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CFTC Amends Real-Time Swap Public Reporting Requirements

November 11, 2020

The Commodity Futures Trading Commission (CFTC) has unanimously approved amendments to the real-time swap reporting rules in Part 43 of the CFTC’s regulations by, among other things, clarifying the applicability of the rules to swaps executed in a prime brokerage agency arrangement.

The CFTC previously issued no-action relief that addressed mirror swaps in prime brokerage agency arrangements, providing relief from the real-time public reporting obligations in response to concerns that public reporting of both legs of a prime brokerage transaction would incorrectly suggest the presence of more trading activity in the market than actually existed (see CFTC No-Action Letter No. 12-53).

The September 17 amendments largely codify the no-action relief, but introduce new concepts and defined terms to prevent duplicative swap reporting by limiting the scope of mirror swaps that should not be reported to those swaps that are integrally related to trigger swaps and their related pricing events. The practical effect of the rulemaking for parties in a swaps prime brokerage agency arrangement (see below) is to clarify that mirror swaps do not need to be reported under the CFTC’s real-time reporting rules and to identify the party responsible for reporting the trigger swap.

 

What Is a Swaps Prime Brokerage Agency Arrangement?

  • A swap counterparty (the prime broker’s client) opens an account with a prime broker who grants limited agency powers to the client, enabling the client (as agent for the prime broker) to enter into swaps with executing dealers approved by the prime broker, provided that the swaps are within predefined limits and parameters.
  • The prime broker enters into “give-up” arrangements with the approved executing dealers that permit the executing dealers to agree to negotiate swaps with the prime broker’s clients, acting as an agent for the prime broker, again subject to predefined limits and parameters. Pursuant to the give-up arrangements, the executing dealers face the prime broker as counterparty for the resulting “trigger swap.”[1]
  • After a client seeks bids for its desired swap from approved executing dealers, and agrees on the terms of a swap with an executing dealer, both the client and the executing dealer provide the prime broker with a notice of the terms for the “trigger swap.” Once the prime broker accepts the swap (and it must accept the swap if the terms are within the predefined parameters), the prime broker enters into a “mirror swap” with the client with identical economic terms and pricing (with an adjustment for the prime brokerage servicing fee).

EFFECTIVE DATE AND COMPLIANCE DATES

The amendments are effective 60 days after the rules are published in the Federal Register. The compliance dates are 18 months for most of the amended regulations, including the swaps prime brokerage agency arrangement reporting rules, after the rules are published in the Federal Register, and 30 months after the rules are published in the Federal Register for Regulation 43.4(h) (post-initial cap size) and Regulation 43.6 (block trades and large notional off-facility swaps).

SUMMARY OF RULES RELATED TO SWAPS PRIME BROKERAGE AGENCY ARRANGEMENTS

The CFTC’s amended regulations incorporate public reporting rules applicable to swaps prime brokerage agency arrangements. Trigger swaps must be reported to a swap data repository (SDR) as soon as technologically practicable upon execution (deemed to occur at the time of the pricing event for the trigger swap). Where a swap dealer is a counterparty to the trigger swap but is not serving as the prime broker, the swap dealer counterparty is designated as the reporting counterparty for the trigger swap. Where no counterparty to a trigger swap is a swap dealer, the general rules apply (Regulation 43.3(a)(3), providing a hierarchy of reporting based on a counterparty’s status). In the proposal, the CFTC remarked that if neither party to a trigger swap is a swap dealer, the prime broker could amend the terms of its arrangement to require the parties to report execution in a timely manner to permit the prime broker to report the trigger swap as soon as technologically practicable.

Although the proposal did not directly address the party responsible for reporting in the scenario where one leg of a prime brokerage transaction is executed on a swap execution facility (SEF) or designated contract market (DCM) (with the mirror swap executed bilaterally pursuant to the give-up arrangement), the final rules clarify that a prime broker swap that is executed on or subject to the rules of an SEF or DCM shall be treated as a trigger swap, with the SEF or DCM responsible for the reporting of the trigger swap.

With respect to a prime broker swap that is cleared by a central counterparty, the final rules do not impose different requirements to prime broker swaps that are cleared by a derivatives clearing organization (DCO). If a prime broker swap is executed on an SEF or DCM and submitted to a DCO for clearing, the CFTC’s reporting rules applicable to an “original swap” (a swap that has been accepted for clearing by a DCO) and a “clearing swap” (a swap created pursuant to the rules of a DCO with the DCO as a counterparty, including any swap that replaces an original swap that was extinguished upon acceptance for clearing) will apply to the prime broker swap that is cleared by a DCO.

The CFTC is adopting the term “mirror swap” with the following modifications from the proposed rule: (1) removing the explicit reference to a partial reverse give-up because the definition already captures swaps associated with partial reverse give-ups, making this reference unnecessary; and (2) replacing references to “notional” with “contractually agreed payment and delivery amounts,” a broader term that clarifies that mirror swaps may apply to swaps in all asset classes, including swaps for which the term notional is not used by market participants.

At the request of commenters, the CFTC adopted a new term not included in the proposal. Under the final rules, the term “prime broker swap” is defined to mean a swap with a counterparty that is a swap dealer that is acting in its capacity as a prime broker. As a result, trigger swaps and mirror swaps are considered prime broker swaps and the proposed rules are clarified to avoid any confusion that a prime brokerage agency arrangement is limited to the execution of the trigger swap.

In this and the other swap data reporting rulemakings adopted on the same day, the CFTC noted that it received a request to require reporting parties to “tag” swaps that are entered into pursuant to a swaps prime brokerage agency arrangement. The CFTC declined to identify swaps in this manner.

