September 15, 2015
In its rush to implement the Dodd-Frank Act over the past few years, the Commission issued multiple rules that proved to be confusing, impracticable or unworkable, which in turn necessitated the unprecedented issuance of no-action relief, either due to unrealistic compliance deadlines, problematic elements of the rules or both. I trust that today’s proposal from the Commission signals that the epoch of heedless rule production is drawing to a close.
The Commission is seeking comment on a proposed rule that would codify a modified version of no-action relief issued in 2013 (the No-Action Relief) by the Division of Swap Dealer and Intermediary Oversight (DSIO) pursuant to a request for an interpretive letter from the International Swaps and Derivatives Association (ISDA). The No-Action Relief allows Swap Dealers (SDs) and Major Swap Participants (MSPs) to treat certain Part 45 data fields as non-material for purposes of portfolio reconciliation under Commission Regulation 23.502.1
I commend the Chairman and DSIO staff for taking steps to replace the No-Action Relief with a rulemaking subject to a cost-benefit analysis and the notice and comment requirements of the Administrative Procedure Act. Reasonable people understood at the height of the Dodd-Frank rulemaking frenzy that the Commission would and could not get everything right. That is why actions like today’s rule proposal are necessary and appropriate.
I urge the CFTC staff to continue down the path of bringing to the Commission for consideration amendments to flawed Dodd-Frank rulesets. It is appropriate as a matter of good government that we replace the hundreds of no-action, exemptive and interpretive letters, guidance, advisories and other communications, both written and unwritten, issued without a Commission vote in the wake of the Dodd-Frank Act with proper administrative rulemakings
I support issuing for public comment the proposed amendments to the definition of “material terms” for purposes of portfolio reconciliation. As the public reviews this rule change and formulates comments, I would like to draw its attention to several aspects of the proposal. Commission Regulation 23.502 requires SDs and MSPs to engage in portfolio reconciliation once each day, week or calendar quarter, depending on the size of the swap portfolio, and to resolve immediately any discrepancy in a material term. It is unclear why the Commission needs a daily, weekly, or quarterly reconciliation of data fields that will not change over time once established. In particular, I note that the proposed rule would continue to treat as material terms the execution timestamp and timestamp for submission to a swap data repository for uncleared swaps, an indication of whether the clearing requirement exception in section 2(h)(7) of the Commodity Exchange Act has been elected and the identity of the counterparty electing the clearing requirement exception. I am aware of the staff’s concern that a discrepancy in these terms could negatively impact the Commission’s regulatory mission, but question whether these terms will ever need to be reconciled after an initial verification.
On the other hand, I also question what additional burden will be placed on market participants by including these terms in the portfolio reconciliation process. I note that in its request for an interpretive letter ISDA stated that requiring reconciliation of data fields that are not relevant to the ongoing rights and obligations of the parties to a swap unnecessarily adds to the costs and complexity associated with implementing and managing the portfolio reconciliation process.2 It would be most helpful if parties affected by the rule would submit detailed comments regarding these costs.
It is also unclear why the Commission is proposing to retain the requirement that SDs and MSPs exchange non-material terms throughout the life of a swap as part of a portfolio reconciliation exercise. Commission Regulation 23.500(i) defines portfolio reconciliation as the process by which two parties to one or more swaps: (1) exchange “terms” (meaning all terms) of all swaps between the counterparties; (2) exchange each counterparty’s valuation of each swap as of the close of business on the immediately preceding business day; and (3) resolve any discrepancy in “material” terms and valuations. I note that ISDA requested that the Commission narrow the definition of “terms” in Rule 23.500(i)(1) to mean “material terms,” but the Commission is not proposing to do so. Thus, counterparties will be required to exchange all terms of each swap on a daily, weekly, or quarterly basis throughout the life of a swap, but will be required to reconcile only “material terms.” As with treating the terms relating to timestamps and the clearing exception as “material terms” discussed above, I question the utility of including non-material terms that are not required to be reconciled as part of the portfolio reconciliation process. It would be most helpful if parties affected by the rule would submit detailed comments weighing the burdens against benefits of continuing to include such non-material terms.
I look forward to thoughtful comments on all aspects of the proposal.
1 See CFTC Letter No. 13-31 (June 26, 2013).
2 See ISDA Request for Interpretive Letter – Part 23 dated May 31, 2013.
Last Updated: September 15, 2015