Home > Compliance > Swap Dealers (SDs) and Major Swap Participants (MSPs) > Section 4s Implementing Rule Descriptions' Definitions

Section 4s Implementing Rule Descriptions' Definitions

A. Internal Business Conduct Standards

1. Chief Compliance Officer: Swap Dealers (SDs) and Major Swap Participants (MSPs) are required appoint a qualified individual as Chief Compliance Officer (CCO), who reports directly to the board or to the senior officer. The CCO must administer required compliance policies and establish procedures for the remediation of noncompliance issues. The CCO is also required to prepare, sign, and certify an annual compliance report that contains a description of the registrant's compliance with the Commodity Exchange Act (CEA) and Commission regulations. For more information see the Commission's Business Conduct Standards Fact Sheet regarding the Final Rule on Designation of Chief Compliance Officer and Preparation of Annual Compliance Report (see page 7) and Q&A (see page 4).

2. Conflicts of Interest: SDs and MSPs must implement conflicts of interest policies and procedures that establish appropriate informational partitions between research analysts and persons who are involved in pricing, trading or clearing activities. Additional partitions are required between business trading personnel and the personnel of an affiliated clearing member. For more information see the Commission's Business Conduct Standards Fact Sheet regarding the Final Rule on Conflicts of Interest for Swap Dealers, Major Swap Participants, Futures Commission Merchants, and Introducing Brokers (see page 5) and Q&A (see page 3).

3. Risk Management: SDs and MSPs are required to establish a risk management program designed to monitor and manage the risks associated with their swap activities. Additionally, SDs and MSPs are required to establish policies for monitoring their traders and to require traders to follow established procedures for executing and confirming transactions. For more information see the Commission's Business Conduct Standards Fact Sheet regarding the Final Rules on Duties for Swap Dealers and Major Swap Participants (see page 3) and Q&A (see page 2).

4. Disclosure of Information to the CFTC and Anti-Trust Considerations: SDs and MSPs are required to disclose information required by the Commission or a prudential regulator and must have adequate internal systems that will permit the Commission to obtain any information in a timely manner. Additionally, SDs and MSPs are required to adopt policies and procedures to prohibit any action that results in any unreasonable restraint of trade or imposes any material anticompetitive burden on trading or clearing, unless necessary or appropriate to achieve the purposes of the CEA. For more information see the Commission's Business Conduct Standards Fact Sheet regarding the Final Rules on Duties for Swap Dealers and Major Swap Participants (see page 4) and Q&A (see page 1).

5. Business Continuity and Disaster Recovery: SDs and MSPs are required to establish a business continuity and disaster recovery plan designed to enable them to resume operations by next business day following an emergency or other disruption. For more information see the Commission's Business Conduct Standards Fact Sheet regarding the Final Rules on Duties for Swap Dealers and Major Swap Participants (see page 4).

6. Diligent Supervision: Diligent Supervision: SDs and MSPs are required to establish a system of diligent supervision over all activities performed by its partners, members, officers, employees, and agents, and requires the creation of a supervisory system with qualified supervisory personnel. For more information see the Commission's Business Conduct Standards Fact Sheet regarding the Final Rules on Duties for Swap Dealers and Major Swap Participants (see page 4).

7. Recordkeeping: SDs and MSPs are required to keep business records, full and complete transaction and position information for all swaps activities, and information required to be submitted to a Swap Data Repository (SDR) and reported publicly on a real-time basis. For more information see the Commission's Business Conduct Standards Fact Sheet regarding the Final Rules on Reporting, Recordkeeping, and Daily Trading Record Requirements for Swap Dealers and Major Swap Participants (see page 1) , Q&A (see page 1), Final Rule on Swap Data Recordkeeping and Reporting Requirements (see page 1) and Q&A (see page 1).

8. Daily Trading Records: SDs and MSPs are required to retain records of trade information related to pre-execution, execution, and post-execution data. Pre-trade execution trade data includes records of all oral and written communications that lead to the execution of a swap. For more information see the Commission's Business Conduct Standards Fact Sheet regarding the Final Rules on Reporting, Recordkeeping, and Daily Trading Records Requirements for Swap Dealers and Major Swap Participants (see page 1-2) and Q&A (see page 1).

