CFTC Adopts Final Rules on Business Conduct Standards: CFTC Imposes External Business Conduct Standards on Swap Dealers and Major Swap Participants

Sullivan & Cromwell LLP - February 6, 2012

The Commodity Futures Trading Commission (the “Commission” or “CFTC”) adopted final rules on the Business Conduct Standards for Swap Dealers and Major Swap Participants With Counterparties (the “External Business Conduct Rules” or “Final Rules”). The duties imposed on swap dealers (SDs) and major swap participants (MSPs) by the Final Rules are designed not only to protect their counterparties from fraud and abuse; but also to “level the information playing field” and require extensive disclosures by SDs and MSPs “to enable counterparties to make their own informed decisions about the appropriateness of entering into [a] swap.” SDs must, in addition, provide scenario analyses to counterparties upon request and undertake efforts to ensure that counterparties are able to evaluate such information. When dealing with “Special Entities”, which include certain benefit plans and governmental entities, both SDs and MSPs must ensure the counterparty is adequately represented. SDs recommending a swap or strategy involving swaps to a Special Entity must further ensure that their recommendations are in the best interests of their Special Entity counterparties. The Final Rules also include a “pay-to-play” provision, similar to the “pay-to-play” provision adopted by the Securities and Exchange Commission (the “SEC”).