Guidance on the Real-Time Reporting Rule

Summary

SIFMA and the International Swaps and Derivatives Association (ISDA) provide comments to the Commodity Futures Trading Commission (CFTC) requesting interpretative guidance pursuant to Rule 140.99 with regard to the requirements of the CFTC’s Part 43 Regulations on the Real-Time Public Reporting of Swap Transaction Data (the Real-Time Reporting Rule).  The Associations are concerned that the definition of “publicly reportable swap transaction”, which is the basis for exempting inter-affiliate trades, is unduly vague and creates significant uncertainty for market participants that are currently expending significant resources to develop systems in order to comply with the rule.

Excerpt

March 19, 2012

Mr. Richard Shilts

Acting Director

Division of Market Oversight

Commodity Futures Trading Commission

Three Lafayette Centre

1155 21st Street, N.W.

Washington, DC 20581

Re: Request for Interpretative Letter: Rule 43.2 (Real-Time Public Reporting of Swap Transaction Data)

Dear Mr. Shilts:

The International Swaps and Derivatives Association, Inc. and the Securities Industry and Financial Markets Association (together, “the Associations”), 1 on behalf of our members with reporting obligations under Part 43 of the Regulations of the Commodity Futures Trading Commission (the “Commission”) and other similarly situated persons, is writing to request interpretative guidance pursuant to Rule 140.99 with regard to the requirements of the Commission’s Part 43 Regulations on the Real-Time Public Reporting of Swap Transaction Data (the “Real-Time Reporting Rule”).

The Associations appreciate the consideration given to the comments expressed in our February 7, 2011 comment letter on the proposed rule.2 We support the objective of the rule to promote and enhance price discovery and the Commission’s decision to exclude certain inter-affiliate trades from the requirements of the rule. In particular, we welcome the commentary stating that the Commission “concurs that publicly disseminating swap transaction and pricing data related to certain swaps between affiliates would not enhance price discovery” and noting that the disclosure of such information could provide an inaccurate appearance of market depth. 3

As discussed in greater detail below, the Associations are concerned, however, that the definition of “publicly reportable swap transaction”, which is the basis for exempting inter-affiliate trades, is unduly vague and creates significant uncertainty for market participants that are currently expending significant resources to develop systems in order to comply with the rule. This problem is compounded by the

language in footnote 44 of the final rule,4 which could be read for the proposition that all “covered

transactions” subject to Federal Reserve Act Section 23A and 23B5 are publicly reportable. Read in this

manner, footnote 44 would fundamentally conflict with the final rule text, which states by way of

example that transactions between wholly-owned subsidiaries are not publicly reportable.6

It appears the Commission has suggested examples of transactions subject to Sections 23A and 23B

because under the Federal Reserve Act, such transactions are subject to a “market terms” requirement.7

This example, if construed as an interpretation under Title VII of the Dodd-Frank Act, however, conflates

a regulation-imposed standard (under Sections 23A and 23B, in this case) with the pricing yielded by a

competitive, market-based negotiation between unrelated parties. By doing so, it creates ambiguity

regarding the status of many other inter-affiliate trades.

Therefore, as discussed in greater detail below, we request interpretative guidance that the definition of

“publicly reportable swap transaction” should be understood to mean “any executed swap transaction that

is an arm’s length transaction between two parties that are not members of a consolidated affiliated group

that results in a corresponding change in the market risk position between the two parties” as well as the

other interpretative guidance set out in Section II below.

The interpretative guidance we request is needed to restore consistency with the Commission’s statements

in the adopting release for the final Part 43 rules8 as well as Commissioner and staff statements at the

open meeting at which the final rules were adopted.9

1 The International Swaps and Derivatives Association’s (“ISDA”) mission is to foster safe and efficient derivatives markets to facilitate effective risk management for all users of derivative products. ISDA has more than 800 members from 58 countries on six continents. These members include a broad range of OTC derivatives market participants: global, international and regional banks, asset managers, energy and commodities firms, government and supranational entities, insurers and diversified financial institutions, corporations, law firms, exchanges, clearinghouses and other service providers. For more information, please visit: www.isda.org.

The Securities Industry and Financial Markets Association (“SIFMA”) brings together the shared interests of hundreds of securities firms, banks and asset managers. SIFMA’s mission is to support a strong financial industry, investor opportunity, capital formation, job creation and economic growth, while building trust and confidence in the financial markets. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association. For more information, visit www.sifma.org., 2 http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=27581&SearchText=

3 77 Fed. Reg. 1182, 1187.

4 Id.

5 12 U.S.C. §§ 371c and 371c-1. 6 Rule 43.2, clause (2)(i) of the definition of “publicly reportable swap transaction.”

7 12 U.S.C. § 371c-1; 12 C.F.R. § 223.51. 8 See note 3, supra, and accompanying text. 9 Transcript of December 20, 2011 Commission Meeting, pages 129-131. 10 Section 608 of the Dodd-Frank Act amends Section 23A’s definition of “covered transaction” to include a derivative

transaction with an affiliate — but only to the extent that the transaction causes a member bank or a subsidiary to have “credit

exposure” to the affiliate. The Federal Reserve, however, has yet to define “credit exposure” for purposes of Section 608 of the

Dodd-Frank Act. Linking public reporting to an undefined Section 23A/B concept not only compounds the compliance

uncertainty facing market participants but also illustrates why status as a 23A/B “covered transaction” is inapposite to public

reporting. The purpose of any forthcoming Federal Reserve definition of “credit exposure” would be to define the amount by