Alert December 26, 2012

CFTC Issues Range of Swaps-Related Interpretive Guidance and No-Action relief

The CFTC issued a number of no-action relief letters as year-end approached.  In the absence of the relief, compliance with a number of CFTC rules and regulations would have been required starting on December 31, 2012, or January 1, 2013.  The following is a brief summary of certain of these letters.

Exclusions from the de minimis calculation for purposes of the “swap dealer” definition

Several of the no-action letters concern the manner in which calculations for the de minimis exception to the swap dealer definition are made.  Specifically, these letters allow certain swaps activities to be excluded from the calculations that must be made to determine whether an entity trades a sufficient volume of swaps to require it to register under the “swap dealer” definition.  For example, one letter permits the exclusion from the de minimis calculation of certain swaps entered into as part of “multilateral portfolio compression exercises,” which allow swap market participants to use netting and off-setting to reduce the size and number of outstanding swaps between them.

A second letter permits the exclusion from the de minimis calculation of certain swap activity by floor traders.  The CFTC noted in the letter that certain swaps entered into by floor traders on or subject to the rules of a swap execution facility (“SEF”) are not considered for the purpose of determining whether the floor trader is a swap dealer, provided that certain conditions are met; however, because the CFTC has not yet finalized its rules regarding SEFs, market participants could not, in the absence of relief, avail themselves of this exclusion.  Accordingly, the relief permits an entity to exclude, for purposes of the de minimis calculation, a swap that is submitted to a registered derivatives clearing organization (“DCO”) for clearing, provided that the entity complies with certain conditions of the floor trader exclusion and meets certain other conditions.  This relief expires on July 1, 2013.  Those wishing to avail themselves of the relief must e-mail certain information to the CFTC prior to December 31, 2012.

A third letter provides that, on a time-limited basis, swaps transacted on the Natural Gas Exchange (“NGX”), a Canadian entity that has applied for registration with the CFTC as a Foreign Board of Trade (“FBOT”), are not required to be considered in calculations for purposes of the swap dealer de minimis exception.  The relief expires on the earlier of (1) March 31, 2013 or (2) the granting or denial of the NGX’s application for registration as an FBOT.

Relief from reporting requirements

A number of the no-action letters provide temporary relief from certain reporting requirements.  For example, the CFTC’s Division of Market Oversight (the “DMO”) issued a no-action letter providing relief to swap dealers that are not clearing members regarding the timing of compliance with large swap trader reporting requirements for physical commodity swaps and swaptions embodied in Part 20 of the CFTC’s regulations.  The letter provides that the DMO will not recommend that the CFTC commence an enforcement action against a non-clearing member swap dealer for failure to submit certain reports under Part 20 for the period from December 11, 2012, until March 1, 2013.  Non-clearing member swap dealers satisfying the conditions of CFTC Regulation 20.10(e) have until September 1, 2013 to comply.  Any entity relying on the no-action relief must state that it is doing so in an e-mail to the CFTC by no later than the date on which the entity applies for swap dealer registration.

The DMO also issued a no-action letter providing relief to swap dealers and major swap participants from the swap data recordkeeping and swap data repository reporting requirements for “CDS Clearing-Related Swaps,” which are essentially forced swaps entered into by clearing members of a DCO in accordance with DCO rules.  The letter states that the DMO will not recommend that the CFTC take enforcement action against a reporting counterparty for failing to comply with its swap data reporting requirements for CDS Clearing-Related Swaps, subject to certain conditions.  The no-action relief expires on June 30, 2013.

An additional letter provides relief from the CFTC’s regulations involving the real-time reporting of swap transactions (embodied in Part 43 of the CFTC’s regulations) and swap data recordkeeping and reporting requirements (embodied in Part 45) in the context of prime brokerage arrangements relating to any uncleared over-the-counter transaction meeting the “swap” definition.  The letter, which acknowledges that the regulations could be read to require reporting by multiple parties, allows the parties in prime brokerage transactions to allocate reporting responsibilities between the prime brokers and executing dealers, provided that certain conditions are met.  The relief expires “on or before” June 30, 2013.

Another letter provides relief from CFTC Regulation 45.4(b)(2)(ii), which requires the reporting of valuation data for all swaps cleared by a DCO.  The letter provides that the DMO will not recommend that the CFTC take enforcement action against a swap dealer or major swap participant for its failure to comply with Regulation 45.4(b)(2)(ii), provided that certain conditions are met.  The relief will expire on June 30, 2013.

Finally, the DSIO issued a no-action letter providing relief to certain swap dealers from the requirement to prepare and furnish to the CFTC an annual report for the fiscal year that ends on December 31, 2012.  The relief only applies to swap dealers that (1) are required to register as swap dealers by December 31, 2012, (2) are currently regulated by a U.S. prudential regulator or are registrants of the SEC, and (3) have a fiscal year‑end of December 31, 2012 (“Covered Firms”).  The letter explains that under the strict terms of the regulation in question, absent relief, an annual report submitted by a Covered Firm for fiscal year 2012 would cover only a single day:  December 31, 2012.

Other relief

The CFTC issued several other letters as well.  For example, one letter provides relief from the post-allocation swap timing requirement of CFTC Regulation 45.3(e)(ii)(A), a part of the swap data reporting rules involving allocations, which take place after a trade and involve a so-called “agent” allocating portions of the executed swap among various clients.  The no-action letter addresses concerns that, because swap counterparties may be located in different time zones and in jurisdictions with different business day or holiday calendars, it is possible that an agent allocating a swap will be unable to inform the reporting counterparty of the identities of the allocated entities within the timing required by the regulations.  The letter allows for additional reporting time for a swap in which the agent is located in a jurisdiction other than that of the reporting counterparty with a time zone difference greater than four hours, subject to certain conditions.  The relief provided by the letter expires on June 30, 2013.

In another letter, the DSIO provided that, notwithstanding certain business conduct standards regulations to the contrary, it will not recommend that the CFTC take an enforcement action against a swap dealer or major swap participant for failure to disclose the pre-trade mid-market mark to a counterparty in certain derivatives transactions both prior to and following the issuance of final CFTC regulations governing the registration of swap execution facilities SEFs, provided that certain conditions are met.

Finally, the CFTC’s Division of Clearing and Risk issued a no-action letter stating that it would not recommend that the CFTC take enforcement action against the Japan Securities Clearing Corporation (“JSCC”) for failure to register as a DCO, or against a qualified clearing participant of JSCC for failure to clear a swap that is required to be cleared through a registered DCO, provided certain conditions are met.  The relief expires on the earlier of December 31, 2013, or the date on which JSCC registers as a DCO with respect to its “IRS Clearing Business.” The Division of Clearing and Risk also issued a similar no-action letter pertaining to Singapore Exchange Derivatives Clearing Limited (“SGX-DC”), which expires on the earlier of December 31, 2013, or the date on which SGX-DC registers as a DCO.