The Commission is amending the recordkeeping obligations set forth in Commission regulations along with corresponding technical changes to certain provisions regarding retention of oral communications and record retention requirements applicable to swap dealers and major swap participants, respectively. The amendments modernize and make technology neutral the form and manner in which regulatory records must be kept, as well as rationalize the rule text for ease of understanding for those persons required to keep records pursuant to the Commodity Exchange Act and regulations promulgated by the Commission thereunder. The amendments do not alter any existing requirements regarding the types of regulatory records to be inspected, produced, and maintained set forth in other Commission regulations.
The global compliance deadline for implementation of variation margin requirements for uncleared swap transactions is March 1, 2017. Unless an exception is available, the rules generally require swap dealers to collect and post variation margin with no credit threshold. The rules require the parties to enter into new or amended credit support documentation, limit the types of collateral that may be posted, prescribe minimum transfer amounts and effectively require new operational processes to be put in place. Moreover, different rules can apply depending on who the swap dealer’s regulator is and/or the jurisdiction of the counterparty. Not surprisingly, many market participants, particularly smaller financial firms, buy-side firms, asset managers, pension funds and insurance companies are unlikely to be compliant by the March 1 deadline. This has caused immense consternation among buy-side market participants who feared that they would be unable to trade until they came into compliance.
On February 23, 2017, following requests from numerous trade associations, U.S. banking regulators and IOSCO, the umbrella body for global securities regulators, issued statements encouraging leniency in enforcement of the documentation requirements. More specifically, the Federal Reserve provided guidance to examiners of CFTC-registered swap dealers that, except for transactions with financial end users that present “significant exposures” (which must still comply with the March 1 deadline), examiners should focus on swap dealer’s good faith efforts to comply as soon as possible but no later than September 1, 2017. Similarly, though less explicitly, IOSCO issued a statement that, while it expects all parties to make every effort to meet the March 1 deadline, it believes that the global regulators should take “appropriate measures … to ensure fair and orderly markets during the introduction and application of such variation margin requirements.” These statements follow the release by the CFTC on February 13, 2017 of a time-limited no-action letter delaying compliance by swap dealers under their jurisdiction until September 1, 2017.
There are a number of paths to compliance for buy-side firms, including negotiating bilateral agreements or amendments directly with swap dealers or using an industry-wide questionnaire-style protocol developed by ISDA and available through their ISDA Amend automated service run jointly with Markit.
If you have questions regarding the current deadlines or need assistance with compliance, please contact our derivatives partner, Daniel Budofsky (firstname.lastname@example.org), or your regular Pillsbury contact.
The CFTC’s recent enforcement against Bitfinex’s financed trading activities demonstrates the Commission’s increasing interest in virtual currency and digital assets.
The U.S. Commodity Futures Trading Commission (CFTC) is further expanding its oversight of virtual currency exchanges and digital assets in general. On June 2, 2016, Bitfinex (a Hong Kong-based bitcoin and cryptocurrency exchange) settled with the CFTC following an investigation into its trading activities. The CFTC charged that the exchange offered illegal off-exchange financed retail commodity transactions, and that Bitfinex had failed to register as a Futures Commission Merchant (FCM) as required by law. As a result, Bitfinex will pay $75,000 in civil penalties.
This action is more evidence of the CFTC’s interest in not only bitcoins, but any digital asset that can be considered a commodity. Transactions in decentralized digital tokens (such as Ether, DAO Tokens, Safecoins, Factoids, and Bitcrystals) are becoming more common, and so is regulatory interest.
The CFTC has approved a final rule that removes reporting and recordkeeping requirements for trade option counterparties that are neither swap dealers nor major swap participants (Non-SD/MSPs). The removal of the reporting requirements also applies to commercial end users transacting in trade options connected to their business.
Regarding the reporting requirement, the annual notice reporting requirement for otherwise unreported trade options under CFTC regulation 32.3(b) has been eliminated from Form TO. Additionally, the position limit requirements referenced in regulation 32.3(c) have been eliminated.
Regarding the recordkeeping requirement, the swap-related recordkeeping requirements for Non-SD/MSPs stemming from their trade option activities have been eliminated. However, Non-SD/MSPs that transact in trade options with swap dealers or major swap participants must obtain a legal entity identifier and provide it to their swap dealer or major swap participant counterparties.
Once the Trade Options Final Rule becomes effective, upon publication of the final rule in the Federal Register, CFTC No-Action Letter 13-08 which provides conditional relief for trade option counterparties that are Non-SD/MSPs from certain swap related recordkeeping and reporting requirements will be withdrawn.
The full CFTC release can be read here.