CFTC Proposes Block Size Rules for Swaps: CFTC Proposes Procedures to Establish Appropriate Minimum Block Sizes for Block Trades and Large Notional Off-Facility TradesSullivan & Cromwell LLP - March 12, 2012
Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) added Section 2(a)(13)(A) to the Commodity Exchange Act (the “CEA”), which requires the Commodity Futures Trading Commission (the “CFTC” or the “Commission”) to prescribe rules concerning the real-time reporting of swap transaction and pricing data. These rules are intended to provide transparency and enhance price discovery for swap contracts while protecting liquidity in the market as well as counterparty anonymity. On December 20, 2011, the Commission adopted rules concerning the “Real-Time Public Reporting of Swap Transaction Data” (the “Real-Time Reporting Rules”). At that time, the Commission chose not to adopt the provisions proposed in connection with these rules that concerned the procedures for determining minimum block sizes. Less than fifty days after adopting the Real-Time Reporting Rules, the Commission has re-proposed rules concerning procedures to establish appropriate minimum block sizes for large notional off-facility swaps and block trades (the “Proposed Rules”). If a trade size of a swap is greater than the appropriate minimum block size, whether executed on- or off-facility, the swap transaction and pricing data is subject to a reporting time delay. The Proposed Rules would provide a means for separating swaps into categories within five asset classes (the interest rates, credit, foreign exchange, equity and other commodity asset classes). Further, the Proposed Rules would establish prescribed initial appropriate minimum block sizes as well as methods for determining post-initial minimum block sizes. If the trade size of a swap is greater than the appropriate minimum block size, the swap transaction and pricing data is subject to a reporting time delay. The minimum block sizes in the Proposed Rules will be important not only for reporting purposes, but also may determine the size of trades that can be traded off-facility. The Proposed Rules would replace the interim cap sizes adopted in the Real-Time Reporting Rules with initial cap sizes and methods for determining post-initial cap sizes. In the release accompanying the Proposed Rules (the “Proposing Release”), the Commission offers a number of alternatives for categorizing swaps in each asset class as well as alternatives to the method for determining the appropriate minimum block size and cap size; the Commission would consider adopting any of these alternatives as a final rule.