Dodd Frank Swaps Regulation. David Lucking: Partner, New York

Transcription

1 Dodd Frank Swaps Regulation David Lucking: Partner, New York

2 Topics to be covered Registration and Swap Dealer Duties Trade Execution Clearing Capital and Margin Reporting Expected Developments 2

3 Dodd-Frank basics Signed into law July 21, 2010 Composed of 16 titles; 2,319 pages long Requires regulators to promulgate 330 new rules, conduct 67 studies, and issue 22 reports Sweeping financial reform that touches almost every area of financial services, including systemic risk, orderly liquidation, hedge funds, insurance, derivatives, credit agencies, payment, clearing and settlement, securities, consumer protection, mortgages, and banking, including affiliate transactions, capital and margin, and proprietary trading 3

4 Registration All swap dealers and major swap participants must register with the CFTC (with respect to swaps) or with the SEC (with respect to security-based swaps), including depository institutions and foreign banks Who is a Swap Dealer? Who is an MSP? 4

5 Documentation Timely confirmations Title VII requires timely and accurate confirmation of swap transactions (including execution, amendment, termination, etc.) Applies to registered SDs/MSPs only SD/MSPs must send an acknowledgement of each swap transaction to CP as soon as technologically possible but no later than the end of the first business day after execution SD/MSPs must have procedures to ensure that it executes a confirm for each swap transaction that it enters into with a financial institution no later than the end of the first business day after execution CP may request that the SD give a draft acknowledgement prior to execution Swap trading relationship documentation SDs and MSPs to establish, maintain and enforce written policies to ensure that they execute written Swap trading relationship documentation with their Counterparties The Swap trading relationship documentation shall be in writing and shall include: all terms governing the trading relationship between the SD or MSP and its Counterparty, including, without limitation, terms addressing payment obligations, netting of payments, events of default or other termination events, calculation and netting of obligations upon termination, transfer of rights and obligations, governing law, valuation, and dispute resolution; all confirmations of Swaps; and credit support arrangement 5

6 Portfolio reconciliation and compression SD/MSPs must conduct portfolio reconciliation with their counterparties SD/MSPs must establish policies reasonably designed to ensure that they engage in portfolio reconciliation with CPs who are not SD/MSPs Portfolio Reconciliation Where both Counterparties are SDs or MSPs, Portfolio Reconciliation must be performed no less frequently than: Once each business day for each Swap portfolio that includes 500 or more Swaps; Once each week for each Swap portfolio that includes more than 50 but fewer than 500 Swaps on any business day during any week; and Once each calendar quarter for each Swap portfolio that includes no more than 50 Swaps at any time during the calendar quarter Where only one Counterparty is an SD or MSP, Portfolio Reconciliation must be performed no less frequently than: Once each calendar quarter for each Swap portfolio that includes more than 100 Swaps at any time during the calendar quarter; and Once annually for each Swap portfolio that includes no more than 100 Swaps at any time during the calendar year Policies must cover resolution of disputes over valuation or material terms Dodd-Frank March 2013 Protocol allows a non-sd party to choose whether portfolio reconciliation data will be sent one-way from the SD or both ways 6

7 Portfolio reconciliation and compression (cont d) Portfolio Compression SD/MSPs must conduct portfolio compression with other SD/MSPs Portfolio compression involves terminating/amending swaps so that total notional exposure is reduced, thus reducing risk SD/MSPs are required to have policies in place to do portfolio compression if their non -SD/MSP counterparties request it 7

8 Execution A Swap entered into by a Counterparty (regardless of whether the Counterparty is an SD or MSP) that: is subject to a Clearing Determination (and for which no exclusion or exemption applies); is subject to a made-available-to-trade determination (a MATT Determination); and is not a Block Trade or otherwise subject to no-action or other exemptive relief is required to be executed on or pursuant to the rules of a Swap Execution Facility (SEF) or a Designated Contract Market (DCM) 8

9 Central clearing Certain swaps and security-based swaps subject to a clearing requirement through a derivatives clearing organization (DCO) Exemptions: Swaps entered into prior to effectiveness, if reported to an SDR Swaps that no clearing organization will clear End user exemption Cooperatives Inter-Affiliate Eligible Treasury Affiliates Partial Novation and Partial Termination Multilateral Portfolio Compression Exercises Certain non-us swaps 9

