In a notice released December 18, 2012, the Commodity Futures Trading Commission (CFTC) delayed the effective date of certain implementation rules for participants in the swaps markets.
Part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) gave the CFTC jurisdiction over most issues dealing with swaps transactions and joint jurisdiction with the Securities and Exchange Commission over securities-based swaps. The CFTC has exercised that authority since 2010, issuing over 41 different regulatory projects containing the rules on how the market is to function in compliance with the mandates of Dodd-Frank.
One piece of that regulatory initiative has resulted in the International Swaps and Derivatives Association (ISDA) developing a protocol system for market participants to “adhere” to the new rules for all of their ISDA Master Agreements in place with multiple counterparties. Another part of the rule requires parties to exchange information so that each knows that the other is eligible to participate in the market and what is required to comply with the applicable regulations. ISDA had also developed, as part of the adherence protocol, a mechanism for adherents to exchange questionnaires in order to meet new due diligence requirements.
In its letter to the CFTC requesting an extension of time to comply (recounted by the CFTC in the rule-making notice released on December 18), the ISDA had pointed out to the CFTC that even though the electronic protocol has been available since August 2012 and significant efforts had been made to reach out to all market participants, as of early December 2012, only 17.5 percent of anticipated market participants had executed adherence letters and less than 1 percent had answered and submitted the necessary questionnaires. The ISDA noted that as a result, on January 1, 2013, the swaps dealers (SDs) and major swap participants (MSPs) would stop dealing with counterparties who had not adhered under the protocol, causing a major dislocation in the marketplace.
To avoid the disruption, CFTC extended the compliance date to May 1, 2013. The bottom line: if you have swaps in place or were planning to execute them on or after January 1, 2013, and you have not yet adhered to the ISDA Dodd-Frank Protocol, you have a bit more time.
Other compliance rules, such as the anti-fraud rules, chief compliance appointment requirements and pay-to-play prohibitions, to name a few, still will go into effect on December 31, 2012.
There is a second protocol in the works that will address the Dodd-Frank requirement that SDs and MSPs agree with their counterparties, prior to the execution of a swap, on the process for determining the value of such swap at any time from the execution to the termination, maturity, or expiration of such swap. The deadline for compliance with this feature has been pushed back to July 1, 2013.
This regulatory overlay is NOT going away. If your business involves entering into swaps for treasury management, to gain alpha or to stabilize beta, you need to start the adherence process, if you haven’t already. Like many recent regulatory initiatives, the enforcer of the new rules will be SDS or MSPs (i.e., the bank or brokerage who normally would be on the other side of the swap); if you are not an adherent, the counterparty cannot do business with you unless you have made other arrangements in one-off negotiations, which is likely to be impractical. If you have been executing swap transactions using long-form confirmations (without an ISDA Master Agreement in place), then there is an alternative procedure.
If you need assistance, please contact the author.
Gregory J. Nowak
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