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CFTC “simplifies” Portfolio Reconcilation

The CFTC seeks comment on a proposed rule to modify which Part 45 data fields are regarded  as “material” under Regulation 23.502. Readers will doubtless recall CFTC No-Action Letter  13-31, granting relief as to the “material terms” of a swap for the purposes of portfolio  reconciliation; the proposal is to amend then codify and replace the Letter’s relief. Regulation  23.502 requires swap dealers to reconcile their swap portfolios with their counterparties,  defining “reconciliation” as the exchange of values and attributes of uncleared swaps, the  timely resolution of any material discrepancy in such exchange and the reporting of valuation  disputes to the CFTC. Reconciliation is to be undertaken daily (portfolios > 500), weekly (51-499), or quarterly (<50). SDs/MSPs are required to immediately resolve “any discrepancy in a material term of a swap identified as part of a portfolio reconciliation”- the Agency is seeking to amend the Regulation 23.500(g) definition of “material terms” to exclude 9 data fields. The newly “non-material” data fields relate to swap allocation or clearing, neither category is relevant data for portfolio reconciliation. The proposal largely codifies Letter 13-31, while retaining as “material terms” two data fields that pertain to the clearing requirement exception in CEA section 2(h)(7). The proposal also seeks detailed comment on the market’s general experience with portfolio reconciliation to date, and on the specific utility of the process in enhancing the integrity of data reported to SDRs.

It is difficult to disagree with the (largely) supportive statement by Commissioner Giancarlo,

“In its rush to implement the Dodd-Frank Act over the past few years, the Commission issued multiple rules that proved to be confusing, impracticable or unworkable, which in turn necessitated the unprecedented issuance of no-action relief, either due to unrealistic compliance deadlines, problematic elements of the rules or both…Reasonable people understood at the height of the Dodd-Frank rulemaking frenzy that the Commission would and could not get everything right. That is why actions like today’s rule proposal are necessary and appropriate.”

It can only be a positive for the market that the CFTC is beginning to permanently redress the the many areas that have until now been temporarily “patched” by the issuance of over 200 No-Action Letters and Guidance notes. The extent of feedback the Agency is seeking on its proposal is also in marked contrast to the more uncompromising style of Chairman Massad’s predecessor. While this and other recent remediative proposals are a promising first step, the road to Dodd-Frank rationality will be a long one.

The comment period ends on 13 November 2015.

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