Last week the Commodity Futures Trading Commission (“CFTC”) issued a series of no-action letters – 11 in all – that address a range of Dodd-Frank regulatory requirements applicable to swap dealers and major swap participants (“Swap Entities”). The letters preceded the July 1, 2013 effectiveness of several related rules and regulations, including those governing Swap Entity documentation, swap reporting, certain business conduct rules and swap portfolio reconciliation.
Although the no-action letters most directly affect obligations imposed on Swap Entities, they are also relevant to other swap market participants, as they govern several aspects of how Swap Entities must deal with their counterparties. Three of the letters, described in the first three sections below, may be of particular interest to certain investment funds and managers; non-US counterparties that deal with Swap Entities may find of particular interest the fourth letter described below.
Before turning to the no-action letters themselves, we note the interplay between the letters and the ISDA March 2013 Dodd-Frank Protocol (the “2013 Protocol”). The 2013 Protocol, which is distinct from the ISDA Dodd-Frank protocol published in August 2012, gives Swap Entities and their counterparties a means of addressing, in a documentation-efficient manner, a number of regulatory requirements that are scheduled to come into effect on July 1, 2013; and the letters provide no-action relief from some, but not all, of these requirements. Because the no-action letters are tailored in their application, they do not represent a general delay in the implementation of the requirements that motivated the 2013 Protocol.
Our discussion of last week’s no-action letters is organized by subject matter as follows:
- Trading Relationships Limited to Foreign Exchange Transactions
- Foreign Exchange Prime Brokerage
- Intended-To-Be-Cleared Swaps
- Miscellaneous Reporting Obligations
- Swap Portfolio Reconciliation Floor Trader Activities
Trading Relationships Limited to Foreign Exchange Transactions
Letter 13-38 (June 27, 2013)See http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-38.pdfCFTC Regulation 23.504 sets out the CFTC’s requirements for swap trading relationship documentation used by Swap Entities (“STRD Rule”). Following a series of extensions, the STRD Rule comes into effect today, July 1, 2013. This letter provides no-action relief that effectively extends the compliance deadline in the limited case of trading relationships where the only swap transactions are (i) foreign exchange transactions that are swaps and (ii) physically-settled foreign exchange forwards and swap agreements that have been exempted from the definition of swap by the U.S. Treasury Secretary (collectively, “Covered FX Transactions”). Importantly, the no-action relief applies only where the Swap Entity and the counterparty in question do not currently trade under an ISDA Master Agreement or similar documentation – i.e., in circumstances where compliance with the STRD Rule presents particular challenges because of the absence of a master agreement. In addition, as between any Swap Entity and one of its counterparties,1 the no-action relief is time-limited and conditioned as follows:
- September 1, 2013: for Swap Entity counterparties that are “active funds”2
- December 31, 2013: for all other Swap Entity counterparties
- the Swap Entity has established and is maintaining (as distinguished from complying with) the written policies and procedures required under the STRD Rule;
- the only swaps that are in effect between the Swap Entity and the counterparty as of June 27, 2013 are Covered FX Transactions;
- from June 27, 2013 until the expiration of the no-action relief, the Swap Entity only enters into swaps with the counterparty that are Covered FX Transactions; and
- as of June 27, 2013, the Covered FX Transactions in effect between the Swap Entity and the counterparty are not governed by relationship documentation that is, or is substantially similar to, an ISDA Master Agreement.
Foreign Exchange Prime Brokerage
Letter 13-39 (June 27, 2013)See http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-39.pdfThis letter provides swap dealers with no-action relief from certain of the CFTC’s business conduct standards for Swap Entities in their dealings with counterparties (“External BCS”) in the context of foreign exchange intermediated prime brokerage arrangements. This relief follows earlier no-action relief (Letter 13-11, dated April 30, 2013) addressing FX prime brokerage arrangements in the context of which swap dealers and their counterparty customers execute Covered FX Transactions other than those subject to clearing. The earlier letter provided no-action relief where responsibility for complying with External BCS rules is allocated between a swap dealer acting as primer broker for a Covered FX Transaction and a swap dealer acting as executing broker for the transaction. The new letter effectively extends the no-action relief to circumstances where an introducing broker (“IB”) or futures commission merchant (“FCM”) registered with the CFTC acts as intermediary in the Covered FX Transaction between the counterparty and the executing broker. The new letter permits certain External BCS responsibilities to be allocated to the IB or FCM that serves as intermediary (in light of the executing broker not knowing the counterparty’s identity). The relief in both letters is subject to numerous conditions related to the arrangements among the swap dealer that serves as prime broker, the swap dealer that serves as executing broker, the counterparty and, in the case of the more recent letter, the IB or FCM that serves as intermediary.