9. Swap Data Repository - Reporting: SDs and MSPs are required to report swap transactions to a Swap Data Repository ("SDR"). For more information see Q&A - On Start of Swap Data Reporting. The Commission has issued several No-Action Letters relating to these regulations, including 13-34; 13-35; and 13-36.

10. Real-Time Public Reporting: SDs and MSPs are required to report in real-time swap transaction and pricing data. For more information see the Commission's Fact Sheet regarding the Final Rules regarding Reporting of Swap Transaction and Pricing Data, Q&A - Final Rulemaking: Part 43 (Real-Time Public Reporting).

11. Clearing Member Risk Management: SDs and MSPs that are clearing members are required to implement policies and procedures to limit the financial risks they incur as a result of clearing swaps and to ensure that the clearing member has adequate resources to meet financial obligations that arise. For more information see the Commission's Fact Sheet regarding Customer Clearing Documentation, Timing of Acceptance for Clearing, and Clearing Member Risk Management and Q&A.

12. Swap Processing and Clearing: SDs and MSPs are required to implement policies and procedures that ensure the firm has the capacity to route swaps for clearing to a derivative clearing organization (DCO) in a manner acceptable to the DCO. For more information see the Commission's Fact Sheet regarding the Customer Clearing Documentation, Timing of Acceptance for Clearing, and Clearing Member Risk Management and Q&A.

13. Swap Confirmation: SDs and MSPs are required to adhere to certain standards for the timely and accurate confirmation of swaps transactions.

14. Portfolio Reconciliation: SDs and MSPs are required to periodically engage in portfolio reconciliation with respect to uncleared swaps with its swap counterparties. SDs and MSPs are required to implement policies and procedures designed to resolve discrepancies in material terms and material discrepancies in valuation. For more information see the Commission's No-Action Letter 13-40 regarding the compliance date for portfolio reconciliation. The Commission has issued an additional No-Action Letters relating to these requirements, No-Action Letter 13-31 and No-Action Letter 13-35.

15. Portfolio Compression: SDs and MSPs are required to periodically engage in bilateral and multilateral portfolio compression exercises where substantially similar transactions among the parties are terminated and replaced with a smaller number of transactions of decreased notional value.

16. Swap Trading Relationship Documentation: SDs and MSPs are required to adhere to certain standards for the documentation of trading relationships with their counterparties. SDs and MSPs are also required to obtain documentation sufficient to provide a reasonable basis on which to believe that a counterparty electing the end-user exception meets the conditions of the exception. For more information see the Commission's Fact Sheet regarding the Final Rule on End-User Exception to the Clearing Requirement for Swaps and Q&A. The Commission has issued No-Action Letters relating to these requirements, including: 13-38; and 13-45.

B. External Business Conduct Standards

17. Business Conduct Standards with Counterparties: SDs and MSPs are prohibited from certain abusive practices and are required to disclose material information to counterparties. In addition, SDs and MSPs must undertake certain due diligence obligations, including obtaining essential information about their counterparties. SDs and MSPs also have additional requirements when transacting with Special Entities. For more information see the Commission's Fact Sheet regarding the Final Rules regarding Business Conduct Standards for Swap Dealers and Major Swap Participants Dealing with Counterparties, Q&A. The Commission has issued No-Action Letters relating to these requirements, including: 12-33; 12-42; 12-58; 13-11; 13-12; 13-13; 13-33; and 13-19.

C. Segregation and Bankruptcy for Uncleared Swaps

18. Segregation of Collateral for Uncleared Swaps – New Counterparties: SDs and MSPs are required to notify their counterparties of their right to require initial margin be held in a segregated account at an independent custodian. If elected, initial margin must be held in an account segregated for and on behalf of the counterparty. SDs and MSPs are required to comply with regulations 23.700 through 23.704 by 5/5/2014 for swaps with new counterparties.

19. Segregation of Collateral for Uncleared Swaps – Existing Counterparties: SDs and MSPs are required to notify their counterparties of their right to require initial margin be held in a segregated account at an independent custodian. If elected, initial margin must be held in an account segregated for and on behalf of the counterparty. SDs and MSPs are required to comply with regulations 23.700 through 23.704 by 11/3/2014 for swaps with existing counterparties.

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