Projected Compliance Timelines for the CFTC s Trading Documentation Rules and Uncleared Swap Margin Rules

Transcription

1 September 20, 2011 Projected Compliance Timelines for the CFTC s Trading Documentation Rules and Uncleared Swap Margin Rules Contents On September 8, 2011, the Commodity Futures Trading Commission (the CFTC ) approved for publication in the Federal Register a notice of proposed rulemaking (the NPR ) to establish separate compliance schedules for the trading relationship documentation rules (the Trading Documentation Rules ) 1 and the uncleared swap margin rules (the Uncleared Swap Margin Rules and together with the Trading Documentation Rules, the Rules ) 2 that it had previously proposed under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act ) with respect to swap dealers and major swap participants. 3 The NPR would establish 90-, 180- or 270-day phase-in periods, depending on the category of parties involved in a particular swap transaction. However, the CFTC explained that the phase-in periods would not commence until a long list of conditions precedent are satisfied, including the adoption or publication (in some instances) of several final rules that are prerequisites to implementing the Rules. The CFTC also proposed a rule to establish implementation timelines for the Dodd-Frank Act s mandatory clearing and SEF/DCM execution requirements, which we addressed in a separate client note. 4 Scenario A No Slippage. 2 Scenario B Some Slippage... 3 Scenario C Lots of Slippage... 3 Scenario A Assumptions:. 3 Scenario B Assumptions:. 4 Scenario C Assumptions: Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants, 76 Fed. Reg (Feb. 8, 2011), available at The proposed phase-in period would apply only to the policy and documentation requirements of Proposed Rule (a) and (b), and not to the audit, recordkeeping and reporting provisions of Proposed Rule (c), (d) and (e). The CFTC also stated that the proposal would have no application with respect to the external business conduct standards for swap dealers and major swap participants. Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 76 Fed. Reg (Apr. 28, 2011), available at Pub. L , 124 Stat (2010). Swap Transaction Compliance and Implementation Schedule: Trading Documentation and Margining Requirements under Section 4s of the Commodity Exchange Act, (the CEA ), available at Note that although the Rules are framed in terms of swap dealers and major swap participants they also apply when those types of entities face counterparties which are neither swap dealers nor major swap participants. Swap Transaction Compliance and Implementation Schedule: Clearing and Trade Execution Requirements under Section 2(h) of the CEA (Sept. 8, 2011), available at Projected Compliance Timelines for Trading Documentation and Uncleared Swap Margin Rules 1

2 The CFTC also released a tentative outline of the swap reform rules that it plans to consider before the end of the year and in the first quarter of Based upon this information (which is subject to change), other market guidance and the specific assumptions set forth below, we have projected various scenarios reflecting what we view as potentially the earliest possible dates by which the compliance periods for the Rules will commence for various types of entities. While the NPR would establish separate compliance timetables for the Rules to the extent they are published on the same date, the compliance periods would be identical. If the Uncleared Swap Margin Rules are not completed until after the Trading Documentation Rules are published, then the compliance periods for the Uncleared Swap Margin Rules would commence later. This is because the publication of the Trading Documentation Rules is a prerequisite to the compliance periods for the Uncleared Swap Margin Rules commencing. Since our focus is on the earliest possible potential dates for compliance, we have provided only one set of dates on the assumption that the Rules will be published on the same date. We have set forth our estimates in the tables below. We note that these are estimates only and are based upon a series of assumptions and the information available to us at this time. As such, they should not be considered definitive and may prove to be inaccurate. Scenario A No Slippage* participants, active funds 6 ) employee benefit plans, 7 entities activities, 8 other private funds) July 5, 2012 October 3, 2012 * Based upon the Scenario A Assumptions set forth below. January 2, Projected Timelines for Mandatory Swap Clearing and SEF/DCM Execution Requirements (Sept. 16, 2011), available at The outline is available on the CFTC website at An active fund is a private fund that executes 20 or more swaps per month (based on a 12-month rolling average). The term private fund has the same meaning under the proposals as it has in the Investment Advisers Act of 1940, as amended, except that it excludes a third-party sub-account, which is a managed account that requires specific approval by the account s beneficial owner to execute a swap transaction. As defined in Section 3 of the Employee Retirement Income and Security Act of 1974, as amended. As defined in Section 4(h) of the Bank Holding Company Act of 1956, as amended. Projected Compliance Timelines for Trading Documentation and Uncleared Swap Margin Rules 2

