where one counterparty is a foreign SD/MSP, the domestic non-SD/MSP counter-party has no obligation to report creation or continua-tion data to an SDR. Although it is possible that a mutual fund, private fund, or separately managed account could qualify as an MSP, it is anticipated that most, if not all, of such market participants will benefit from these aspects of the SDR Reporting Rules.
Under the SDR Recordkeeping Rules, each SEF, DCM, DCO, SD, and MSP must maintain “full, complete, and systematic” records of its respective activities related to swap transactions.10 Likewise, all non-SD/MSP counterparties must maintain similar records for any swaps to which they are a counterparty.
Parties must retain those records for the duration of the swap and for a period of five years following its termi-nation. SEFs, DCMs, DCOs, SDs, and MSPs must maintain those records in a format prescribed by the CFTC, and be capable of retrieving such records within three business days during the duration of the swap and for two years following its expiration. Non-SD/MSP counterparties must be able to retrieve their records within five business days for the entire retention period. The CFTC will have real-time access to the records in an electronic format during the life of a swap and for five years after its termination.11
SEFs, DCMs, DCOs, SDs, MSPs and SDRs will be required to comply with the SDR Reporting Rules and SDR Recordkeeping Rules with respect to interest rate swaps and credit default swaps on July 16, 2012, or 60 days after the CFTC publishes definitions for “swap,” “swap dealer,” and “major swap participant,” whichever is later. The same entities will be required to comply with the SDR Reporting Rules and SDR Recordkeeping Rules with respect to swaps on all asset classes 90 days thereafter. Non-SD/MSP counterparties will be required to comply 180 days after July 16, 2012, or 240 days after the CFTC publishes definitions for “swap,” “swap dealer,” and “major swap participant,” whichever is later.
Extension of Exemptive Relief from Swap Regulatory Requirements
On December 19, 2011, the CFTC issued a final order (Final Order)12 extending the temporary exemptive relief the CFTC had granted on July 14, 2011 (July 14 Order)13 from certain swap regulatory requirements under the CEA that otherwise would have taken effect on July 16, 2011. The Final Order extends the potential latest expiration date of the July 14 Order from December 31, 2011 to July 16, 2012 and adds provisions to account for the repeal and replacement of Part 35 of the CFTC’s Regulations (Part 35).14
With respect to the provisions of the Dodd-Frank Act that are self-effectuating (i.e., do not require a rulemak-ing) and that reference one or more of the terms for which the CFTC and the Securities and Exchange Commission are required jointly to provide further definition (e.g., “swap,” “swap dealer,” “major swap participant,” “eligible contract participant” and “security-based major swap participant”), the Final Order extends the exemptive relief provided in the July 14 Order until the earlier of (i) the effective date of the applicable final rule defining the relevant term re-ferenced in the provision, or (ii) July 16, 2012.
With respect to any agreement, contract or transaction in a non-agricultural commodity that was exempt from the CFTC’s regulatory oversight prior to the enactment of the Dodd-Frank Act (e.g., financial, energy and metals commodity contracts), which complies with Part 35 as in effect prior to December 31, 2011, the Final Order extends the exemptive relief provided in the July 14 Order until the earlier of (i) July 16, 2012, or (ii) such other compliance date as may be determined by the CFTC. This is notwithstanding that the agreement, contract or transaction may not satisfy certain requirements of Part 35.15