February 06, 2012
The Commodity Futures Trading Commission (“CFTC”) recently adopted a series of rules and orders that begin to establish the final framework for the registration and regulation of swap dealers (“Dealers”) and major swap participants (“MSPs”, and together with Dealers, “Registered Entities”). On January 11, 2012, the CFTC adopted Registration Rules (the “Registration Rules”) to implement new Registered Entity registration requirements under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). The CFTC also authorized the National Futures Association (“NFA”) to administer the registration process for Registered Entities (the “Order”). The CFTC, in a divided vote, separately adopted the first set of business conduct standards to apply to Registered Entities—the so-called “external” business conduct rules (the “External Business Conduct Rules”).
The Registration Rules and the Order together establish the procedures for registration of Dealers and MSPs. However, as acknowledged in the Registration Rules, several significant substantive issues for Registered Entities remain to be addressed. These include, among others, (1) the definitions of Dealer and MSP (i.e., who is required to register), (2) many of the key regulatory requirements that will apply to Registered Entities and (3) the application of the Dealer and MSP requirements to entities outside the United States. As a result, the full scope of the regulatory requirements for Registered Entities is not yet clear.
Pending completion of the regulatory framework, entities that expect that they will be Registered Entities will be able to provisionally register with the NFA and demonstrate compliance with a number of the new requirements applicable to Registered Entities on a rolling basis as they become effective. Registration will be required by the latest effective date of the final rules defining Dealer and MSP. The NFA began accepting applications through its electronic registration system on January 19, 2012. Registered Dealers and MSPs will be required to be NFA members as well.
As a result of the External Business Conduct Rules, Registered Entities will have a substantially expanded set of obligations towards their counterparties than they have had in the current OTC derivatives market. Following the compliance date of the External Business Conduct Rules, Registered Entities will be required, among other things, to provide enhanced disclosure of material information to counterparties and will have suitability obligations when recommending swap transactions. These types of enhanced responsibilities are expected to fundamentally alter the current business and trading relationship between derivatives dealers and their clients. Not all of these new requirements are applicable to MSPs and some additional requirements are applicable only when dealing with so-called “Special Entities”, which include among others, U.S. federal or state governmental agencies, employee benefit plans subject to Title I of the Employee Retirement Income Security Act of 1974 (“ERISA” and “ERISA Plans”, respectively), governmental plans (as defined in Section 3 of ERISA) and endowments.