CFTC Delays Compliance with External Business Conduct Standards for Swap Dealers and MSPs | Practical Law

CFTC Delays Compliance with External Business Conduct Standards for Swap Dealers and MSPs | Practical Law

The CFTC extended the date for compliance with certain external business conduct standards for swap dealers (SDs) and major swap participants (MSPs) in their dealings with their customers with which they enter into swaps.

CFTC Delays Compliance with External Business Conduct Standards for Swap Dealers and MSPs

by PLC Finance
Published on 30 Aug 2012 • USA (National/Federal)
The CFTC extended the date for compliance with certain external business conduct standards for swap dealers (SDs) and major swap participants (MSPs) in their dealings with their customers with which they enter into swaps.
On August 27, 2012, the CFTC issued a compliance date extension from October 15, 2012 to January 1, 2013 for certain "external" business conduct standards for swap dealers (SDs) and major swap participants (MSPs) in their dealings with their counterparties. This extension was included in the CFTC's final rules on swap documentation requirements for SDs and MSPs (final swap documentation rules). The extension is intended to align the compliance dates for the final external business conduct rules, many of which involve documentation issues, with the new final swap documentation rules. For more information on the external business conduct standards for SDs and MSPs, see Practice Note, Swap Dealers and MSPs: Final Dodd-Frank External Business Conduct (EBC) Rules.
The extension delays the compliance date to January 1, 2013 for the following final rules, found in subpart H of new part 23 of the CFTC's regulations, which was added by the Dodd-Frank Act:
  • General provisions. Provisions requiring SDs and MSPs to, among other things, create policies and procedures to ensure compliance with applicable Dodd-Frank swaps rules (Section 23.402).
  • Conflict of interest rules. Provisions prohibiting SDs and MSPs from disclosing or using for their own purposes any material confidential information provided by a swap counterparty to the SD or MSP (Section 23.410(c)).
  • Know-your-customer rules. Provisions covering verification of counterparty eligibility referred to as "know your customer" rules (Section 23.430).
  • Disclosure rules. Provisions covering disclosure of material information by SDs and MSPs to any non-SD/non-MSP counterparty in connection with entering into swaps with them to allow the counterparty sufficient time to assess, among other things, material risks and characteristics of the swap (Section 23.431(a) - (c)).
  • Clearing disclosure. Provisions which require SDs and MSPs to inform their non-SD/non-MSP swap counterparties of their right to have a swap cleared even though it may not be required to be cleared under Dodd-Frank mandatory swap clearing rules because the counterparty is an exempt commercial end user (see Legal Update, Final Rules on End-user Exception to Swap Clearing Requirement under Dodd-Frank Issued by CFTC) and to select the clearinghouse (Section 23.432).
  • Institutional suitability. Provisions covering recommendations by SDs to their swap counterparties as to the appropriateness of the swap for the counterparty given its business, financial situation and other factors, referred to as institutional suitability recommendations (Section 23.434(a)(2), (b) and (c)).
  • Advising special entities. Provisions covering requirements for SDs acting as advisors to "special entities," which are federal, state and local government entities in the US (but not non-US sovereigns) and employee benefit plans (Section 23.440).
  • Entering into swaps with special entities. Provisions covering requirements for SDs and MSPs acting as swap counterparties to special entities (Section 23.450).
The compliance date for all other provisions of subpart H will remain October 15, 2012. These include provisions:
  • Covering prohibition on fraud, manipulation and other abusive practices in connection with non-security-based swaps (swaps) entered into by SDs and MSPs with their customers (Section 23.410(a)).
  • Requiring SDs and MSPs to provide their counterparties with the daily mark-to-market valuation of the swaps between them (Section 23.431(d)).
  • Requiring SDs and MSPs to communicate with their swap counterparties in a fair and balanced manner (Section 23.433).
  • Requiring SDs that recommend a swap to a counterparty to perform the necessary due diligence to ascertain the appropriateness of that recommendation (Section 23.434(a)(1)).
As noted, many of the final external business conduct rules involve documentation issues that will require some time for SDs and MSPs to comply with as they amend their existing swap documents and enter into protocols to conform with these external business conduct rules and the final swap documentation rules. ISDA members had requested that the CFTC extend the compliance dates in light of industry-led efforts already underway to facilitate compliance with the final swaps documentation rules. They argued that aligning the compliance dates for the external business conduct standards rules with those in the final swap documentation rules would allow the most efficient transition to compliance.
For details on ISDA's protocol for amending swap documents to comply with Dodd-Frank external business conduct standards as well as certain other applicable Dodd-Frank rules to be effective shortly, see Legal Update, ISDA Launches Dodd-Frank Protocol to Amend Swap Documents.
For suggestions and information on how parties may amend their swap documentation to comply with these and other rules, see Practice Note, Swap Dealers and MSPs: Final Dodd-Frank External Business Conduct (EBC) Rules.
For more information on Dodd-Frank regulations affecting SDs and MSPs, see The Dodd-Frank Act: Requirements for Swap Dealers and MSPs Checklist.
PLC Finance will be covering the final swap documentation rules shortly. For information on the proposed rules, see Legal Updates: