On December 18, the Commodity Futures Trading Commission (CFTC), by private vote, adopted interim final rules (Interim Final Rules) to amend the compliance dates for previously issued final rules that establish external business conduct standards, trade documentation and portfolio reconciliation requirements for swap dealers (SDs) and major swap participants (MSPs). The Interim Final Rules do not change the substance of the aforementioned rules. Rather, they afford SDs and MSPs until May 1, 2013 to comply with the external business conduct standards rules and until July 1, 2013 to comply with the trade documentation and portfolio reconciliation requirements. Although the relief afforded by the Interim Final Rules is directly applicable to SDs and MSPs, other market participants, including end-users, also benefit from the extended compliance dates, for the reasons discussed below.
External Business Conduct Standards -
The CFTC’s external business conduct standards rules, which were adopted last January, were slated to become effective for SDs and MSPs beginning on December 31, 2012. They impose a myriad of requirements on SDs and MSPs when dealing with counterparties including, among other things, know-your-counterparty requirements, disclosure obligations and pay-to-play restrictions, which requirements would apply on a prospective basis (i.e., to swaps executed after December 31, 2012). Pursuant to the external business conduct standards rules, SDs and MSPs may rely on written representations from their counterparties, and standardized disclosures, to comply with many of these requirements. As a result, SDs and MSPs are requiring their counterparties to amend their existing trade documentation.
To facilitate SDs’ and MSPs’ compliance with the external business conduct rules, and several other CFTC rules, the International Swaps and Derivatives Association (ISDA) developed an “ISDA August 2012 DF Protocol” (Protocol). By adhering to the Protocol and exchanging a “Questionnaire”, persons may amend their existing trade documentation so that the SD or MSP counterparty is in compliance with certain of the external business conduct standards requirements. However, the CFTC’s rules do not require adherence to the Protocol. Instead, counterparties may elect to facilitate SDs’ and MSPs’ compliance with the external business conduct standards via an alternative means (e.g., by bilaterally amending existing trade documentation).
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