3 Scenario B Some Slippage* participants, active funds) employee benefit plans, entities activities, other private funds) August 6, 2012 November 5, 2012 * Based upon the Scenario B Assumptions set forth below. February 1, 2013 Scenario C Lots of Slippage* participants, active funds) employee benefit plans, entities activities, other private funds) September 5, 2012 December 4, 2012 * Based upon the Scenario C Assumptions set forth below. March 4, 2013 Scenario A Assumptions: > The CFTC finalizes all of the following rules (the Conditions Precedent Rules ), which are conditions precedent to the commencement of the phase-in period for the Rules, 9 on March 30, 2011 (in line with the CFTC s outline) and the final Rules are published in the Federal Register on April 6, 2012: 10 9 Note, not all of these items are actually expressed to be conditions precedent to the Uncleared Swap Margin Rules, although in effect they all are, because publication of the final Trading Documentation Rules is a condition precedent to the commencement of the compliance periods for the Uncleared Swap Margin Rules. 10 Under the proposal, the phase-in periods for the Rules would begin to run from the date the final Rules are published in the Federal Register. Thus, if the Rules were approved on March 30 (the last business day of the first quarter of 2012) and published a week later on April 6, the phase-in periods would begin to run from that publication date. Projected Compliance Timelines for Trading Documentation and Uncleared Swap Margin Rules 3

4 - Further Definition of Swap, Security-Based Swap and Security-Based Swap Agreement ; Mixed Swaps; Security-Based Swap Agreement Recordkeeping. - Further Definition of Swap Dealer, Security-Based Swap Dealer, Major Swap Participant, Major Security-Based Swap Participant and Eligible Contract Participant. - Registration of Swap Dealers and Major Swap Participants - Confirmation, Portfolio Reconciliation, and Portfolio Compression Requirements for Swap Dealers and Major Swap Participants 11 - Protection of Collateral of Counterparties to Uncleared Swaps; Treatment of Securities in a Portfolio Margining Account in a Commodity Broker Bankruptcy > The NPR is adopted as a final rule and goes into effect by April 6, > The CFTC adopts and publishes the final Rules in the Federal Register by April 6, Scenario B Assumptions: > The CFTC finalizes all of the Conditions Precedent Rules on April 30, 2012 (a month behind schedule) and the final Rules are published in the Federal Register on May 7, > The NPR is adopted as a final rule and goes into effect by May 7, > The CFTC adopts and publishes the final Rules in the Federal Register by May 7, Scenario C Assumptions: > The CFTC finalizes all of the Conditions Precedent Rules on May 31, 2012 (two months behind schedule) and the final Rules are published in the Federal Register on June 7, > The NPR is adopted as a final rule and goes into effect by June 7, > The CFTC adopts and publishes the final Rules in the Federal Register by June 7, The confirmation rule is not on the CFTC s schedule of rules that it plans to consider. In the NPR, however, the CFTC explained that it planned to finalize the confirmation rule at approximately the same time that it finalizes the protection of collateral and trading relationship documentation rules, both of which the CFTC has indicated it will consider in the first quarter of The conditions precedent to implementation of the Uncleared Swap Margin Rules are that the CFTC adopt (1) the two further definitions rule proposals, (2) the rules for registration of swap dealers and major swap participants, and (3) the trading relationship documentation rule. Thus, once the Trading Relationship Documentation Rules and the Conditions Precedent Rules are complete, all of the conditions precedent for the Uncleared Swap Margin Rules will have been satisfied. We have assumed that the final Uncleared Swap Margin Rules will be approved and published in the Federal Register at the same time as the Trading Documentation Rules, in accord with the CFTC s schedule, and that the Rules would thus go into effect at the same time. To the extent that the Uncleared Swap Margin Rules are finalized later, however, then the phase-in dates for that requirement would be pushed back. Projected Compliance Timelines for Trading Documentation and Uncleared Swap Margin Rules 4

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