Alert May 28, 2013

CFTC Approves Procedures to Establish Minimum Block Sizes

The CFTC approved a final rule establishing procedures to set minimum block sizes for swap transactions.  The block size rule pertains to the CFTC’s real-time public reporting rules, which require that certain information about publicly reportable swap transaction be reported to a swap data repository as soon as technologically practicable after execution, and that swap data repositories in turn publicly disseminate swap transaction and pricing data.  The real-time public reporting rules, however, provide for a time delay for the reporting of “block trades,” which are essentially swaps that are large enough to potentially impact pricing or liquidity in the relevant market, for example because the real-time reporting of a large swap may alert market participants to the possibility that one of the swap counterparties would attempt to offset that transaction.  In response to public comments suggesting that the CFTC set block sizes based on empirical data, the CFTC did not set block sizes at the time it finalized its real-time public reporting rules.

The new rules follow the real-time public reporting rules in dividing swaps into five asset classes:  interest rates, equity, credit, foreign exchange, and “other commodities.” Based on empirical data where available, the block trade rules further divide these asset classes into a number of categories based on various criteria; for example, interest rate swaps are subdivided into approximately 27 categories based on tenor and underlying currency, while credit swaps are subdivided into approximately 18 categories based on tenor and traded spread.

The rules provide for a two-stage implementation period.  In an initial period of no less than one year, block sizes will be as established in the rule, with specific block sizes listed in an appendix to the rule for various asset categories, subject to certain exceptions.  After a registered swap data repository has collected at least one year of “reliable data” for a particular asset class, the CFTC would establish minimum block sizes for the post-initial period based on the data and using methodology described in the rule.  The CFTC will update post-initial minimum block sizes at least once per calendar year.  Post-initial minimum block sizes will be posted on the CFTC’s website.

The rule also includes provisions to protect the identities of counterparties to swaps from public disclosure.  One such provision establishes “cap sizes,” which are the largest sizes that may be publicly reported for a particular swap category.  Trades exceeding a cap size would be reported as exceeding the established cap size, but the exact amount would not be disclosed.  Another provision limits public dissemination of geographic detail of the assets underlying a swap under certain conditions.

The rule will become effective 60 days after its forthcoming publication in the Federal Register.