PRACTICAL CONSIDERATIONS

The final rules introduce legal and operational considerations that prime brokers should take into account. The parties in a swaps prime brokerage agency arrangement should reevaluate their swap data reporting agreements in light of the CFTC’s rulemaking. Of course, changes to existing reporting procedures may necessitate operational changes. When considering whether swap data reporting changes are necessary, potential changes should be discussed with the prime broker’s or executing dealer’s operations team to ensure that the prime broker or executing dealer can comply with the updated reporting obligations by the final rules’ compliance dates.

RELEVANT RULE TEXT RELATED TO SWAPS PRIME BROKERAGE AGENCY ARRANGEMENTS

CFTC Regulation 43.2(a) Definitions

  • As soon as technologically practicable means as soon as possible, taking into consideration the prevalence, implementation, and use of technology by comparable market participants.
  • Execution means an agreement by the parties, by any method, to the terms of a swap that legally binds the parties to such swap terms under applicable law.
  • Execution date means the date of execution of a particular swap.
  • Mirror swap means a swap:

(1) To which—

  • a prime broker is a counterparty or
  • both counterparties are prime brokers;

(2) That is executed contemporaneously with a corresponding trigger swap;

(3) That has identical terms and pricing as the contemporaneously executed trigger swap, except:

  • that a mirror swap, but not the corresponding trigger swap, may include any associated prime brokerage service fees agreed to by the parties, and
  • as provided in paragraph (5) of this “mirror swap” definition;

(4) With respect to which the sole price forming event is the occurrence of the contemporaneously executed trigger swap; and

(5) The execution of which is contingent on, or is triggered by, the execution of the contemporaneously executed trigger swap. The contractually agreed payments and delivery amounts under a mirror swap may differ from those amounts of the corresponding trigger swap if:

  • under all such mirror swaps to which the prime broker that is a counterparty to the trigger swap is also a counterparty, the aggregate contractually agreed payments and delivery amounts shall be equal to the aggregate of the contractually agreed payments and delivery amounts under the corresponding trigger swap; and
  • the market risk and contractually agreed payments and delivery amounts of all such mirror swaps to which a prime broker that is not a counterparty to the corresponding trigger swap is a party will offset each other, resulting in such prime broker having a flat market risk position at the execution of such mirror swaps.
  • Pricing event means the completion of the negotiation of the material economic terms and pricing of a trigger swap.
  • Prime broker means, with respect to a mirror swap and its related trigger swap, a swap dealer acting in the capacity of a prime broker with respect to such swaps.
  • Prime brokerage agency arrangement means an arrangement pursuant to which a prime broker authorizes one of its clients, acting as agent for such prime broker, to cause the execution of a prime broker swap.
  • Prime brokerage agent means a client of a prime broker who causes the execution of one or more prime broker swap(s) acting pursuant to a prime brokerage agency arrangement.
  • Prime broker swap means any swap to which a swap dealer acting in the capacity as prime broker is a party.
  • Trigger swap means a swap:
    • That is executed pursuant to one or more prime brokerage agency arrangements;
    • To which one counterparty or both counterparties are prime brokers;
    • That serves as the contingency for, or triggers, the execution of one or more corresponding mirror swaps; and
    • That is a publicly reportable swap transaction that is required to be reported to a swap data repository pursuant to this part and part 45 of this chapter. A prime broker swap executed on or pursuant to the rules of a swap execution facility or designated contract market shall be treated as the trigger swap for purposes of this part.

CFTC Regulation 43.3(a)(6) Method and Timing for Real-Time Public Reporting

Prime Broker Swaps

  • A mirror swap is not a publicly reportable swap transaction. Execution of a trigger swap, for purposes of determining when execution occurs under paragraphs (a)(1) through (3) of this section, shall be deemed to occur at the time of the pricing event for such trigger swap.
  • With respect to a given set of swaps, if it is unclear which is, or are the mirror swap(s) and which is the related trigger swap (including, but not limited to, situations where there is more than one prime broker counterparty within such set of swaps and situations where the pricing event for each set of swaps occurs between prime brokerage agents of a common prime broker), or if under the prime brokerage agency arrangement, the trigger swap would occur between two prime brokers, the prime broker(s) shall determine which of the prime broker swaps shall be treated as the trigger swap and which are mirror swaps.
  • Trigger swaps shall be reported in accordance with the following:
    • Trigger swaps executed on or pursuant to the rules of a swap execution facility or designated contract market shall be reported pursuant to paragraph (a)(2) of this section; and
    • Off-facility trigger swaps shall be reported pursuant to paragraph (a)(3) of this section, except that if a counterparty to a trigger swap is a swap dealer that is not a prime broker with respect to that trigger swap, then that swap dealer counterparty shall be the reporting counterparty for the trigger swap.

CFTC Regulation 43.3(a)(6) Method and Timing for Real-Time Public Reporting

Third-Party Facilitation of Data Reporting

Any person required by this part to report swap transaction and pricing data, while remaining fully responsible for reporting as required by this part, may contract with a third-party service provider to facilitate reporting.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Boston
Katherine Dobson Buckley

Chicago
Michael M. Philipp

New York
Thomas D’Ambrosio



[1] A trigger swap is the swap that is negotiated between an executing dealer and the client of a prime broker but “given up” to the prime broker, resulting in a swap between the executing dealer and the prime broker if the swap is within predefined parameters. This swap serves as the trigger for the execution of the mirror swap, or the swap between the prime broker and its client.