24 February 2011

SIFMA addresses business conduct standards for swap dealers in comment letter to CFTC

SIFMA submitted a comment letter to the Commodity Futures Trading Commission (CFTC) regarding its proposed rule on business conduct standards for swap dealers and major swap participants (MSPs).

“We have serious concerns with the Commission’s proposed rule and believe that, if implemented in its current form, it would inappropriately transform the nature of the relationship between swap dealers and major swap participants and their counterparties, all of whom are institutional market participants,” said Ken Bentsen, executive vice president, public policy and advocacy at SIFMA. “We also believe that the overly broad proposal could effectively preclude participation in swap markets by pension plans, municipalities and other entities. As written the rule would seek, in effect, to impose a new fiduciary duty on institutional swap participants, a proposal that Congress rejected during consideration of the Dodd-Frank Act.” The business conduct standards rule would govern the relationship between swap dealers and major swap participants and their counterparties, including “special entities,” such as pension funds and state and local governments.

In its letter, SIFMA noted that while the proposed rule sets out requirements prescribed in the Dodd-Frank Act, the proposal contains provisions that go well beyond what has been mandated by law. Although the letter points out that the provisions that exceed the statutory mandate are inappropriate as a general matter, even the statutorily-mandated proposals are concerning. Both types of proposed provisions include requirements that are based on current industry best practices and self-regulatory organization (SRO) rules which are rooted in retail customer protection, while the swap deals covered by the proposal are conducted in institutional markets. The proposed rule would limit the transactions that could take place in the institutional market by imposing a more restrictive regime than is currently in place in the retail market.

Among the specific concerns noted by SIFMA were:

- Communications between dealers and their customers that provide information about potential transactions should not be deemed recommendations that give rise to special duties on the part of dealers; otherwise they will be discouraged from providing useful and important information to their customers;

- In an effort to prevent front running, the proposed rules impose trading prohibitions that extend well beyond those existing in any other market and which, if implemented, would handcuff legitimate dealer activity even in situations where a dealer is merely in early stage discussions with a counterparty regarding a swap; and

- The proposed requirements that dealers and MSPs obtain certain information or make disclosures prior to executing a transaction cannot be met in many circumstances that are common in the swaps market today; these unnecessary delays will have an adverse impact on liquidity in the swaps markets.

SIFMA also noted that the proposed rules, and the increased reliance on swap dealers and MSPs, is problematic because the proposed rule is not coordinated with provisions of the recently proposed Department of Labour fiduciary regulations. If swap dealers are treated as fiduciaries under the DOL Regulations, then any swap transaction with ERISA Plans will immediately become a prohibited transaction under ERISA.

Press release

Comment letter 

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