Updated: reporting requirements for swap dealers, swap participants, and large traders in the futures and options market

On April 30, 2024, in two separate releases, the Commodity Futures Trading Commission ("CFTC") announced that it has finalized amendments updating reporting requirements for market participants.

In the first release, the CFTC announced amendments to the capital and financial reporting requirements for Swap Dealers and Major Swap Participants (the "Financial Reporting Requirements"). The amendments to the Financial Reporting Requirements are consistent with CFTC staff's position in CFTC Staff Letters No. 21-15 and 21-18 with respect to the tangible net worth capital approach and financial reporting requirements for bank Swap Dealers, respectively.

Among other requirements, the Financial Reporting Requirements notably revise:

• The definitions of "tangible net worth" and "predominantly engaged in non-financial activities" in Commission Regulation 23.100, so that the eligibility of nonbank Swap Dealers using the tangible net worth capital approach may be determined at the parent or entity level and using GAAP or IFRS principles;
• CFTC Regulation 23.105(p), so that U.S. domiciled bank Swap Dealers file schedules under Federal Financial Institutions Examination Council reports in lieu of Appendix C forms at the same time as filed with prudential regulators;
• CFTC Regulations 23.105(k) and (l) and the titles of Schedules 1-4 in Appendix B, to clarify that such supplemental schedules are intended to be provided by all nonbank Swap Dealers and to provide that the supplemental schedules must be submitted on a monthly or quarterly basis, as applicable;
• CFTC Regulation 23.101(a), to provide that subordinated debt for net capital is subject to a qualification determination by either the CFTC or the NFA; and
• CFTC Regulations 23.105(d) and (e), to provide that Swap Dealers that are also registered with the SEC as either broker dealers or security-based Swap Dealers must file financial reports required to be filed with the SEC, and Swap Dealers also registered as FCMs must file Form 1-FR-FCM.

Further, the Financial Reporting Requirements provide that an affirmative statement of no material difference between audited and unaudited financial reports is required and require that Swap Dealers also registered as FCMs include a supplemental accountants report on material inadequacies with its audited financial report. See CFTC Fact Sheet, available here. Commissioners Johnson and Pham provided statements in support of the new Financial Reporting Requirements.

In the second release, the CFTC amended the large trading reporting regulations for futures and options ("Large Trader Requirements") available here. The Large Trader Requirements now require futures commission merchants, clearing members, foreign brokers, and certain reporting markets ("reporting firms") to report position information for the largest futures and options traders to the CFTC.

The Large Trader Requirements provide for:

• A replacement of the data elements currently enumerated in the CFTC's regulations with an appendix specifying applicable data elements.
• The publication of a separate Part 17 Guidebook specifying the form and manner for reporting.
• The removal of the "outdated" 80-character data submission standard in the CFTC's regulations. That standard will be replaced by a FIXML standard, as set out in the Part 17 Guidebook.

Commissioners Johnson and Mersinger provided statements in support of these amendments, but Commissioner Pham dissented. In her dissent, Commissioner Pham noted that although she supported most of the rule amendments, she "find[s] it insincere, or incongruous at best, for the Commission to state that it is dedicated to providing certainty to market participants—or even clarity, which the Final Rule asserts seven times—when the Commission is delegating authority to a ghost office to make decisions that may cost firms millions of dollars to implement." In addition, Commissioner Pham raised concerns over the CFTC not providing a "reasonable" notice standard and due process protections in the adoption of the amendments.

The compliance date for the Financial Reporting Requirements will be September 30, 2024, and the compliance date for the Large Trader Requirements will be two years after publication in the Federal Register. Both sets of amendments create significant changes for commodity market participants. Swap Dealers, major swap participants and large traders in the futures and options market will now be subject to a new regulatory framework for their reporting and compliance programs.

[View source.]