Beginning November 13, 2012, the CFTC will impose new rules on swap dealers and major swap participants in an effort to standardize the “previously unchecked derivatives market.”
The rules, which are laid out in Section 713 of the Frank-Dodd Act, are intended to enhance transparency in the swaps market by regulating procedural requirements in the “confirmation, processing, netting, documentation, and valuation” of swaps. They “mandate a portfolio reconciliation on a daily, weekly, and quarterly basis” as well as require parties to “timely and accurately confirm swap transactions by the end of the first business day following the date of execution.” The rules also force both dealers and counterparties to agree to the “methods, procedures, rules, and inputs” for all swap valuations.
Although they will necessitate many changes within the swaps industry, the new rules were not drafted without taking dealer concerns into account; only portfolios with 500 or more swaps will have to submit to daily portfolio reconciliation and dealers are no longer required to provide valuation documentation for third parties to weigh in. The rules also respect the confidential nature of proprietary information so long as the valuation documentation that is submitted is true to a swaps value.
