The CFTC recently adopted Interim Final Rule 44.02 (the “Interim Final Rule” or the “Rule”), which imposes recordkeeping requirements on (i) swap1 dealers, (ii) major swap participants that enter into swaps with counterparties that are not swap dealers, and (iii) entities that enter into swaps with counterparties that are neither swap dealers nor major swap participants. The Interim Final Rule imposes no new requirements on an entity that is not a swap dealer and that enters into swaps subject to regulation by the Commodity Futures Trading Commission (the “CFTC”) only with swap dealers.2
The Dodd-Frank Wall Street Reform and Consumer Protection Act requires that swaps entered into before July 21, 2010 and outstanding as of that date and subject to regulation by the CFTC (“pre-enactment unexpired swaps”) must be reported to a registered swap data repository (“SDR”) or, if no registered SDR will accept the data, to the CFTC. Because there are currently no registered SDRs and the CFTC is not yet prepared to accept swap data, the CFTC has adopted the Interim Final Rule. The Rule is effective as of October 14, 2010 and will remain in effect until the effective date of permanent recordkeeping and reporting rules for swap transactions promulgated by the CFTC. The Rule requires that the swap counterparties described below retain records regarding pre-enactment unexpired swaps. Data regarding such pre-enactment unexpired swaps will need to be reported no later than 60 days from the date the appropriate SDR is registered or by the compliance date established by CFTC rules, whichever comes first.
In a swap in which only one counterparty is a swap dealer or a major swap participant, the swap dealer or major swap participant will be responsible for reporting the swap. In a swap between a swap dealer and a major swap participant, the swap dealer will be responsible for reporting the swap. The future reporting obligation for all other swaps will be decided by the counterparties.
The counterparty responsible for reporting data on a pre-enactment unexpired swap will have to submit a copy of the transaction confirmation (in electronic form, if available) and, if available, the time the transaction was executed. The CFTC may also request additional information such as actual and summary trade data. The counterparty responsible for submitting data should retain in its existing format all information and documents, to the extent and in such form as they presently exist, relating to the terms of the transaction. This information includes (i) any information necessary to identify and value the transaction; (ii) the date and time of execution of the transaction; (iii) information relevant to the price of the transaction; (iv) whether the transaction was accepted for clearing by any clearing agency or derivatives clearing organization, and if so the identity of such agency or organization; (v) any modification(s) to the terms of the transaction; and (vi) the final confirmation of the transaction. Counterparties to pre-enactment unexpired swaps are not required to create or retain new records with respect to transactions that occurred in the past.
The definitions of swap dealer and major swap participant are yet to be finalized by future regulations, but we expect that most swaps to which private investment funds and institutional investors are parties will be deemed to be swaps with swap dealers. Accordingly, the recordkeeping and reporting obligations will not be imposed on the fund or the institutional investor under the Interim Final Rule. If there is any doubt whether an existing swap is with a swap dealer, a fund should retain the records referred to above in order to be in a position to comply with the Rule.
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1The term “Swap” is defined in Section 1a(47) of the Commodity Exchange Act.
2 While the definition of swap dealer is still subject to further refinement by the CFTC, it includes an entity that regularly enters into swaps with counterparties as an ordinary course of business for its own account.
