Clock Now Ticks for Swaps Compliance
July 30, 2012
The starter's pistol is about to be fired for the swaps industry.
The Commodity Futures Trading Commission is expected to publish on August 2 its recently approved swaps definitions in the Federal Register.
Sixty days later-on October 1-market participants, including asset managers, are expected to comply with the first set of rules related to these definitions.
For example, firms must decide whether they need to register as swap dealers or major swap participants. Other chores include learning and adopting new business conduct codes, such as provisions governing conflicts of interest and monitoring of position limits, and developing systems for recording and reporting swaps transactions.
After that, the swaps industry will move relatively rapidly toward trading standardized contracts on electronic venues known as swap execution facilities. This, mandated by the 2010 Dodd-Frank Wall Street Reform Act, is designed to head off a repeat of the calamitous use of swaps contracts, privately negotiated, that led to the credit crisis of 2008.
Not all of the rules on how this will take place are clear, and registration will clearly cause growing pains in the form of serving two regulatory masters, the CFTC and the Securities and Exchange Commission, but experts say the operational headaches are manageable.
"For the vast majority of fund managers, the product definitions were significant since they were a bellwether on the state of the regulatory reform-that is, Dodd-Frank rulemaking overall is viewed as having entered the 'final stage,'" says Andrew Cross, team leader of the Derivatives and Structured Products practice at the law firm Reed Smith.
Cross said that the definitions provide clarity for asset managers in a number of important areas. They can now seriously consider whether they need to register as swaps dealers or major swap participants, or apply for exemption. They can determine whether they need to be treated as commodity trading advisors for giving advice on over-the-counter instruments. The definitions, he says, will also help managers prepare for the impacts of earlier adopted changes to the CFTC Rules 4.5 and 4.13, which govern exemptions to commodity pool operator registration for mutual funds and hedge funds.
The definitions have already had an impact, says Jack Callahan, CME Group Executive Director and OTC Product Specialist.
"We've seen a definite increase in new customer activity since the swap definitions were finalized, as many buy side firms are progressing towards clearing their first trades and completing their final stages of testing and internal readiness," he says. "We've already cleared trades across a variety of market participants including asset managers, insurance companies, hedge funds, and banks."
CME prepared for the rule changes, in part, by building a system that allows market participants to clear their trades in real-time. That means customers can focus more on managing their portfolios and worry less about operational and credit risk, Callahan says.
Meanwhile, the IntercontinentalExchange, which operates regulated futures exchanges, clearing houses and over-the-counter markets, developed ICE Trade Vault as a swap data repository. It enrolled 250 customers in advance of its launch. The Trade Vault has already received provisional approval from the CFTC as a Swap Data Repository.
To be sure, observers say that there are plenty of areas where the new definitions and rules are still unclear, and complying with them will be a bear.
