CFTC Grants Limited Relief to Prime Broker Swap Dealers from Certain External Business Conduct Standards

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Published Date : May 01, 2013

Near the stroke of midnight on 30 April 2013, the CFTC's Division of Swap Dealer and Intermediary Oversight granted no action relief to swap dealers related to certain of their obligations under the Commission's external business conduct standards in connection with prime brokerage arrangements involving swaps (other than cleared swaps) where a swap dealer has allocated certain obligations under such standards to an executing dealer that is also a swap dealer. Lesser relief was also granted in connection with prime brokerage arrangements involving exempt FX transactions (ie, physically settled FX swaps and forwards), where the prime broker is also a swaps dealer but the executing dealer is not.

In the relevant prime brokerage arrangements, a market participant (who is not a swap dealer; the "counterparty") opens an account with a prime broker is a swap dealer. In opening such an account, the prime broker conducts due diligence and AML know your customer reviews of the counterparty.

Ultimately, transactions are negotiated or structured by the counterparty on behalf of the prime broker with other market participants, such that the prime broker enters into one transaction with the counterparty, and an equal but opposite transaction with the market participant approached by the counterparty (ie, the executing dealer).

The Division granted limited relief for prime broker arrangements involving swaps (except exempt FX transactions) where both the prime broker and executing dealer are each a swap dealer. The Division is permitting the two swap dealers to allocate by written agreement with each other (and with written notice to the counterparty) certain responsibilities they might each otherwise have under the Commission's external business conduct standards stated in Part 23 of its rules.

In connection with prime brokerage arrangements involving exempt FX transactions only, the Division granted certain relief where only the prime broker is a swap dealer (ie, the executing dealer is not a swap dealer). Here the Division is only granting relief to the prime broker from its obligation to provide disclosure to the counterparty of the mid-market mark of the exempt FX transaction and to provide scenario analysis if requested. In such circumstances, the prime broker must notify the counterparty it will not perform these obligations. The Division granted no other relief from the external business conduct standards to the prime broker swap dealer in these arrangements involving exempt FX transactions.

All agreements and notices must be entered into/provided prior to relying on the Division's relief, except for current arrangements where amended agreements and notices must be completed by May 15, 2013.

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The information contained in this article is not legal advice. For legal advice, please consult with your attorney. The information in this article is derived from sources believed to be reliable as of May 1, 2013, but no representation or warranty is made regarding the accuracy of any statement. To ensure compliance with requirements imposed by U.S. Treasury Regulations, Gary DeWaal and Associates LLC informs you that any U.S. tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Gary DeWaal and Associates may represent one or more entities mentioned in this article.

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