The CFTC Division of Market Oversight ("DMO") granted supplemental relief to help swap execution facilities ("SEFs") and designated contract markets ("DCMs") more efficiently correct certain trading errors.
As previously covered, the CFTC Divisions of Market Oversight and of Clearing and Risk extended no-action relief in CFTC Letter 17-27, permitting SEFs and DCMs to continue correcting trades that were rejected for clearing due to operational and clerical errors, as well as trades in which errors were discovered after swaps had been cleared.
CFTC Letter 20-01 supplements the relief provided in CFTC Letter 17-27 to provide SEFs and DCMs with an alternative means for correcting such errors. The CFTC stated that the errors are corrected by engaging in an ex post facto review of corrected error swap trades where counterparties determined that such errors had occurred. Specifically, the DMO stated that it will not recommend enforcement action against an SEF or DCM for failing to comply with CFTC rules 37.9(a)(2) and 38.500 regarding proper methods of execution, or with CFTC rules 37.203 and 38.152 regarding the prohibition against prearranged trading.
These alternative procedures for correcting trades are subject to a number of conditions. Specifically, the SEF or DCM must:
- implement transparent procedures concerning error trade correction by counterparties, including the standards by which counterparties may determine that an error trade has occurred, how it will be corrected, notification to the SEF or DCM of the correction, and the timeframe in which they must complete such correction;
- conduct an ex post facto review of the error trade offsetting trade and correct trade on a T+1 basis; and
- execute and submit the offsetting trade and the correct transaction for clearing "as quickly as technologically practicable," and no later than 24 hours after the erroneous cleared swap was executed.