Several commenters questioned the scope of the proposed rules and implicitly, if not expressly, whether the breadth as proposed was appropriate in light of the costs that would result to certain registrants. Comments illustrative of the concerns are discussed below.
The FHLBs articulated several reasons71 for exempting them from the proposed internal business conduct standard rules. First, they maintain that subjecting FHLBs to internal business conduct standards could cause them to cease offering swaps transactions to their risk-hedging members, depriving their members of a competitive swap
transaction counterparty and potentially increasing members’ hedging costs. Second, they maintain that many of the requirements duplicate those imposed by their prudential regulator, the Federal Housing Finance Agency (FHFA), thus there is no incremental benefit attributable to the additional costs of complying with the proposed rules.72
The Commission finds the FHLB’s position unpersuasive. First, the concern that FHLBs would cease transacting swaps is undermined by the FHLB’s position that the proposed rules in large part duplicate the requirements of its prudential regulator; if internal business conduct standards would likely curb the FHLBs’ swaps activity, presumably that would have occurred already. Second, the Commission construes the FHLB’s position to be inconsistent with the statutory intent of sections 4s(f), (g), (j), and
71 In addition to the two reasons discussed, the FHLBs also expressed that, unlike external business conduct standards, the internal business conduct standards as mandated by Congress in the Dodd-Frank Act do not generate benefits to justify their costs. As noted above, this concern falls beyond the Commission’s implementation discretion.
72 SIFMA made a similar argument with respect to all SDs and MSPs that are subject to regulation by a prudential regulator.
(k)—i.e., consistent Commission oversight of SDs and MSPs, regardless of whether they are also subject to regulation by a prudential regulator. For, in the one area that Congress intended the Commission to defer to prudential regulation with respect to SDs and MSPs
—capital and margin requirements—it provided so expressly.73 There is no such express language requiring prudential regulation deference in sections 4s(f), (g), (j), and (k). This gives rise to a negative inference that, with respect to them, Congress intended the
Commission to establish uniform requirements for SDs and MSPs, notwithstanding any overlapping prudential regulation. In addition, to the extent that, as the FHLBs assert, FHFA rules are substantively similar with the proposed rules, compliance with the proposed rules should not present substantial additional compliance costs.
The Working Group suggested that the proposed rules would impose substantial costs with no corresponding increase in risk management and compliance effectiveness.
The Commission disagrees. It believes that its final internal business conduct standards will enhance risk management by requiring, among other things: (1) SDs and MSPs to have a complete understanding of the various risks that the entity faces; and (2) entities to monitor their traders for compliance with trading policies established by the SD or MSP.
These final rules also require that SDs and MSPs have sound recordkeeping policies in place, which will ensure that swap transactions are fully memorialized. Sound risk management and internal controls on an individual firm level is the basis of systemic risk mitigation.
Other commenters (MetLife, MFA, BlackRock, and AMG) argued that the Dodd-Frank Act does not require the Commission to apply the same rules to MSPs as those
73 See CEA section 4s(e).
applied to SDs, and that MSPs should not be subject to the same regulations as SDs because MSPs do not engage in market-making activities. These commenters contend that the costs of compliance would be too high for MSPs. The Commission believes that the statutory baseline under sections 4s(f), (g), (j), and (k) of the CEA is identical
treatment of SDs and MSPs. The statutory provisions of sections 4s(f), (g), (j), and (k) of the CEA do not distinguish between the requirements applied to SDs and those applied to MSPs. Additionally, in response to claims that the costs will be too high for MSPs, the Commission notes that if an MSP does not engage in certain activities, the regulations pertaining to those activities are not applicable. Therefore, in these cases, the
Commission believes MSPs would be relieved of any burden such regulations present.
Finally, Cargill recommended that the Commission make clear that the Commission’s regulations only apply to the swap dealing business of an SD that is a division of a larger company, and not to the other, non-swaps-related business activities of the company.74 The Commission has accepted the alternative proposed by Cargill by including a new definition of “swaps activities” in the final regulations and by limiting the scope of several requirements to fit this definition. Adopting this alternative approach should allow entities to understand their duties and requirements under the final
regulations more clearly and reduce costs by limiting the scope of the rules’ applicability.
74 Presumably, Cargill believes that limiting application of Commission regulations to a specific division, rather than the entirety of a larger company, will result in cost savings, although it does not directly advance this argument.
D. Recordkeeping, Reporting, and Daily Trading Records Requirements for