On October 7, 2016, the Commodity Futures Trading Commission (CFTC) issued no-action letter 16-74 (NAL 16-74) to extend time-limited relief to Swap Execution Facilities (SEFs) from certain requirements before facilitating cleared block trades. Block trades present a number of compliance challenges for SEFs and futures commission merchants (FCMs). Block trades are reportable swap transactions (above the appropriate minimum notional or principal amounts) that occur away from a SEF’s order book or a designated contract market (DCM), but are executed pursuant to a SEF’s or DCM’s rules and procedures to facilitate prompt and efficient clearing. Clearing mandates credit risk management requirements that FCMs and SEFs must address before trade execution. CFTC Regulation 1.73 requires FCMs to establish risk-based limits based on position size, order size, margin requirements, or similar factors and to screen orders for compliance with such risk-based limits (Credit Check Requirements). CFTC Regulation 37.702(b) requires SEFs ensure that they have capacity to route trades to clearinghouses and to coordinate with clearinghouses to facilitate prompt and efficient clearing (Coordination Requirements). For block trades intended to be cleared that occur away from a SEF’s order book, FCMs and SEFs are still working towards automated solutions to ensure compliance with the Credit Check and Coordination Requirements.
The CFTC’s NAL 16-74 provides SEFs with addition time to develop processes to ensure compliance with Credit Check and Coordination Requirements. The conditions for compliance with NAL 16-74 are as follows:
- The block trade occurs away from the SEF’s order book and such trade:
involves a swap listed on a registered SEF;
is executed pursuant to the SEF’s rules and procedures;
meets the notional or principal amount at or above the appropriate minimum block size applicable to the swap; and
is reported to a swap data repository pursuant to the SEF’s rules and procedures and the CFTC’s rules and regulations.
- The SEF adopts rules pertaining to cleared blocks that indicate that the SEF is relying on the relief provided in NAL 16-74 and that requires each cleared block trade executed on a non-order book trading system or platform to comply with other requirements for block trades.
- The FCM completes the Credit Check Requirements before execution on the SEF’s non-order book trading system or platform.
- The block trade is subject to void ab initio requirements where the swap is rejected on the basis of credit.
NAL 16-74 extends relief that the CFTC had previously provided in CFTC Letter 14-118 and CFTC Letter 15-60. The CFTC’s no-action relief will expire on the earliest of midnight (New York time) on November 15, 2017, or the effective date of any additional CFTC action on Credit Check and Coordination Requirements.