10 Central clearing (cont d) Swaps that are required to be cleared must be submitted to the CCP as soon as technologically practicable after execution, but in any event by the end of the day of execution Subject to the clearing mandate (by virtue of 2012 and 2016 determinations): Interest rate swaps (IRS) in certain currencies in the following classes: (1) fixed-to-floating swaps; (2) basis swaps; (3) overnight index swaps; and (4) forward rate agreements; and Credit default swaps (CDS) in the following classes: (1) U.S. dollar-denominated untranched CDS indices covering North America corporate reference entities; and (2) Euro-denominated untranched CDS indices referencing European obligations and/or reference entities 10

11 Capital In 2012, the Federal Reserve Board (FRB) issued final rules implementing changes to its market risk capital rules Banking organizations with significant trading activities are required to adjust their capital requirements to give greater weight to the market risks of activities related to FX and commodities positions and certain trading assets and liabilities Apply to BHCs and state-chartered banks that have aggregate trading assets and liabilities that are at least: 10% of the organization's total assets, or $10 billion Trading accounts covered by the rule (called "covered positions") include assets and liabilities held: For short-term resale With the intention of benefiting from actual or expected short-term price movements For locking in arbitrage profits These final rules apply to SDs, SBSDs, MSPs and MSBSPs, as well as other parties that qualify as covered banks The CFTC has also proposed Title VII swap-related capital requirements for nonbank SDs and MSPs that are not subject to regulation by US prudential bank regulators 11

12 Margin Imposed for all non-cleared swaps entered into by swap dealers/msps with other swap dealers/msps or Financial End Users Variation margin, and (where counterparty is another swap dealer/msp or an FEU with material swaps exposure) initial margin, each business day Compliance dates for variation margin have passed Initial margin phased in from Sep 2016 to Sep 2020, depending on trading volumes Initial Margin must be segregated FX Swaps and FX Forwards are exempt Not required to comply when facing Sovereign entities Initial margin threshold amount is an aggregate credit exposure of up to U.S.$50,000,000 MTA of $500,000 Comparability determinations issued by the CFTC in relation to Japan and the EU 12

13 Reporting SDR Reporting Requirement Creation Data and Continuation Data in relation to all Swaps, whether cleared or uncleared, to be reported to a SDR that is registered with the CFTC, or if no SDR is available for the reporting of such Swap, the CFTC SDRs are to collect and maintain data related to Swaps as prescribed by the CFTC, and to make such data electronically available to particular regulators under specified conditions related to confidentiality Large Trader Reporting Requirements Routine reports from SDs, and other entities (such as clearing members and DCOs), to the CFTC of significant proprietary and Counterparty positions in physical commodity swaps Real-time Public Reporting Requirement Swap and pricing data must be reported to an SDR by the reporting Counterparty. The SDR must then publicly disseminate the relevant data 13

14 Expected developments Sept. 1, 2018 The CFTC initial margin requirements (Rule ) will apply to Phase 3 entities (covered entities belonging to a group whose aggregate average notional amount of non-centrally cleared derivatives over a 3-month period exceeds $1.5 trillion) December 31, 2018 Phase-in termination date of the swap dealer registration de minimis threshold. On this date, the de minimis threshold will drop from $8 billion to $3 billion Security-Based Swaps (SBS) ( [TBD]) the SEC has proposed all of its major SBS rules under Dodd-Frank, but it is still unclear when compliance with the SBS rules will be required CFTC Reg AT (compliance date TBD) proposes risk control and other requirements for market participants using algorithmic trading systems (ATSs), who are defined as AT Persons in the rulemaking Project KISS on May 3, 2017, the CFTC released a request for public comment and a proposal to reduce (1) certain duties of swap dealer and FCM chief compliance officers ( CCOs ) and (2) the required content of CCO annual reports Political climate is expected to be one of weakening of regulation 14

15 Contact details David Lucking Partner New York Tel +1 (212) Mob

16 Questions? These are presentation slides only. The information within these slides does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources. Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP s affiliated undertakings. 16