Footnote 195- a timebomb not a ticking clock

March 18, 2015

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From midnight tonight the 24 current SEFs will have precisely 195 days to comply with the CFTC’s Footnote 195 guidance . From midnight EST on 30 September 2015, SEFs will have to hold complete copies of all documentation affecting their clients’ uncleared trades, “glean” information and report it to an SDR. The genesis of Footnote 195 goes some way to indicating that this final deadline will indeed be final:

• Title VII Dodd-Frank amends the Commodity Exchange Act. The new CEA Section 5h requires the CFTC to promulgate rules for SEFs
• Part 37 of the CFTC regulations apply to SEFs, the preamble indicates that the SEF’s Confirmation should contain all of the terms of the transaction, “including possible long-term credit support arrangements.”
• The requirement is necessary with respect to “legal certainty” and to “to promote the Commission’s policy goals of achieving ‘straight-through processing’ of swap transactions in order to facilitate orderly markets, whether bilateral or facility traded.”
• Footnote 195 guidance allows SEFs to “incorporate terms by reference” but expects that such terms must be ““submitted to the SEF ahead of execution”
• August 2014- No-Action Letter 14-108 extends relief granted by two previous no-action letters, granting relief until 30 September 2015. The no-action letter grants significantly extra time than requested by industry lobby groups.

There are sound reasons for regulators to have oversight beyond trade volumes, prices and times- derivatives finally devolve to the legal agreements that govern them. An April 2011 joint study by the SEC and CFTC reluctantly concluded that OTC derivatives then defied standardised taxonomy, making a swap data-documentation library unfeasible- this is no longer the case, advances in OCR technology and database architecture render taxonymy irrelevant. The initial expansive intention of both the CFTC and the SEC was diluted to an obligation to include full copies of documentation with every confirmation, the footnote is a further dilution to allow the incorporation of terms by reference. Footnote 195 represents the legacy burden without the insight opportunities for both regulators and regulated; even so, it is unlikely to be subject to even further relief. Compliance is not optional, profiting from necessity by embracing compliance is subject to choice. There is still time to create a solution that will benefit both regulators and the market, the 195 countdown begins tomorrow.