Letter 13-33 (June 26, 2013)See http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-33.pdfThis letter provides tailored no-action relief to Swap Entities from aspects of both the STRD Rule and the External BCS rules. The CFTC’s staff acknowledged in the letter that full application of the STRD Rule and External BCS rules would be inappropriate for swaps that are not executed on a swap execution facility (SEF) or designated contract market (DCM), but (i) are executed without the Swap Entity knowing the identity of the counterparty, in some instances, and (ii) intended to be submitted for clearing contemporaneously with execution, in all instances (collectively, “ITBC Swaps”). One context specifically addressed in the letter is ITBC Swaps arising when an asset manager executes a single swap with the intention of allocating it to multiple accounts under its management. Thus, in the context of Swap Entities entering into ITBC swaps, the letter provides no-action relief (i) from the STRD Rule and certain specified External BCS requirements (e.g., certain know-your-customer and notice requirements) when the Swap Entity does not know the identity of its counterparty and (ii) from the STRD Rule even when the Swap Entity knows the identity of its counterparty, subject in each case to certain detailed conditions (including the presence of fallback arrangements should a given ITBC Swap fail to be accepted for clearing as intended).
Miscellaneous Reporting Obligations
Letter 13-41 (June 28, 2013) – Reporting Information Related to Certain Non-U.S. Counterparties See http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-41.pdfThis letter provides reporting parties under Parts 20, 45 and 46 of the CFTC’s regulations with time-limited no-action relief from requirements to report certain identifying information regarding swap counterparties in specific non-U.S. jurisdictions. The letter was sought due to concern that compliance with the CFTC reporting requirements would violate statutory or regulatory prohibitions in those jurisdictions.3 The letter addresses Legal Entity Identifiers, other identifying swap data fields pursuant to Parts 45 and 46 and large swap trader counterparty identification information pursuant to Part 20. To avail themselves of the relief, reporting parties must first meet specific criteria set forth in the letter, and must also comply with certain conditions attached to the relief (including formally requesting written guidance from foreign regulators). The no-action letter effectively permits reporting parties to fulfill their CFTC reporting obligations while acknowledging privacy, secrecy and blocking laws in certain non-U.S. jurisdictions. The relief extends previous no-action relief (Letter 12-46, dated December 7, 2012); it will expire no later than June 30, 2014.
Letter 13-32 (June 26, 2013) – Annual Reports of Swap Dealer Compliance OfficersSee http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-32.pdfThis letter provides certain swap dealers with time-limited no-action relief in respect of the requirement that chief compliance officers of such swap dealers prepare and submit an Annual Report, pursuant to CFTC Regulation 3.3. The no-action relief is applicable to all swap dealers that: (1) are not registrants of the SEC or regulated by a U.S. prudential regulator; and (2) ended their fiscal year on March 31, 2013. The letter enumerates the subjects that must be addressed in the Annual Report of such firms for the fiscal year that ended on March 31, 2013. The letter also provides no-action relief concerning the certification that a chief compliance officer must execute with respect to the Annual Report.
Letter 13-34 (June 26, 2013) – Reporting Valuation DataSee http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-34.pdfThis letter extends time-limited no-action relief to Swap Entities from the obligation to report valuation data for cleared swaps as required by § 45.4(b)(2)(ii) of the CFTC’s regulations. The relief was sought because of concerns that market participants do not currently have the necessary communications connectivity to report valuation data as required. The no-action relief applies to: (i) all Swap Entities that are reporting counterparties under regulation 45.8, for purposes of regulation 45.4(b)(2)(ii), and (ii) all cleared swaps for which the Swap Entity has the obligation to report valuation data under regulation 45.4(b)(2)(ii). The no-action relief expires on June 30, 2014.
Letter 13-35 (June 27, 2013) – Reporting Bespoke or Complex SwapsSee http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-35.pdfThis letter grants time-limited no-action relief, for bespoke or complex swaps,4 from certain reporting obligations under Part 43 and Part 45 of the CFTC’s regulations. The no-action relief effectively extends a number of elements of no-action relief previously granted (Letter 12-39, dated November 30, 2012). The letter includes discussion of on-going industry efforts to improve the types of data reportable through use of Financial products Markup Language (FpML). For bespoke or complex swaps, the letter provides no-action relief where (1) a reporting party fails to report certain enumerated data fields otherwise required by Part 43, or (2) a reporting counterparty fails to report certain enumerated data fields otherwise required by Part 45. In addition, for bespoke or complex swaps, the letter provides no-action relief from the reporting of the “any other term(s)” field as required by Part 45. Also, for bespoke or complex swaps that are uncleared inter-affiliate swaps, the letter provides no-action relief from certain confirmation data reporting obligations under Part 45. The no-action relief will expire on September 30, 2013.
