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CFTC Unanimously Approves Rule Amendments to Ease Regulatory Burdens

On March 28, the Commodity Futures Trading Commission announced that it has unanimously approved two final rule amendments designed to ease registrants’ regulatory burdens. Both final rule proposals originated from the CFTC’s Project KISS Initiative, which is intended to simplify and reduce burdens by revisiting our rules based on staff implementation experience and public comment. The two rule amendments will become effective 30 days after publication in the Federal Register and are detailed below:

Segregation of Assets Held as Collateral in Uncleared Swaps Transactions

Subpart L of Part 23 of the CFTC’s rules 23.700 – 23.704 implement the requirements for segregation of initial margin for uncleared swaps transactions, where the swap is between a swap dealer and either 1) a nonfinancial end-user; or 2) a financial end-user without “material swaps exposure”, as defined in the CFTC’s rules. In response to comments received in connection with Project KISS, the CFTC had proposed a number of amendments to Subpart L to “simplify and rationalize” existing requirements. The rules have been adopted as proposed and, among other changes, in Rule 23.701:

  1. the required notification of the right to segregate is to be made at the beginning of the first uncleared swap transaction that provides for exchange of initial margin;

  2. the exception to the notification requirement in cases where segregation is required under the CFTC Margin Rule is expanded to include cases where segregation is required under Prudential Regulator Margin Rules;

  3. the annual notification requirement is eliminated;

  4. the requirement to identify in the notification one or more creditworthy custodians and to provide information regarding the cost for segregation for each named custodian is eliminated;

  5. the requirement to provide the notification to a person with specific job title at the counterparty is eliminated;

  6. the terms of segregation are to be established by written agreement with the counterparty; and

  7. the requirement to obtain from the counterparty and maintain written confirmation of receipt of the notification is eliminated.

In addition, specific requirements in Rule 23.702 regarding the withdrawal or turnover of control of initial margin are replaced with a provision that the segregation agreement provide that instructions to withdraw initial margin be in writing and that withdrawal notification be given immediately to the non-withdrawing party. Further, the restriction in Rule 23.703 on investment of segregated margin to investments permitted under Regulation 1.25 is eliminated.

The amended rule takes effect 30 days after publication in the Federal Register, which is available here.

Financial Surveillance Examination Program Requirement for Self-Regulatory Organizations

CFTC Rule 1.52 requires a self-regulatory organization (SRO) to adopt written policies and procedures concerning the examination of its member registrants, and in particular, futures commission merchants (FCMs). Further, the rule requires an SRO to retain an “examinations expert” to evaluate its supervisory program prior to its initial use and to evaluate the SRO’s application of the supervisory program at least once every three years after its initial use. Among other changes that the CFTC has adopted, the amendments to Rule 1.52 revise the scope of a third-party expert’s evaluation of an SRO’s financial surveillance program to cover only the examination standards used by SRO staff in conducting FCM examinations. The amendments also extend the minimum timeframe from three years to five years between when an SRO must engage a third-party consultant to evaluate its FCM examination standards.

The amended rule takes effect 30 days after publication in the Federal Register, which is available here.

©2021 Katten Muchin Rosenman LLPNational Law Review, Volume IX, Number 88
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About this Author

Kevin M. Foley, Finance Lawyer, Katten Llaw Firm
Partner

Kevin M. Foley has extensive experience in commodities law and advises a wide range of clients, both in the United States and abroad, on compliance with the Commodity Exchange Act and the rules of the Commodity Futures Trading Commission (CFTC) affecting traditional exchange-traded products, as well as the over-the-counter markets involving swaps and other derivative instruments. His clients include futures commission merchants, derivatives clearing organizations, designated contract markets, foreign boards of trade and an industry trade association.

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312-902-5372
Associate

Leonard Licht is an associate in the Financial Services practice. He advises a broad range of financial market participants, including investment managers to private funds and investors in private funds. Prior to joining Katten, Lenny practiced as a corporate and securities attorney and has also worked in an analytical capacity with a family office.

While in law school, Lenny was a Heyman scholar and member of the Moot Court Honor Society.

212-940-6587
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