CFTC Approves Final Rule Related to Recordkeeping and Reporting, Conflicts of Interest and Chief Compliance Officer Designation

by Katten Muchin Rosenman LLP

On April 3, the Commodity Futures Trading Commission’s final rules relating to Swap Dealer (SD) and Major Swap Participant (MSP) Recordkeeping, Reporting, and Duties; Futures Commission Merchant (FCM) and Introducing Broker (IB) Conflicts of Interest; and Chief Compliance Officer (CCO) Rules for SDs, MSPs and FCMs were published in the Federal Register. The final rules were promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act and approved by the Commission by a vote of 3-2 with Commissioners O’Malia and Sommers dissenting.

SD and MSP Recordkeeping, Reporting and Duties Rules: The final rules require SDs and MSPs to maintain full and complete records of transaction and position information for all swaps. Basic business records (such as meetings minutes, organizational charts, and audit documentation), certain financial records, records of complaints against personnel and marketing material must also be retained. The rules prescribe daily trading recordkeeping requirements including: pre-execution, execution, and post-execution data. SDs and MSPs are also required to report their swaps in accordance with the real-time reporting and swap data rules and to maintain records of all information reported to a swap data repository.

SDs and MSPs are required to establish risk management procedures and monitor for and prevent violations of position limits. To ensure compliance with position limits, the SD or MSP must: (i) provide annual training for personnel, (ii) diligently monitor and supervise trading, (iii) implement an early warning system, (iv) test position limit procedures, (v) document compliance with position limits on a quarterly basis, and (vi) audit its procedures on an annual basis. SDs and MSPs are also required to establish business continuity and disaster recovery plans, promptly disclose any information required by the CFTC or a prudential regulator and adopt antitrust policies.

Conflicts of Interest Rules: The conflicts of interest rules require segregated research and trading functions for SDs, MSPs, FCMs and IBs. The rules prohibit non-research personnel from directing the views and opinions expressed in a research report, directing a research analyst’s decision to publish a research report, or reviewing a research report before publication for any purpose other than verifying its factual accuracy, non-substantive editing, or indentifying potential conflicts of interest. Research analysts may not be supervised or controlled by the business trading or clearing unit at an SD, MSP, FCM or IB, and may not be compensated based on their contributions to the trading or clearing business. All communications between research analysts and non-research personnel concerning the content of a research report must be made through legal and compliance staff. Firms are also prohibited from retaliating against research analysts on the basis of an adverse, negative or otherwise unfavorable research report.

A research analyst may not omit a material fact or qualification in any communication with a current or prospective customer, and firms may not directly or indirectly offer favorable research or threaten to change research as an inducement or consideration for the receipt of business. In all research reports and public appearances, including third party reports, SDs, MSPs, FCMs and IBs must prominently disclose whether a research analyst maintains a financial interest in any derivative of a type, class, or category that the research analyst follows and the nature of the financial interest.

The rule defines a research analyst as an employee of an SD, MSP, FCM or IB who is primarily responsible for the preparation of the substance of a research report relating to any derivative; a research report is defined as any written communication (including electronic) that includes an analysis of the price or market for any derivative and provides information reasonably sufficient upon which to base a decision to enter into a derivatives transaction.

CCO Rules for SDs, MSPs and FCMs: Under the rules, each SD, MSP and FCM must designate a qualified CCO who will report directly to the board of directors or senior officer of the SD, MSP or FCM. The CCO is responsible for establishing compliance policies, resolving conflicts of interest, ensuring compliance with the Commodity Exchange Act (CEA), CFTC Regulations, and the firm’s compliance policies, and identifying and remediating non-compliance issues. The CCO is required to prepare an annual report that contains: (i) a description of the registrant’s compliance with the CEA, CFTC Regulations and its own policies; (ii) an assessment of the registrant’s compliance policies; (iii) a discussion of areas for improvement; (iv) a description of compliance resources; and (v) a summary of any non-compliance issues that were identified and addressed.

The effective date for the rule is June 4. For SDs and MSPs that are currently registered with a U.S. prudential regulator or the Securities and Exchange Commission, the compliance date for the reporting, recordkeeping, daily trading records, and risk management provisions is the later of July 2 or the date on which SDs and MSPs are required to be registered under CFTC Rule 3.10, and the compliance date for the business continuity and disaster recovery and CCO provisions is the later of October 1 or the date on which SDs and MSPs are required to be registered under Rule 3.10.

For SDs and MSPs that are not currently registered with the SEC or a prudential regulator, the compliance date for the reporting, recordkeeping, daily trading records, and risk management provisions is the later of October 1 or the date on which SDs and MSPs are required to be registered under Rule 3.10, and the compliance date for the business continuity and disaster recovery and CCO provisions is the later of December 31 or the date on which SDs and MSPs are required to be registered under Rule 3.10.

The compliance date for the position limits, diligent supervision, conflicts of interest, availability of information and antitrust provisions for all SDs and MSPs is the later of June 4 or the date on which SDs and MSPs are required to be registered under Rule 3.10.

FCMs and IBs that are currently registered must comply with the conflicts of interest provisions (except for the clearing activity provisions) by June 4, and must comply with the clearing activity provisions on the later of the June 4 or the date on which SDs and MSPs are to be registered under Rule 3.10. FCMs that are currently registered with the CFTC and currently regulated by a prudential regulator must comply with the CCO provision by October 1. FCMs that are registered with the CFTC but not currently regulated by a prudential regulator have until March 29, 2013 to comply with the CCO provision. FCMs that are not registered with the CFTC as of the effective date, must comply with the CCO provision upon registration with the CFTC.

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Written by:

Katten Muchin Rosenman LLP

Katten Muchin Rosenman LLP on:

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