sec cftc final swap rules a race to put banks plan into action

8/13/2019 SEC CFTC Final Swap Rules a Race to Put Banks Plan Into Action

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Rima Consulting Updates 11 th July, 2012

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During a meeting held on 10 July 2012, the U.S. Swaps Regulator approved akey definition that will start the clock ticking on a host of reforms for the over-the-counter (OTC) global swaps market. The Commodity Futures TradingCommission (CFTC) voted on the definition of a "swap", which activates acountdown on compliance requirements for other rules, such as "registrationand reporting", for major swaps players to comply with the Dodd-Frank

financial reform law and Protection Act (Dodd-Frank Act).

BackgroundThe Title VII of the Dodd-Frank Act entitled the Wall Street Transparency and Accountability Act("Title VII") establishes a regulatory regime applicable to the OTC derivatives market by providing theSecurities and Exchange Commission (SEC) and the CFTC with authority to oversee the derivativesmarket. Title VII provides that the CFTC will regulate "swaps", the SEC will regulate "security-basedswaps" (SBSs), and together they will regulate "mixed swaps". Now that both agencies have adoptedthe final rules, they will become effective 60 days after the date of publication in the Federal Register(FR).

Final Rule related to the further meaning of Swap The definition of "swaps" determines which products will face a multitude of rules mandated by theDodd-Frank Act, which requires most swaps to be centrally cleared and traded on exchanges or swapexecution facilities. The swaps definition shades closely to the one first proposed by regulators in April2011 1 and contained in the Dodd Frank Act itself.Swaps include:

Foreign exchange swaps and forwards;Foreign currency options;Commodity options; andCross-currency swaps and Forward rate agreements.

The CFTC clarified that foreign exchange swaps and forwards 2 would be considered to be swaps underthe Dodd-Frank Act, subject to a decision by the US Treasury on whether or not to exempt them.

The swap definition also includes a number of exemptions for certain insurance products and someconsumer and commercial transactions such as life, property, and casualty insurance. In addition,interest rate caps on consumer mortgages and home heating oil agreements are also exempt. The final

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Section 721 of Dodd-frank Act defines a Swap as any agreements, contracts, or transactions.2 Regardless of the Treasury's decision, forex swaps and forwards will be subject to reporting and business conduct standards.

Rima Consulting

Regulatory Al ert

SEC & CFTC Final Swap rules: "A Race to put Banks ’ plan into action"

11th July, 2012


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rule makes clear that the exemption for some insurance products is a "safe harbor 3", meaning thoseproducts not explicitly excluded could still avoid swaps regulation.The CFTC added a seven-part test for distinguishing swaps from commodity forwards; a contract to buy or sell a certain amount of a commodity at a particular point in the future.

A race against the clock for swap dealers Many of the rules set in motion by the definition fall heavily on so-called "swap dealers 4," mostly banks with more than US$8 billion in swap trades annually. Major Wall Street firms and banksdominate the derivatives market and have been widely expected to be captured in the swap dealercategory: JPMorgan Chase & Co, Bank of America, Citigroup, HSBC and Goldman Sachs control 96percent of cash and derivatives trading for commercial banks and trust companies as of 31 December2011 5, according to the Office of the Comptroller of the Currency.

Market players will have 60 days to register with the National Futures Association after the finaldefinition is published by the FR. Banks will have to implement robust internal and external businessconduct standards 6, and begin reporting swaps to swap data warehouses. A compliance delay recently

proposed by the CFTC could push back some of these reforms if the agency finalises it.

Final Rule related to the End-User Exception to the Clearing Requirement for Swaps

The CFTC voted unanimously to approve a proposed rule that frees up end-users of derivatives fromthe requirement that they transmit their trades through independent clearing houses.

The so-called "end-user rule" will be widened to exempt small banks, credit unions, and cooperatives with up to US$10 billion in assets. Dodd-Frank directed the CFTC to consider exempting small banksat that threshold, but many banks had lobbied for higher asset levels such as US$50 billion, or a risk- based measurement. The agency estimates roughly 30,000 firms would qualify for the exemption.

Proposed Rule related to Clearing Exemption for Certain Swaps entered into byCooperatives The CFTC also unanimously approved a proposal to exempt cooperatives such as farm credit andcredit unions from the clearing mandate. The exemption would apply so long as the swaps are designed to hedge risk arising from loans or other financial interactions with their members, whomust be "end users".

RemarkSince 21 July 2012, the G14 banks have tried to anticipate the regulatory changes however this was nota trivial exercise. All these institutions have been proactive and focused on a "to do list" to beprepared to comply with the new regulatory challenges. Now it is time to put the plan into action!

3 The CFTC adopted as a safe harbor, an interim final rule that excludes swaps entered into for the purpose of hedging physical

positions: http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/msp_ecp_qa_final.pdf 4 The Dodd-Frank Act definitions of the terms ``swap dealer'' and ``security-based swap dealer'' focus on whether a person

engages in particular types of activities involving swaps or security-based swaps.\8\ Persons that meet either of thosedefinitions are subject to statutory requirements related to, among other things, registration,margin, capital and business conduct.\9\: http://www.cftc.gov/LawRegulation/FederalRegister/FinalRules/2012-10562 http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/defs_factsheet.pdf 5 http://www.occ.treas.gov/topics/capital-markets/financial-markets/trading/derivatives/dq411.pdf p11

6 http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_4_BusConductStandardsInternal/index.htm

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/msp_ecp_qa_final.pdfhttp://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/msp_ecp_qa_final.pdfhttp://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/msp_ecp_qa_final.pdfhttp://www.cftc.gov/LawRegulation/FederalRegister/FinalRules/2012-10562http://www.cftc.gov/LawRegulation/FederalRegister/FinalRules/2012-10562http://www.cftc.gov/LawRegulation/FederalRegister/FinalRules/2012-10562http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/defs_factsheet.pdfhttp://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/defs_factsheet.pdfhttp://www.occ.treas.gov/topics/capital-markets/financial-markets/trading/derivatives/dq411.pdfhttp://www.occ.treas.gov/topics/capital-markets/financial-markets/trading/derivatives/dq411.pdfhttp://www.occ.treas.gov/topics/capital-markets/financial-markets/trading/derivatives/dq411.pdfhttp://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_4_BusConductStandardsInternal/index.htmhttp://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_4_BusConductStandardsInternal/index.htmhttp://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_4_BusConductStandardsInternal/index.htmhttp://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_4_BusConductStandardsInternal/index.htmhttp://www.occ.treas.gov/topics/capital-markets/financial-markets/trading/derivatives/dq411.pdfhttp://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/defs_factsheet.pdfhttp://www.cftc.gov/LawRegulation/FederalRegister/FinalRules/2012-10562http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/msp_ecp_qa_final.pdf


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About Rima ConsultingRima Consulting Limited ("RIMA") is a boutique, London based, Consultancy & Advisory firmspecialised in Risk Management and Regulatory Risk & Compliance.

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sec cftc final swap rules a race to put banks plan into action

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