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Proposed Rules on Making Swaps "Available to Trade" under Dodd-Frank Issued by CFTC
Practical Law Legal Update 3-515-4528 (Approx. 3 pages)
Proposed Rules on Making Swaps "Available to Trade" under Dodd-Frank Issued by CFTC
by PLC Finance
| Published on 07 Dec 2011 • USA (National/Federal) |
The CFTC proposed rules under the Dodd-Frank Act establishing a process for Designated Contract Markets (DCMs) and Swap Execution Facilities (SEFs) to make swaps "available to trade" within the meaning of Section 2(h)(8) of the Commodity Exchange Act (CEA).
On December 5, 2011, the CFTC proposed rules under the Dodd-Frank Act, as detailed in a fact sheet and Q&A, establishing a process for swap exchanges to make non-security-based swaps "available to trade" within the meaning of Section 2(h)(8) of the Commodity Exchange Act (CEA). The newly proposed rules require designated contract markets (DCMs) and swap execution facilities (SEFs) to submit to the CFTC a determination that a swap is available to trade. Approval would be then be granted by either the CFTC or under a self-certification procedure.
To make a swap available for trading under the proposed rules, a DCM or SEF must consider:
- Whether there are ready and willing buyers and sellers of the swap.
- The frequency and size of transactions in the swap on that DCM or SEF, or of bilateral transactions in the swap.
- The trading volume for the swap on that DCM or SEF, or of bilateral transactions in the swap.
- The bid/ask spread for the swap.
- The usual number of resting firm or indicative bids and offers that the DCM or SEF receives in the particular swap being considered.
- Whether the DCM's or SEF's trading facility or platform will support trading in the swap.
- Any other relevant factors.
If a DCM or SEF makes a swap available to trade, all other DCMs and SEFs listing or offering for trading the same or equivalent swaps must also make those swaps available to trade for purposes of the trade execution requirement of Section 2(h)(8) of the CEA.
It is not clear from the proposed rules whether the CFTC intends to consider each of the broad Dodd-Frank categories of swaps at each DCM and SEF (rate swaps, credit swaps, equity swaps and commodity swaps), or more numerous and specific categories of swaps at each DCM and SEF (for example, interest rate swaps). Alternatively the CFTC could take an even more granular approach and break down swap categories by specific commercial terms, counterparty identity or other means.
In the future, the CFTC may consider setting objective factors based on an empirical analysis of swap trading data in a future rulemaking.
The proposal also requires each DCM and SEF to conduct an annual review and assessment of each swap it has made available to trade to determine whether to continue making that swap available for trading and to submit a report of this review to the CFTC.
Comments on the proposed regulations must be submitted within 30 days of the publication of the proposal in the Federal Register.
For more information on requirements of swaps exchanges under the Dodd-Frank Act, see Practice Notes, Summary of the Dodd-Frank Act: Swaps and Derivatives: Requirements for Swap Exchanges and Clearinghouses Under Dodd-Frank and Summary of the Dodd-Frank Act: Swaps and Derivatives: Swap Clearing and Exchange Trading.