The CFTC allows some relief for prime brokerage arrangements
03 May 2013 Washington DC
Image: Shutterstock
Gary Barnett of the US Commodity Futures Trading Commission (CFTC) has penned a letter in response to requests for relief from market participants to oversight of their prime brokerage arrangements.
Some industry employees had asked for leeway on the Division of Swap Dealer and Intermediary Oversight of the Commodity Futures Trading Commission regarding business conduct standards for swap dealers with counterparties in the context of prime brokerage arrangements relating to swaps and certain foreign exchange transactions.
Barnett was hired as swaps division director for the firm as part of the agency’s restructuring to fulfill its expanded responsibilities under the Dodd-Frank Act, whereby the CFTC is trying to regulate the swaps market under the law.
“Gary Barnett comes to the CFTC with a vast knowledge of the swaps market,” said CFTC Chairman Gary Gensler at the time. “His derivatives expertise will be essential to leading the CFTC’s new division, which will be integral to implementing the Dodd-Frank provisions that will lower the risk of the swaps market to the overall economy. The division also will provide necessary oversight of this market.”
In the letter, Barnett said that the division had been informed by market participants that it would be difficult or impracticable for prime brokers and executing dealers to fully comply with the External Business Conduct Standards, as each entity has access to different information at different points of time."
"Conversely, the executing dealer, but not the prime broker, often will have access to timely trade information and information about the inherent risks relating to both the ED-PB Transaction and the Counterparty Mirror Transaction. As a result, market participants argue that the executing dealer is in the best position to take responsibility for compliance.”
Based on the representations made by market participants, the division stated that it believed no-action relief is warranted.
The division went on to say that it would not recommend that the commission enforces action against a swap dealer for failure to comply with certain commission regulations so long as the prime brokerage arrangement fulfilled certain descriptions, explained at length in the letter.
However, it was warned that: “The relief issued by this letter does not excuse the affected persons from compliance with any other applicable requirements contained in the CEA or in the commission’s regulations issued thereunder.”
Some industry employees had asked for leeway on the Division of Swap Dealer and Intermediary Oversight of the Commodity Futures Trading Commission regarding business conduct standards for swap dealers with counterparties in the context of prime brokerage arrangements relating to swaps and certain foreign exchange transactions.
Barnett was hired as swaps division director for the firm as part of the agency’s restructuring to fulfill its expanded responsibilities under the Dodd-Frank Act, whereby the CFTC is trying to regulate the swaps market under the law.
“Gary Barnett comes to the CFTC with a vast knowledge of the swaps market,” said CFTC Chairman Gary Gensler at the time. “His derivatives expertise will be essential to leading the CFTC’s new division, which will be integral to implementing the Dodd-Frank provisions that will lower the risk of the swaps market to the overall economy. The division also will provide necessary oversight of this market.”
In the letter, Barnett said that the division had been informed by market participants that it would be difficult or impracticable for prime brokers and executing dealers to fully comply with the External Business Conduct Standards, as each entity has access to different information at different points of time."
"Conversely, the executing dealer, but not the prime broker, often will have access to timely trade information and information about the inherent risks relating to both the ED-PB Transaction and the Counterparty Mirror Transaction. As a result, market participants argue that the executing dealer is in the best position to take responsibility for compliance.”
Based on the representations made by market participants, the division stated that it believed no-action relief is warranted.
The division went on to say that it would not recommend that the commission enforces action against a swap dealer for failure to comply with certain commission regulations so long as the prime brokerage arrangement fulfilled certain descriptions, explained at length in the letter.
However, it was warned that: “The relief issued by this letter does not excuse the affected persons from compliance with any other applicable requirements contained in the CEA or in the commission’s regulations issued thereunder.”
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