At an open meeting on November 10, the CFTC proposed four rules regarding regulation of, and registration requirements for, swap dealers and major swap participants (“MSPs”) under the Dodd-Frank Act. According to the CFTC's fact sheets and Q&As, the proposed rules would:
- establish a procedure for registration of swap dealers and MSPs, including: allowing, but not requiring, provisional registration pending final definitions and regulatory requirements under Dodd-Frank; requiring swap dealers and MSPs to become members of a registered futures association; and prohibiting them from associating with persons subject to statutory disqualifications;
- through a policies and procedures approach, require swap dealers and MSPs to: establish written risk management procedures; monitor trading to prevent violations of position limits; supervise activities; create business continuity and disaster recovery plans designed to permit resumption of activities by the business day after an interruption; develop systems to ensure prompt disclosure when required by regulators; and avoid antitrust violations;
- require swap dealers and MSPs to implement systems to avoid conflicts of interest between research analysts and individuals involved in pricing, trading or clearing activities and maintain partitions between business trading personnel and the personnel of an affiliated clearing member; and
- require swap dealers and MSPs to designate a chief compliance officer with certain specified duties, including preparing an annual compliance report.
The November 10 meeting did not clarify who will be required to register as a swap dealer or MSP. Chairman Gensler indicated during the meeting that definitions of these terms are scheduled to be proposed on December 1. Despite the lack of definitions, the rules proposed on November 10 will allow, but not require, entities to provisionally register as swap dealers or MSPs beginning on April 15, 2011, the date on which the CFTC plans to adopt rules governing the registration process. These provisionally registered swap dealers and MSPs would be subject to any rules regarding behavior of swap dealers or MSPs effective at the time of their registration application, and would become subject to each subsequent rule as it becomes effective. Once all required rules are effective, provisionally registered swap dealers and MSPs will be considered fully registered.
In addition, the CFTC is proposing for comment three possible options for how swap dealers and MSPs will be supervised to ensure they are in compliance with CFTC rules: 1) direct supervision by the CFTC; 2) supervision by a registered futures association with oversight of the CFTC; and 3) a split of compliance oversight between the CFTC and the registered futures association. Currently, the only registered futures association is the National Futures Association.
In addition to the four rules proposed relating to swap dealers and MSPs, the CFTC adopted proposed rules relating to whistleblower incentives and protection, registration of foreign boards of trade, and conflicts of interest rules for futures commission merchants and introducing brokers similar to those proposed for swap dealers and MSPs. Comments are due on all proposed rules 60 days after publication in the Federal Register, which is expected shortly.
Davis Polk will continue to monitor these developments and will prepare a more comprehensive memorandum once the proposed rules are published.