CFTC Proposes Minimum Block Sizes for Large Swap Exception to Real-time Swap Data Reporting Rules | Practical Law

CFTC Proposes Minimum Block Sizes for Large Swap Exception to Real-time Swap Data Reporting Rules | Practical Law

The CFTC proposed rules under the Dodd-Frank Act that would establish minimum sizes, known as block sizes, for large notional swaps, known as block trades and large notional off-facility swaps. These swaps would be excepted from real-time swap data reporting requirements, and subject to delayed data reporting obligations.

CFTC Proposes Minimum Block Sizes for Large Swap Exception to Real-time Swap Data Reporting Rules

by PLC Finance
Published on 08 Mar 2012 • USA (National/Federal)
The CFTC proposed rules under the Dodd-Frank Act that would establish minimum sizes, known as block sizes, for large notional swaps, known as block trades and large notional off-facility swaps. These swaps would be excepted from real-time swap data reporting requirements, and subject to delayed data reporting obligations.
On February 23, 2012, the CFTC proposed rules under the Dodd-Frank Act that would establish minimum sizes, called block sizes, for large swaps that will be excepted from final Dodd-Frank real-time swap data reporting rules. Parties to swaps with notional values above the minimum block sizes established by the rules will generally be permitted initial public-reporting time delays of 30 minutes for those swaps.
The rules are designed to both facilitate compliance with the public-disclosure objectives of Title VII and final Dodd-Frank swap data reporting rules, while protecting the confidentiality interests of counterparties to large bespoke swaps that could be easily identifiable. These swaps are referred to in the proposed rules as:
  • Block trades. These are large notional swaps that are executed on a swap exchange (a designated contract market (DCM) or swap execution facility (SEF)) registered with the CFTC under Dodd-Frank rules.
  • Large notional off-facility swaps. These are large notional swaps that are executed bilaterally, not on a swap exchange.
These swaps might include, for example, an interest rate or currency swap associated with a large ABS transaction. In practice, most large, customized swaps will not be standardized, will not generally be executed on exchanges (nor cleared) and will more likely be classified as large notional off-facility swaps than block trades under these rules. However, the distinction is largely a matter of semantics, as the same block sizes would apply to both.

Determining Minimum Block Sizes for Swaps to Be Subject to Real-time Reporting Delays

Swaps that are above the minimum notional block size for their swap category, whether block trades or large notional off-facility swaps, would be excepted from final Dodd-Frank real-time public swap data reporting requirements (see Legal Update, Final Rules on Real-time Public Reporting of Swap Transaction and Pricing Data under Dodd-Frank Issued by CFTC).
These swaps would be subject to delayed swap data reporting, meaning that the parties to these swaps will have a maximum of 30 minutes after execution to publicly disseminate the required swap data. This timeframe will be reduced to 15 minutes on the first anniversary of the applicable compliance date in the final rules. Certain large off-facility swaps to which no swap dealer or MSP is a party, but which are cleared, are subject to longer delays detailed in the rules.
Swaps that are below the minimum block size for their swap category must be reported "as soon as technologically practicable" according to the final Dodd-Frank real-time swap data reporting rules.
Block sizes would be phased in over two periods:
  • An initial period that would last a minimum of one year. The block sizes for this first phase would be established by the final rules. Proposed initial block sizes are specified in Appendix F to part 43 on page 210 of the proposal. These initial thresholds would be effective 60 days after the final rules on minimum block sizes are published in the Federal Register.
  • The initial block sizes would expire on the first day of the second month after the CFTC publishes new minimum block sizes for each swap category on its website. After the phase-in period, block sizes would be reported using a complex calculation that the CFTC has determined would result in, for example, 94% of all interest rate swaps being reported in real time. These minimum block sizes would be recalculated at least once a year for each swap category.
See Legal Update, Final Rules on Real-time Public Reporting of Swap Transaction and Pricing Data under Dodd-Frank Issued by CFTC: Compliance Dates for information on compliance schedules for the real-time reporting requirements.
The proposed rules would establish swap categories based on common risk and liquidity profiles within the five asset classes defined in the CFTC's final rule on real-time public swap data reporting:
  • Interest rate swaps. The interest rate asset class would have 24 swap categories based on eight tenor (length of swap) groups and three currency categories.
  • Credit swaps. The credit asset class would have 18 swap categories based on six tenor groups and three conventional spread groups.
  • FX swaps. The foreign exchange asset class would have swap categories based on unique currency combinations.
  • Commodity swaps. Swap categories for the "other commodity" asset class would be:
    • swaps on contracts listed in Appendix B to part 43 of the CFTC's regulations;
    • swaps that are economically related to certain futures contracts (the minimum block sizes for these swaps would be based on the block sizes set by DCMs for economically related futures contracts); and
    • other swaps sharing common product types, found in Appendix D to part 43 of the proposed rules.
  • Equity swaps. All swaps in the equity asset class would be combined into one swap category because no equity swap would qualify as a block trade or large notional off-facility swap. All equity swaps must therefore be reported according to the final Dodd-Frank real-time data reporting rules.
For a swap that meets the minimum block size requirement to be treated as a block trade, parties to the swap must notify the registered SEF or DCM that they elect to have a swap treated as a block trade. The SEF or DCM must then notify the registered swap data repository (SDR) of the election when submitting swap transaction and pricing data. Similarly parties that wish to have the swap treated as a large notional off-facility swap must notify the registered SDR of this election.

Maintaining Anonymity of Market Participants

The publication of detailed information regarding large notional swap transactions (referred to collectively in the proposed rules as "outsize" swaps) could expose swap counterparties to higher trading costs. For example, the publication of detailed information about an outsize swap transaction may alert the market to the possibility that one or both of the parties to the outsize swap transaction will be re-entering the market to offset or hedge that transaction. Other market participants may be alerted to the parties' need to offset this risk and could exploit that information. This could deter swap providers and other parties that provide liquidity to swap markets from becoming parties to these types of swap transactions.
Because of this, the proposed rules aim to protect the identities of swap counterparties by removing identifying information, limiting geographic detail and generically capping disclosed notional values at a fixed number to mask the exact size of these large swap transactions.
The notional value cap would work as follows: If the notional value of a swap transaction equals or exceeds the applicable cap size for that swap category, then when the data for the swap is publicly disseminated, the notional value of that swap would be listed as the cap size with a "plus" sign after it (for example, "$300MM+"), indicating that it is larger than the cap. This way, the actual sizes of these swaps are obscured. The objective is to prevent market participants from being able to specifically identify these swaps or the parties to them. It is unclear whether or not these swaps might still be identifiable by the market.
The cap size will also be phased in over two periods:
  • The cap size during the initial period would be the greater of:
    • the applicable initial minimum block size for that swap category; and
    • the applicable cap size listed for that category of swaps in the final rules (proposed cap sizes are listed in the proposed rules on page 194 and 195).
    If no applicable initial minimum block size exists, then the initial cap size would be the applicable cap size listed for that category of swaps in the rules. The initial cap sizes would be effective until the first day of the second month after the date on which the CFTC publishes new cap sizes for each swap category on its website.
  • Following the initial period, new cap sizes would be calculated and disseminated by the CFTC.
The CFTC is accepting public comment on the proposed rules until 60 days after publication in the Federal Register.
For more information on these final rules, see the CFTC's fact sheet and Q&A. For more information on the regulation of swap data reporting under the Dodd-Frank Act, see Practice Notes, Summary of the Dodd-Frank Act: Swaps and Derivatives: Swap Data Reporting Requirements and Road Map to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010: Swaps and Derivatives.