The CFTC has adopted an interim final rule that clarifies the reporting obligations of market participants with respect to swaps entered into on or after the date of enactment of the Dodd-Frank Act and prior to the effective date of swap data reporting rules implementing Section 2(h)(5)(B) of the Commodity Exchange Act, or CEA. The rule refers to these swaps as transition swaps. The rule does not impose a present reporting requirement, but rather is intended to advise potential counterparties that (1) reporting requirements applicable to transition swaps will be adopted by the CFTC in a separate rulemaking pursuant to Section 2(h)(5)(B) of the CEA; and (2) implicit in a reporting requirement is the obligation to preserve certain data pending implementation of the provisions of Section 2(h)(5)(B). The rule is codified in CFTC Regulation 44.03.

Although the CFTC has not yet proposed permanent rules implementing Section 2(h)(5)(B) of the CEA, the CFTC believes that the reporting obligations imposed by that statutory provision became effective upon enactment of the Dodd-Frank Act. Accordingly, counterparties who are or may become subject to those obligations should be prepared to report swap data relating to transition swaps at such time as reporting is required under a permanent rule. While Section 2(h)(5) does not expressly require that counterparties retain data related to transition swaps, implicit in the reporting requirement established by this provision is the obligation to preserve data related to the terms of each transition swap so that it may be reported when permanent reporting rules implementing Section 2(h)(5)(B) are adopted by the CFTC.

The CFTC stated it is mindful that the data retention obligation may be perceived as burdensome, and in that regard the Note to Regulation 44.03 attempts to limit the data to material information that may be expected to assist the CFTC in performing its oversight functions under the CEA. To ensure that important information relating to the terms of transition swaps may be preserved with minimal burden on counterparties, the Note specifically does not require any counterparty to a transition swap to create new records and permits records to be retained in their existing format. Similarly, the Note specifies that information not in the counterparty’s possession prior to the effective date of the interim final rule need not be reported.

While the final regulations are not yet available, we believe interested persons can review the record retention requirements for pre-enactment swaps that have been promulgated by the CFTC for guidance.

Check frequently for updates on the Dodd-Frank Act and other important securities law matters.