On November 3, the CFTC proposed what new Chairman Timothy Massad described as “further fine-tuning of our rules” to avoid “unintended consequences on . . . nonfinancial commercial companies . . . .” This post addresses the CFTC’s proposals regarding:
1) recordkeeping requirements; and
2) the deadline for posting “residual interest.”
Recordkeeping requirements
The CFTC is proposing to amend Rule 1.35 to address concerns of commercial end users that the CFTC’s new recordkeeping requirements are too burdensome (Commissioner Giancarlo dissented, stating that the proposal does not go far enough).
The proposal would clarify the requirement that records be “identifiable and searchable by transaction” to mean that they must be:
1) searchable; and
2) in the case of some records, allow for identification of a particular transaction.
The CFTC has said this means that certain records of communications would not have to link to a particular transaction. But the precise nature of this clarification is difficult to discern until the CFTC publishes the proposed language.
The proposed amendments to Rule 1.35 also would codify, and in one instance expand, relief that staff previously granted in two no-action letters:
- The proposal would codify staff letter 14-72, which granted no-action relief to members of exchanges (designated contract markets, or DCMs) or swap execution facilities (SEFs), if the members are not required to register with the CFTC, from the requirements to:
1) keep text messages; and
2) store required records so that they are “identifiable and searchable by transaction.”
- It also would codify staff letter 14-60, which granted no-action relief to commodity trading advisors that are members of DCMs or SEFs from the requirement to record oral communications regarding the execution of swaps, and would expand that relief to cover futures and options, too.
Residual interest deadline
The CFTC proposes to amend Rule 1.22 relating to when a futures commission merchant (FCM) must deposit its own capital (residual interest) in an amount sufficient to cover its customers’ aggregate undermargined amounts.
The current rule, adopted as part of the CFTC’s customer protection enhancements a year ago, provides an initial deadline for posting residual interest of 6:00 pm Eastern time on the date of settlement, beginning November 14, 2014.
Rule 1.22 also directs CFTC staff to conduct a public roundtable, solicit comment, and publish a report by May 16, 2016, on the practicability of moving the residual interest deadline from 6:00 pm to the time of settlement or some other time of day. Regardless of the comments received or the conclusions of that report, however, the rule provides that the residual interest deadline will change to the time of settlement on December 31, 2018 (the “automatic adjustment”).
Concerns have arisen that, because the deadline for FCMs to post their capital affects the deadline for customers to increase their own margin funds, this automatic adjustment would force market users to pre-fund their margin requirements. This would adversely impact commercial end users in particular.
Accordingly, the CFTC issued a proposed Rule 1.22 amendment to eliminate the automatic adjustment. All other aspects of the rule remain in place, but under the proposal, the residual interest deadline would remain at 6:00 pm unless the CFTC changes it through a future notice-and-comment rulemaking.
Possible implications for swap dealer registration de minimis threshold
If adopted, the residual interest amendment could stand as precedent for a similar change to the “automatic decrease” that will occur in the de minimis threshold for swap dealer registration from a US$8 billion to a US$3 billion aggregate gross notional amount.
Like Rule 1.22, the de minimis rule requires staff to publish a report regarding the de minimis threshold, but the threshold will drop to US$3 billion regardless of that report.
If the CFTC adopts its residual interest proposal as final, market participants undoubtedly will argue that it similarly should amend its swap dealer registration rule to maintain the existing US$8 billion de minimis threshold unless the CFTC changes it through a future notice-and-comment rulemaking.
