On March 24, 2017, the CFTC issued an extension of no-action relief with respect to confirmation and recordkeeping requirements for swap execution facilities (“SEFs”) under CFTC Regulations 37.6(b), 37.1000, 37.1001, 45.2 and 45.3(a). SEFs are required under SEF Core Principle 10–implemented by CFTC Regulations 37.1000 and 37.1001– to maintain records of all activities relating to the business of the SEF, including a complete audit trail. CFTC Regulation 37.6(b) requires a SEF to provide each counterparty to a transaction with a written record of all the terms of the transaction which shall legally supersede any previous agreement and serve as a confirmation of the transaction. The CFTC has also stated that SEFs could satisfy the requirement in CFTC Regulation 37.6(b) by incorporating by reference terms set forth in agreements previously negotiated by the counterparties, provided that the SEF had copies of such agreements before transaction execution. Among other things CFTC Regulation 45.2(a) requires the retention of full, complete and systematic records of a SEF’s swap transaction data. CFTC Regulation 45.3(a) requires that with respect to swaps executed on SEFs or designated contract markets (“DCMs”) but not intended to be cleared, the SEF or DCM must report all confirmation data for the swap, as soon as technologically practicable after execution of the swap.
This no-action relief extends the relief provided under CFTC Letter No. 16-25, which expires at 11:59 p.m. on March 31, 2017. Unlike previous extensions, this extension is not time-limited, and instead will terminate as of the effective date of any future CFTC regulation that establish a permanent SEF confirmation solution.
The original request for relief was granted in 2014, and the original requester, the Wholesale Market Brokers’ Association, Americas (“WMBAA”), has sought–and received–extensions of such relief in 2015 and 2016. The relief granted in 2015 and 2016 is substantively similar to the relief granted last week. This particular extension to the no-action relief references the difficulty SEFs have had in finding a feasible way of collecting and maintaining a library of every “underlying previously-negotiated freestanding agreement between counterparties”. The relief therefore allows a confirmation provided under CFTC Regulation 37.6(b) to incorporate by reference terms from previously-negotiated agreements between the counterparties, without the SEF possessing or maintaining a copy of such underlying incorporated agreements under CFTC Regulations 37.1000, 37.1001 and 45.2(a).
Other notable aspects of the relief include the following:
- rather than provide further time-limited relief, the relief will terminate when new rules addressing this point come into effect, providing flexibility to both the agency and market participants to handle the complexity of this issue.
- the relief applies to uncleared swap transactions that were executed on or pursuant to the rules of a SEF.
- SEFs availing themselves of such relief must have rules in their rulebooks requiring the SEF to request from participants the underlying previously-negotiated freestanding agreements on request from the CFTC and requires the SEF to furnish such documents to the CFTC as soon as they are available.
- SEFs may not modify their trading systems or protocols, its reporting to an swap data repository or its confirmation process pursuant to CFTC Regulation 37.6(b) in a way that reduces the amount of primary economic terms data that it reports.
The extension of this relief demonstrates the complexity of the CFTC’s implementation of the Dodd-Frank SEF rules and the CFTC’s attempts to balance regulatory requirements with market participants’ ability to comply in a cost-effective and practicable manner.