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Swap dealers uneasy about ability to meet compliance deadline for CFTC business conduct rules

Jill Sommers

The Commodity Futures Trading Commission has extended the compliance deadline for new business conduct regulations, but many swap dealers are concerned they still will not have enough time to come into compliance with the rules.

The new business conduct rules are intended to enhance transparency and promote responsibility in the over-the-counter derivatives market. Jill Sommers, a CFTC commissioner, said, however, that the rules may actually have a negative impact on swap dealers, according to Risk.net.

“I could not help but think of president Reagan and his statement that the nine most terrifying words in the English language are: ‘I’m from the government, and I’m here to help,’” Sommers said, Risk.net reports.

The rules mandate that major swap participants and swap dealers gather data on customers, determine the eligibility of customers to enter trades and ask clients to affirm that they understand the risks involved in trading.

Those affected by the rule did not know which products and entities would be required to adhere to the new standards until the CFTC finalized swap definitions last month. The original compliance deadline was Oct. 15, but the CFTC chose to extend the deadline to January 1, according to Risk.net.

If dealers cannot come into compliance before January, counter-parties will be unable to trade and some customers may be locked out of the market. Dealers have expressed concern that they would be unable to obtain the required information from counter-parties or receive approval to amend OTC market documentation.

Once the rule takes effect, dealers and MSPs will be required to provide clients with information about a swap’s price, risk and possible conflicts of interest. Banks maintain that this will hinder clients’ ability to trade in fast-moving markets and will require dealers to establish new systems to calculate and deliver the required information.

“Dealers didn’t fully appreciate the enormity of this until the past six to eight weeks—once the swaps rule was finalized and the cross-border guidance was published,” a source with knowledge of the dealers’ preparations said, Risk.net reports. “They then started talking to their operations and systems people and the other dealers—it’s only then that people realized the magnitude of the issue.”

The new rules will apply to all swaps between U.S. dealers or MSPs and their customers in cases where the identity of the counter-party is established, which could put trading venues that utilize an anonymous book trading approach an advantage.

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