The Commodity Futures Trading Commission (CFTC) has passed its final rules for market participants who clear customer trades.
The rules prohibit swap dealers, major swap participants and futures commission merchants (FCMs) from disclosing the identity of a customer’s original executing counterparty. The number of counterparties with whom a customer can enter into a trade has also been limited, as has the size of the position traders can take with any individual counterparty.
The new prohibitions ban trilateral agreements, which the CFTC determined could have potential anticompetitive effects by impairing a customer’s access to the best price, dampening general market liquidity, and hindering the acceptance of trades for clearance.
Trilateral agreements came out of a controversial standardised clearing system proposed last June by the International Swaps and Derivatives Association (ISDA) and the Futures Industry Association (FIA).
Dubbed the ‘give-up agreement’, ISDA had asserted the system mitigated the risk executed trades failed to clear. Under the measures, FCMs could make clients disclose the dealer counterparty’s identity to them.
The result of the give-up agreement could have been that FCMs restrict the number of dealer counterparties a client could use, steering the buy-side towards their own desks. With the rules passed yesterday, the CFTC has categorically denounced such a system.
Yesterday’s final rules mean clearing members and derivatives clearing organisations (DCOs) must accept or reject swaps for clearing “as quickly as would be technologically practicable if fully automated systems were used”. Newly-created swap execution facilities (SEFs), swap dealers and major swap participants must submit most swaps to DCOs for clearing the same day. If a swap is not subject to a clearing mandate but both counterparties elect to clear it, then is must be submitted no later than the next business day after execution.
Under the final rules, swap dealers and major swap participants must conduct stress tests under “extreme but plausible conditions of all positions at least once per week” as well as once a week evaluate their ability to meet initial margin requirements and variation margin requirements in cash. They must also evaluate their ability to liquidate the positions they clear in an orderly manner, and estimate the cost of liquidation at least once per month.
FCMs, swap dealers or major swap participants which are clearing members must also now establish credit and market limits based on position size, order size, margin requirements or similar factors, as well as automate the screening of their orders for compliance with the risk-based limits. Their risk management procedures must monitor adherence to the risk-based limits intraday and overnight and, at least once per week for FCMs, conduct stress tests of positions in their prop account and positions in any customer account that could pose material risk to the FCM.
The CFTC’s final rules for swap dealers and major swap participants become effective 1 October or the date the Dodd-Frank registration rules for swap dealers and major swap participants become effective, whichever is later. SEFs must comply by the latter of 1 October or the date Dodd-Frank rules implementing the core principles for SEFs take effect. FCMs, DCMs and DCOs must comply by 1 October.