Letter 13-36 (June 27, 2013) – Reporting CDS Clearing-Related SwapsSee http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-36.pdfThis letter provides an extension of time-limited no-action relief to Swap Entities from the obligation to report swap data under part 45 of the Commission’s regulations for cleared credit default swaps ("CDS") that are entered into pursuant to a derivatives clearing organization’s (“DCO”) rules related to its price submission process for determining end-of-day settlement prices for cleared CDS ("CDS Clearing-Related Swaps"). The no-action relief applies to any Swap Entity in respect of its failure to comply with its obligations to report swap data required under part 45, for CDS Clearing-Related Swaps. The no-action relief is subject to, among others, the following conditions: (i) the reporting counterparty, as defined in part 45, must be a clearing member of a DCO that is eligible to clear CDS indices and must participate in that DCO’s CDS Settlement Price Process, and (ii) the no-action relief will apply only to CDS Clearing-Related Swaps arising from, or entered into pursuant to, a DCO’s Settlement Price Process, as required by the DCO’s rules and procedures. The no-action relief expires on December 31, 2013.
Swap Portfolio Reconciliation
Letter 13-40 (June 27, 2013) – Time-Limited General ReliefSee http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-40.pdfThis letter provides time-limited no-action relief with respect to the portfolio reconciliation requirements imposed on Swap Entities pursuant to Commission regulation § 23.502. The relief was granted because of unforeseen delays in the development of the market-wide operational infrastructure needed for an efficient portfolio reconciliation process. The relief expires August 23, 2013.
Letter 13-31 (June 26, 2013) – Excluded Data FieldsSee http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-31.pdfThis letter provides no-action relief to Swap Entities who omit certain "Excluded Data Fields" (specified in the letter) from the portfolio reconciliation process required under Regulation 23.502. Generally speaking, the “Excluded Data Fields” (e.g., whether a swap will be allocated) do not bear significantly on the determination of swap valuations. Floor Trader Activities
Letter 13-37 (June 27, 2013)See http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-37.pdfThis letter provides time-limited no-action relief for entities engaging in floor trader activities that fail to include, in their calculation of the aggregate gross notional amount of swaps connected with their swap dealing activity for purposes of the de minimis exception from swap dealer registration set forth in CFTC Regulation 1.3(ggg)(4), a swap that is submitted for clearing to a registered derivatives clearing organization, provided that: (1) the entity does not have a registered swap dealer affiliate; (2) the entity entered into the swap using proprietary funds for its own account; and (3) the entity complies with the requirements set forth in Commission Regulations 1.3(ggg)(6)(iv)(D)-(H). To rely on the relief provided in the no-action letter, a person must file a claim prior to July 1, 2013. The letter extends the time-limited relief previously provided (Letter No. 12-60, dated December 19, 2012). The relief expires on the compliance date for the CFTC’s SEF rules (October 2, 2013).
If you have any questions regarding this update, please contact the Sidley lawyer with whom you usually work.
1Other than another Swap Entity, as the letter does not apply to trading relationships between two Swap Entities.
2Any private fund other than a third-party subaccount that executes 200 or more swaps (disregarding security-based swaps) per month based on an average over the 12 months. Note that the 200 swaps criterion applies on a per fund basis and is not determined on an aggregate basis at the manager level. A “third-party subaccount” is any account that is managed by an investment manager that is independent of and unaffiliated with the account’s beneficial owner or sponsor, and is responsible for the documentation necessary for the account’s beneficial owner to clear swaps.
3France, Korea, Luxembourg, People’s Republic of China, Switzerland, Taiwan, Belgium, India, Algeria, Singapore, Bahrain, Argentina, Hungary, Samoa, Austria and Pakistan.
4Swaps that meet all of the following characteristics: (a) not listed for trading on a designated contract market (DCM); (b) not available to be traded on a swap execution facility (SEF); (c) not eligible to be cleared by a derivatives clearing organization (DCO); (d) not eligible to be confirmed through an electronic matching confirmation system; and (e) not represented in Financial products Markup Language (FpML).
Sidley’s derivatives lawyers in numerous worldwide offices advise clients on a broad range of domestic and international derivatives transactions involving swaps, commodity futures contracts and options. Our clients, located in the U.S. and outside the U.S., include commercial banks, investment banks, insurance companies, hedge funds and mutual funds and their advisers, commodity and options exchanges, clearing organizations and other participants in the OTC and exchange-traded derivatives markets. In serving our derivatives clients, our internationally-based group utilizes the extensive experience of lawyers in Sidley’s other practice areas, including tax, banking, insurance, investment funds, litigation, bankruptcy, employee benefits, securitization and financial regulatory practices. We act for our clients in a wide variety of settings, including initial transaction and product structuring, negotiation and execution; post-trade operation, modification, work-out, dispute resolution, remedies and recovery; practice before regulatory authorities; and general consultation.
To receive Sidley updates via email, please click here.
This Sidley update has been prepared by Sidley Austin LLP for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers.
Attorney Advertising - For purposes of compliance with New York State Bar rules, our headquarters are Sidley Austin LLP, 787 Seventh Avenue, New York, NY 10019, 212.839.5300 and One South Dearborn, Chicago, IL 60603, 312.853.7000. Prior results do not guarantee a similar outcome.