We previously reported on the CFTC’s Interim Final Rule for reporting Pre-enactment Swap Transactions. Since that time, the text of the CFTC Rule 44.00 has been published in the Federal Register and is immediately effective.

Must I Report a Swap or Preserve Data?

We have been asked by our clients who use swap transactions for hedging purposes whether they need to report the transaction or preserve data as set forth in the rule. The rule provides:

  • with respect to a swap in which only one counterparty is a swap dealer or major swap participant, that entity is responsible for reporting the swap;
  • with respect to a swap in which one counterparty is a swap dealer and the other counterparty is a major swap participant, the swap dealer must report the swap; and
  • with respect to any other swap, the counterparties shall select one of them to report the swap.  

To determine whether you must report and preserve data, you must review the definitions referenced in the rule that were established by the Dodd-Frank Act.

The term “swap dealer” means any person who (i) holds itself out as a dealer in swaps; (ii) makes a market in swaps; (iii) regularly enters into swaps with counterparties as an ordinary course of business for its own account; or (iv) engages in any activity causing the person to be commonly known in the trade as a dealer or market maker in swaps, provided however, in no event shall an insured depository institution be considered to be a swap dealer to the extent it offers to enter into a swap with a customer in connection with originating a loan with that customer. The term “swap dealer” does not include a person that enters into swaps for such person’s own account, either individually or in a fiduciary capacity, but not as a part of a regular business. In addition, the Dodd-Frank Act directs the CFTC to exempt from designation as a swap dealer an entity that engages in a de minimis quantity of swap dealing in connection with transactions with or on behalf of its customers. Currently, there is significant uncertainty as to how final regulations will put a gloss on this definition.

The term major swap participant means any person who is not a swap dealer, and (i) maintains a substantial position in swaps for any of the major swap categories as determined by the CFTC, excluding (I) positions held for hedging or mitigating commercial risk; and (II) positions maintained by any employee benefit plan (or any contract held by such a plan) as defined in paragraphs (3) and (32) of section 3 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002) for the primary purpose of hedging or mitigating any risk directly associated with the operation of the plan; (ii) whose outstanding swaps create substantial counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets; or (iii) (I) is a financial entity that is highly leveraged relative to the amount of capital it holds and that is not subject to capital requirements established by an appropriate Federal banking agency; and (II) maintains a substantial position in outstanding swaps in any major swap category as determined by the CFTC.

Given the expansive definitions, and the unfinished state of rule making, many would be well advised to preserve data until there is more clarity in the situation. Occasional swap participants can contact their counterparties to see if they will be considered swap dealers required to report and preserve data. If there is any doubt, data should be preserved.

What Data Must be Preserved?

The explanatory note to Rule 44.00 adopted by the CFTC is stark and simple. It states “Each counterparty to a pre-enactment unexpired swap transaction that may be required to report such transaction shall retain, in its existing format, all information and documents, to the extent and in such form as they presently exist, relating to the terms of a swap transaction.” Specifically, this should include:

  • Any information necessary to identify and value the transaction;
  • The date and time of execution;
  • Information related to the price of the transaction;
  • Whether the transaction was accepted for clearing and if so, the identity of the clearing organization;
  • Any modification(s) to the transaction; and
  • The final confirmation of the transaction.  

Who is the Swap Reported To?

Rule 44.02(a) requires that the designated counterparty to a pre-enactment unexpired swap transaction submit, with respect to such transaction, the following information to a registered swap data repository, or SDR, or to the CFTC: (i) a copy of the transaction confirmation in electronic form, if available, or in written form if there is no electronic copy; and (ii) if available, the time the transaction was executed. In addition, Rule 44.02(b) provides that a counterparty to a pre-enactment unexpired swap transaction must report to the Commission on request any information relating to such transaction during the time that this interim final rule is in effect.

The Dodd-Frank Act establishes that its reporting provisions were effective immediately upon enactment of the Dodd-Frank Act, despite the fact that at this time (i) there are no registered SDRs to immediately accept the swap data; (ii) the CFTC is not prepared to accept swap data; and (iii) the CFTC has not adopted rules governing either the registration of swap dealers or major swap participants or the reporting and maintenance of such data and is not required to do so until 360 days after enactment of the Dodd-Frank Act. In these circumstances, the CFTC believes the Dodd-Frank Act should be read to require that the reporting obligation became effective on enactment of the Dodd-Frank Act and that counterparties who are subject to this obligation should, as of the date of enactment, retain all data relating to pre-enactment unexpired swaps until such time as reporting can be effected—i.e., when swap dealers and major swap participants, as well as the appropriate SDRs, have been registered, or when permanent regulations are enacted pursuant to the Dodd-Frank Act, whichever occurs first.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act.