Under the Dodd-Frank Act, the US Commodity Futures Trading Commission (CFTC) was charged with oversight of the previously unregulated over-the-counter swap markets and directed to develop, implement and enforce rules that would reduce risk, increase transparency and promote market integrity.
In the more than two years since Dodd-Frank was enacted, the CFTC has been developing and proposing rules and regulations. In a recent flurry of activity signaling that the development phase is concluding, the CFTC has finalized key definitions that categorize participants and products, and rules that underpin the regulatory framework. Two recent rule-making actions that are of interest to end-users are the finalization of rules related to swap recordkeeping and reporting, and the establishment of an exemption for end-users to the requirement that swaps be cleared through a clearinghouse.
By April 2013, the CFTC will require all parties to comply with its new regulations for swap reporting and recordkeeping. The new regulations will require electronic reporting of identifying information, valuation data and the primary economic terms of every swap to a designated swap data repository (SDR) at the inception of the swap, and changes to the valuation or the primary economic terms of the swap throughout the life of the swap. In transactions between an end-user and a financial entity, only the financial entity will be required to report swap data to the SDR, but both parties will be required to maintain their own records of the reported data throughout the life of the swap and for five years following the maturity or termination of the swap. The recordkeeping requirement applies to all past, future and ongoing swaps:
- For swaps that matured or were terminated prior to April 25, 2011, end-users must keep any confirmation, master agreement or credit support agreement currently in their possession.
- For ongoing swaps that originated prior to April 25, 2011, end-users must keep any confirmation, master agreement or credit support agreement currently in their possession, as well as records of certain specified, minimum primary economic terms of the swap.
- For swaps that originate after April 25, 2011, end-users must maintain full, complete and systematic records of each swap, including the primary economic terms, all memoranda related to the swap and any record indicating that the swap is eligible for the exemption from the clearing requirement discussed below.
- End-users must be able to retrieve these records within five business days throughout the period during which the records are required to be kept.
Beginning in October 2012, regulations will begin to phase in over a year that will require most new swap transactions to be cleared through a clearinghouse. There is an exemption from the clearing requirement, however, for swap transactions in which an end-user (i.e., not a financial entity) is using the swap to hedge against commercial risk. End-users that elect to use the exemption from the clearing requirement will be required to notify the CFTC of such election and how it will meet its financial obligations under the swap.
For assistance in providing notice to the CFTC in respect of new swaps or coordinating reporting and recordkeeping in respect of existing swaps, please contact the Squire Sanders public finance lawyer with whom you usually work.