On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”).1 Title VII of the Act requires the Commodities Futures Trading Commission (the “CFTC”) and the Securities and Exchange Commission (the “SEC”) to each adopt an interim final rule for the reporting of swap transactions and security-based swap transactions, respectively, entered into before July 21, 2010, whose terms continued beyond that date (collectively, “pre-enactment unexpired swaps”). The CFTC and SEC have each approved and invited comments on their respective interim final rules (the “CFTC Interim Rule” and the “SEC Interim Rule” and, collectively, the “Interim Rules”) pending the creation of final rules governing the reporting of swaps and security-based swaps and record keeping requirements. Once issued, these final rules will supersede the Interim Rules. The Interim Rules each include an interpretive note concerning ongoing record keeping requirements of the parties to pre-enactment unexpired swaps.

Section 723 of the Act requires that all swaps be reported to a registered swap data repository (an “SDR”) or to the CFTC, if there is no registered SDR that would accept the swap, and amends the Commodities Exchange Act (the “CEA”) to mandate that any swap not accepted for clearing by a derivatives clearing organization (a “DCO”) must be reported to an SDR or the CFTC.2 Similarly, Section 766 of the Act requires that all security-based swaps be reported to a registered security-based swap data repository (an “SBSDR”) or to the SEC, if there is no SBSDR that would accept the security-based swap, and amends the Securities Exchange Act of 1934 (the “Exchange Act”) to mandate that any security-based swap not accepted for clearing by a clearing agency or a DCO be reported to an SBSDR or the SEC. Under these mandates, the Interim Rules seek to promulgate rules for recording pre-enactment unexpired swaps. For the sake of clarity, any references to the CFTC rules and regulations should be understood to refer strictly to swaps and participants therein, and any references to the SEC rules and regulations should likewise be understood to refer strictly to security-based swaps and participants therein.

CFTC Rule 44.02 and Exchange Act Rule 13Aa-2T

The CFTC Interim Rule has been incorporated into the CFTC regulations as a new Part 44.3 The SEC Interim Rule has been adopted under the Exchange Act at Part 240 as Rule 13Aa-2T.4 Rule 44.02 and Rule 13Aa-2T(b), which address the reporting requirements, set forth similar requirements as to what information must be reported, who needs to report this information and the timing of the reporting obligations.  

Rule 44.02(a) and Rule 13A2-2T(b) require the designated counterparty to a pre‑enactment unexpired swap transaction to submit the following information (to a registered SDR or the CFTC, in the case of a swap, or to a registered SBSDR or the SEC, in the case of a security-based swap): (i) a copy of the transaction confirmation, in electronic form (or in written form if no electronic copy exists) and (ii) the time the transaction was executed, if available. Rule 44.02(a)(2) and Rule 13Aa-2T(b)(2) state that, upon request, a counterparty to a pre-enactment unexpired swap transaction must report to the CFTC or the SEC, respectively, any information relating to such transaction in a form prescribed by such agency.  

Rule 44.02(b) and Rule 13A2-2T(c) incorporate the provisions indicating which party must report a pre-enactment unexpired swap. In transactions in which only one counterparty is a swap dealer or a major swap participant, then that party must report.5 If one counterparty is a swap dealer and the other is a major swap participant, then the swap dealer must report. Finally, in other transactions where neither party is a swap dealer or a major swap participant, the counterparties must designate which party will report the pre-enactment unexpired swap.  

Effective Date of Reporting Requirement

The CFTC Interim Rule became effective on October 14, 2010, while the SEC Interim Rule became effective on October 20, 2010. While the reporting provisions of the Act became effective upon effectiveness of the Interim Rules and theoretically already permit the respective agencies to request information regarding pre‑enactment unexpired swaps, there currently are no registered SDRs or SBSDRs to accept swap data and the CFTC and SEC are not yet prepared to accept such data. However, the SEC noted in the release accompanying the SEC Interim Rule that the purpose of making the rule effective immediately was to provide the SEC with the ability to request information on pre‑enactment security‑based swaps immediately.  

Pursuant to the Interim Rules, reporting of pre-enactment unexpired swaps will be required by the earlier of: (i) 60 days following the registration of an appropriate SDR or SBSDR, as applicable, and the commencement of its operations to receive and maintain such data, or (ii) a reporting date to be established by the CFTC or SEC, as applicable, which must be no later than January 12, 2012.  

The CFTC noted in the release accompanying the CFTC Interim Rule that the CFTC Interim Rule should be read to require that all reporting obligations under the Act became effective on the date the Act was enacted and that any counterparty subject to a reporting obligation must retain all data relating to pre-enactment unexpired swaps as of the Act’s enactment date, until such time as the reporting can be made to the designated party.  

