The Commodity Futures Trading Commission (CFTC) last Wednesday approved proposals requiring swap dealers, major swap participants and other regulated entities to establish "firewalls" between their trading desks, research arms and clearing activities, register with a registered futures association and adopt policies to prevent "unreasonable restraint of trade." It also cleared a proposal that would provide incentives and protection for whistle blowers.
The CFTC voted out a total of seven proposed rules at its fourth meeting to consider reforms to implement the Dodd-Frank Wall Street Reform Act, which was signed by President Obama in July (see NGI, July 26). All told, the Commission has approved 18 proposed reforms, two final rules and a couple of advanced notice of proposed rulemakings since October (see NGI, Nov. 1; Oct. 25; Oct. 4).
Two proposals "establish firewalls to ensure a separation between the research arm, the trading arm and the clearing activities of swap dealers, major swap participants, futures commission merchants [FCM] and introducing brokers," Chairman Gary Gensler said. Specifically, one would restrict nonresearch personnel from influencing the content of research reports prepared by research analysts employed by a swap dealer, major swap participants, FCMs or an introducing broker. And it prohibits the supervision of research analysts by certain trading and clearing personnel.
Moreover, an FCM or introducing broker must disclose in research reports, and a research analyst must disclose in public appearances, whether the analyst maintains a financial interest in any derivatives of a type that he or she follows. And it requires swap dealers and major swap participants to maintain "appropriate partitions" between business trading personal and the personnel of an affiliated clearing member.
The CFTC voted out proposed regulations to establish a process to register all swap dealers and major swap participants with a registered futures association, such as the National Futures Association. It includes a provisional registration pending the agency's approval of the definition of the terms -- swap dealers and major swap participants.
Commissioners Scott O'Malia and Jill Sommers expressed concern about the CFTC's approval of proposals affecting swap dealers and major swap participants without yet defining the terms. "I think we must immediately produce the critical definitions that define swap market participants. Specifically the swap dealer, major swap participant and end-user definitions must be released sooner rather than later. Each rulemaking that passes without some clarity regarding these definitions creates confusion and uncertainty. I hope we can address this at the next Commission [meeting] on Nov. 19," O'Malia said.
"We [are debating] the terms and conditions for registering swap dealers, but we have yet to provide a definition that spells out who this rule will apply to," he said.
"In a perfect world we would be doing the definitions" first, but that hasn't been the case, Sommers said. "I agree [that] if we're not careful we could mess up...We have to be very careful as we go forward," Commissioner Bart Chilton said.
In addition, the Commission approved a proposed rule that would require swap dealers and major swap participants to establish policies for monitoring their traders throughout the trading day for compliance with trading limits established by the firm, and require traders to follow procedures for executing and confirming transactions.
Specifically, a swap dealer or major swap participant would have to provide annual training for personnel; monitor and supervise trading; implement an early warning system, test the position limit procedures; document compliance with position limits on a quarterly basis; and audit the procedures annually, the CFTC said.
And the rule would require swap dealers and major swap participants to adopt policies and procedures to prohibit any action that results in an "unreasonable restraint of trade or imposes any material anticompetitive burden on trading or clearing, unless necessary or appropriate to achieve the purposes of the CEA [Commodity Exchange Act]."
A separate proposed rule would provide incentives and protections for whistle blowers. The Dodd-Frank Act would allow the CFTC for the first time to pay awards to whistle blowers that provide information that leads to the successful enforcement that results in monetary sanctions exceeding $1 million.
"People [already] are coming to us...identifying themselves as Dodd-Frank whistle blowers," a staff member said. He estimated that CFTC has received 3,600 tips, complaints and referrals in the past year, of which about 5% were related to Dodd-Frank. The new law enables the Commission to "pay bounties" for the information.
Another proposed rule would require FCMs, swap dealers and major swap participants to designate a chief compliance officer (CCO), who would establish compliance policies; resolve conflicts of interest; ensure compliance with compliance policies and CEA requirements; identify noncompliance issues; and try to remediate noncompliance issues.
A CCO would be required to file an annual report with the firm's board of directors, with a copy being forwarded to the CFTC. All the commissioners approved the proposal, with the exception of Sommers.
Gensler said he hopes to have all the proposed reforms completed in December. But "we're human. Some of this probably [will] slip into January," he noted.
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