Saturday, January 14, 2012

CFTC Adopts Business Conduct Standards for Swap Dealers and Major Swap Participants


Author: David Schwartz J.D. CPA David Schwartz J.D. CPA

At its January 11 meeting, the CFTC adopted final business conduct standards for swap dealers and major swap participants.  These rules were proposed in December of 2010, and have garnered much attention and significant comment from the industry.

These rules govern how swap dealers and major swap participants deal with counterparties generally and imposes additional requirements to their dealings with what the rule calls Special Entities (which include governmental entities, certain employee benefit plans under ERISA, and endowments). The rules prohibit certain abusive practices, require disclosures of material information to counterparties, and require swap dealers and major swap participants to perform additional due diligence relating to their dealings with counterparties.

The external business conduct rule will establish and enforce robust sales practices in the swaps market. The registration rule will allow the commission to monitor the swap dealers and major swap participants for compliance in partnership with the National Futures Association.

In reaction to strident industry comments, these final rules eliminated many parts of the proposed rules, such as the best execution and the prohibition against trading and front-running, which many, if not most, commenters said would be unworkable.  The proposal was also modified to, where possible and appropriate, avoid creating trading delays or barriers between swap dealers and major swap participants and their counterparts. One significant way this change was accomplished was by allowing in many instances the demonstration of and compliance with the rules on a relationship basis through disclosures and counterparty representations through documentation.     

In addition, the final rules provide safe harbors for swap dealers, from acting as an advisor to a special entity, and for dealers and major swap participants to meet the requirement as well.  Importantly, the final rule also confirms through a statement through the Department of Labor, the Commission's external business conduct rules will not cause a swap dealer or major swap participant to become an ERISA fiduciary under existing law or in subsequent regulations.

According to Chairman Gary Gensler, this set of swap regulations marks only the first of five or six additional regulatory actions in the area planned for 2012.  


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