While the Interim Rules apply solely to swaps transactions entered into before July 21, 2010, the CFTC and SEC are required under the Act to adopt rules governing the reporting of swap transactions entered into on or after July 21, 2010 within 360 days of the passing of the Act. The CFTC and SEC are also required to adopt rules governing the registration of swap dealers and major swap participants or the maintenance of such data within such timeframe. Retention of Records

The CFTC and SEC were not required to create rules on record retention at this time, but each added an interpretive note to their respective Interim Rules in order to clarify how they expect market participants to enable themselves to comply with these new reporting requirements. In notes to Rule 44.02(a)(1) and (2) and Rule 13A2-2T paragraphs (b)(1) and (2), the CFTC and SEC also require counterparties to pre-enactment unexpired swap transactions to retain all information and documents relating to the terms of the transaction. This information may include, but is not limited to: (i) any information necessary to identify and value the transaction, (ii) the date and time of execution of the transaction, (iii) information relevant to the price of the transaction, (iv) whether the transaction was accepted for clearing by any clearing agency or DCO, (v) any modification to the terms of the transaction and (vi) the final confirmation of the transaction. To satisfy these obligations, counterparties to swap transactions may maintain all records in their existing format.

The CFTC Interim Rule has been incorporated into the CFTC regulations as a new Part 44.3 The SEC Interim Rule has been adopted under the Exchange Act at Part 240 as Rule 13Aa-2T.4 Rule 44.02 and Rule 13Aa-2T(b), which address the reporting requirements, set forth similar requirements as to what information must be reported, who needs to report this information and the timing of the reporting obligations.  

Rule 44.02(a) and Rule 13A2-2T(b) require the designated counterparty to a pre‑enactment unexpired swap transaction to submit the following information (to a registered SDR or the CFTC, in the case of a swap, or to a registered SBSDR or the SEC, in the case of a security-based swap): (i) a copy of the transaction confirmation, in electronic form (or in written form if no electronic copy exists) and (ii) the time the transaction was executed, if available. Rule 44.02(a)(2) and Rule 13Aa-2T(b)(2) state that, upon request, a counterparty to a pre-enactment unexpired swap transaction must report to the CFTC or the SEC, respectively, any information relating to such transaction in a form prescribed by such agency.  

Rule 44.02(b) and Rule 13A2-2T(c) incorporate the provisions indicating which party must report a pre-enactment unexpired swap. In transactions in which only one counterparty is a swap dealer or a major swap participant, then that party must report.5 If one counterparty is a swap dealer and the other is a major swap participant, then the swap dealer must report. Finally, in other transactions where neither party is a swap dealer or a major swap participant, the counterparties must designate which party will report the pre-enactment unexpired swap.  

Effective Date of Reporting Requirement

The CFTC Interim Rule became effective on October 14, 2010, while the SEC Interim Rule became effective on October 20, 2010. While the reporting provisions of the Act became effective upon effectiveness of the Interim Rules and theoretically already permit the respective agencies to request information regarding pre‑enactment unexpired swaps, there currently are no registered SDRs or SBSDRs to accept swap data and the CFTC and SEC are not yet prepared to accept such data. However, the SEC noted in the release accompanying the SEC Interim Rule that the purpose of making the rule effective immediately was to provide the SEC with the ability to request information on pre‑enactment security‑based swaps immediately.  

Pursuant to the Interim Rules, reporting of pre-enactment unexpired swaps will be required by the earlier of: (i) 60 days following the registration of an appropriate SDR or SBSDR, as applicable, and the commencement of its operations to receive and maintain such data, or (ii) a reporting date to be established by the CFTC or SEC, as applicable, which must be no later than January 12, 2012.  

The CFTC noted in the release accompanying the CFTC Interim Rule that the CFTC Interim Rule should be read to require that all reporting obligations under the Act became effective on the date the Act was enacted and that any counterparty subject to a reporting obligation must retain all data relating to pre-enactment unexpired swaps as of the Act’s enactment date, until such time as the reporting can be made to the designated party.  

While the Interim Rules apply solely to swaps transactions entered into before July 21, 2010, the CFTC and SEC are required under the Act to adopt rules governing the reporting of swap transactions entered into on or after July 21, 2010 within 360 days of the passing of the Act. The CFTC and SEC are also required to adopt rules governing the registration of swap dealers and major swap participants or the maintenance of such data within such timeframe.  

Retention of Records

The CFTC and SEC were not required to create rules on record retention at this time, but each added an interpretive note to their respective Interim Rules in order to clarify how they expect market participants to enable themselves to comply with these new reporting requirements. In notes to Rule 44.02(a)(1) and (2) and Rule 13A2-2T paragraphs (b)(1) and (2), the CFTC and SEC also require counterparties to pre-enactment unexpired swap transactions to retain all information and documents relating to the terms of the transaction. This information may include, but is not limited to: (i) any information necessary to identify and value the transaction, (ii) the date and time of execution of the transaction, (iii) information relevant to the price of the transaction, (iv) whether the transaction was accepted for clearing by any clearing agency or DCO, (v) any modification to the terms of the transaction and (vi) the final confirmation of the transaction. To satisfy these obligations, counterparties to swap transactions may maintain all records in their existing format.

In the release accompanying the SEC Interim Rule, the SEC specifically noted that the time of execution of a security-based swap transaction is the point at which the parties became irrevocably bound under applicable law, including by oral agreement over the phone when the parties agree to the material terms. The SEC qualified this by noting that it understands that time of execution is not a data element that is consistently captured with respect to security-based swap transactions.

The SEC further detailed that documentation relevant to the price of the transaction should reflect all information necessary to determine the price, including the quoting convention (for example, the economic spread, expressed as a number of basis points per annum, for CDS transactions, or the LIBOR-based floating rate payment, expressed as a floating rate plus a fixed number of basis points multiplied by the notional amount, for equity or loan total return swaps).