Staff of the Commodity Futures Trading Commission’s Division of Swaps Dealer and Intermediary Oversight granted no-action relief to a futures commission merchant, permitting its guaranteed introducing brokers to arrange non-cleared over-the-counter swaps for its customers with swap dealers and cleared swaps that would clear through other FCMs. Ordinarily, a G-IB may only handle transactions for customers that carry their accounts on a fully disclosed basis with its guarantor FCM. (Unlike a non-guaranteed IB that must meet minimum capital requirements of US $45,000, a G-IB has no independent financial requirements. A G-IB’s obligations are fully guaranteed by its guarantor FCM.) Under the terms of staff’s no-action letter, the guarantor FCM will maintain net capital that exceeds the aggregate amount of net capital each of its G-IBs would have to maintain if non-guaranteed; the guarantor FCM’s and each of its G-IB’s guarantee agreement will be amended to accommodate the proposed activity; each G-IB client will be a highly qualified person or entity known as an “eligible contract participant;” for cleared swaps; each carrying FCM will be selected by the G-IB’s clients; and the G-IBs will receive no compensation from the clearing FCMs selected by its clients. Pursuant to the no-action letter, the guarantor FCM will be liable for all obligations of its G-IBs under applicable law. The staff's no-action relief is dated February 29, 2016.

My View: Attempted compliance by introducing brokers handling swaps transactions with applicable CFTC requirements provides an unsavory path past Scylla and Charybdis that perhaps only Odysseus can safely navigate. One CFTC rule still provides that each IBmust open each customer’s account with a carrying FCM, while another states that each FCM statement must reflect that the account was introduced by an IB and identify the name of the IB. (Click here to access CFTC Rule 1.57(a) and here to access CFTC Rule 1.33(f).) These rules make no sense in connection with IBs introducing over-the-counter swaps transactions to swap dealers and cannot possibly be adhered to. The CFTC should amend its introducing broker rules to conform to the evolution of the role of IBs to handle swaps transactions and not leave a Damoclean sword hanging over swaps IBs. In the interim, staff should issue appropriate interpretive guidance.