The Division of Market Oversight (“Division”) of the U.S. Commodity Futures Trading Commission (“CFTC”) on September 27 and 30, 2013 issued several no-action letters to temporarily registered swap execution facilities (“SEFs”)1 that extend the compliance date (from October 2, 2013): (i) by which a SEF must enforce rules governing its operations to November 1, 2013;2 (ii) by which certain data for swap transactions executed on a SEF is required to be reported to a swap data repository (“SDR”) to October 29, 2013 or December 1, 2013 (depending on the underlying asset class of the swap involved);3 and (iii) for SEFs to issue written confirmations relating to swaps that are not intended to be submitted for clearing (“Non-Cleared Swaps”) to October 29, 2013 or December 1, 2013 (depending on the asset class of the Non-Cleared Swaps involved).4 There have been, and continue to be, requests for even further extensions of these compliance dates, although there is no present indication that the CFTC or the Division will grant any further relief.
Prior to the effectiveness of Title VII of the Dodd-Frank Act,5 many market participants utilized electronic trading systems or platforms to execute swap transactions, as these platforms represented some of the limited venues available for certain swaps trading (other than the bilateral over-the-counter markets). Title VII amended the U.S. Commodity Exchange Act as amended (“CEA”) to require the designation, registration, and regulation of SEFs (which are defined in the CEA as trading systems or platforms “in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants” in the systems or platforms).6 Many of the trading systems and platforms used by market participants fall within this definition and are, as a result, subject to regulation as SEFs under the CEA. However, given the time involved in implementing the SEF-related provisions of the CEA, the CFTC permitted these platforms to continue to operate on an unregulated basis until the CFTC adopted final rules regulating the operations of SEFs.7
On June 4, 2013, the CFTC adopted final rules regarding core principles and certain other requirements that apply to registered SEFs (“SEF Final Rules”).8 The SEF Final Rules require SEFs to register with the CFTC and to comply with CFTC regulations beginning October 2, 2013. As a result, many trading systems and platforms that operated in an unregulated capacity pursuant to the Order (and the amendments thereto) and the SEF Letters are now required to operate as registered and regulated SEFs.9
SEF Rulebooks and User Agreements
Under the CEA, a SEF is required to implement rules governing its operations, including rules relating to trading procedures for orders executed on the SEF.10 SEFs are also required to establish rules and criteria governing market participants who utilize a SEF's services that are designed to deter market abuses. In addition to adopting rules, one of the core principles set forth in CEA Section 5h requires a SEF to enforce compliance with its rules.11
In order to comply with these requirements, each SEF has adopted its own rulebook (“Rulebook”) governing the activities of its participants and has been contacting market participants requesting them to execute the SEF’s own user agreement (“User Agreement”) in order to permit participants to trade (or continue to trade) on its platform. By executing a User Agreement, a market participant agrees to adhere to the SEF’s Rulebook. Citing the limited time that has been available to market participants to review properly SEF Rulebooks and User Agreements following the adoption of the SEF Final Rules, the Division granted no-action relief to SEFs from their obligations to enforce their internal rules until November 1, 2013. Pursuant to this relief, while SEFs are required to have the rules described above in place, the Division will not recommend that the CFTC take enforcement action against SEFs that provide temporary access to market participants who do not sign onboarding documents (e.g., a User Agreement) until November 1, 2013.
Market participants are encouraged to review carefully SEF Rulebooks and User Agreements and to establish appropriate procedures to ensure compliance with applicable SEF rules by the extended compliance date. While the particulars of each Rulebook and User Agreement vary by SEF, as a general matter a Rulebook (among other things) requires participants to adopt appropriate procedures to ensure compliance with the SEF’s rules and to supervise the participant's traders who utilize the platform. These documents also generally, among other things: (i) limit the liability of a SEF arising from a participant’s use of the SEF; (ii) impose criteria that participants and their traders must satisfy in order to utilize a SEF; (iii) grant a SEF the authority to revoke a participant’s access to the SEF; (iv) authorize a SEF to impose fines and take other disciplinary actions against a participant in certain instances; and (v) require a participant to consent to a SEF’s jurisdiction. As from the new compliance date of November 1, 2013, market participants will generally be required to have agreed to the rules of a SEF prior to utilizing that SEF to execute swap transactions.
Swap Data Reporting and Confirmations Relief
Swap Data Reporting. Under the CFTC’s real-time public reporting requirements, a registered SEF is required to transmit swap transaction and pricing data to an SDR as soon as technologically practicable after a publicly reportable swap transaction has been executed on or pursuant to the rules of the SEF.12 This reporting is designed to enable SDRs to publicly disseminate swap transaction and pricing data in real-time. Separately, under the CFTC’s swap data reporting rules, a registered SEF is required to report to an SDR certain “creation data” (including primary economic term (“PET”) data and confirmation data) for each swap executed on or pursuant to the rules of the SEF, as soon as technologically practicable after execution of the swap.13 The swap data reporting rules further require swap counterparties (rather than a SEF) to report certain swap “continuation data” for Non-Cleared Swaps to the same SDR to which the SEF reported creation data for the relevant swap, so that all data in the SDR concerning the particular swap remains current and includes all changes to the PET of the swap occurring during the swap’s existence.14
Multiple SEFs had requested that the Division temporarily provide no-action relief from a registered SEF’s compliance with the real-time data and creation data reporting requirements, to allow for an orderly transition from reporting of swap data by Reporting Counterparties to reporting of such data by SEFs for those swaps executed on or pursuant to the rules of the SEF.15 Similarly, market participants (such as Reporting Counterparties) expressed concern about the ability of a Reporting Counterparty to report required continuation data properly where the Reporting Counterparty is reliant on information either generated by, or otherwise reported to an SDR by, a SEF where the SEF itself is unable to fulfill its own swap reporting obligations.
In response to these concerns, the Division granted the following no-action relief covering the reporting obligations for swaps transacted on or pursuant to the rules of a registered SEF:
- Real-Time and Creation Data. The Division will not recommend that the CFTC take enforcement action against a registered SEF that does not fulfill its real-time public reporting and creation data reporting obligations, until October 29, 2013 for swaps executed on the SEF in the foreign currency (“FX”) asset class and until December 1, 2013 for swaps in the equity and other commodity asset classes16
- Continuation Data. The Division will not recommend that the CFTC take enforcement action if a Reporting Counterparty: (i) fails to report swap continuation data (or, if a report is made, such report includes errors or omissions) due to the failure of a SEF to provide the Reporting Counterparty with the identity of the SDR to which creation data was reported, the unique swap identifier for the swap, or any other creation data that the Reporting Counterparty requires to report continuation data; or (ii) fails to report swap continuation data for a swap as a result of creation data not being reported by a SEF in reliance on the no-action relief granted in the SEF Reporting Letter.17 This relief extends until the earlier of (i) such time as the Reporting Counterparty can fulfill its continuation data reporting obligations, or (ii) October 29, 2013 for swaps executed on or pursuant to the rules of a registered SEF within the FX asset class and December 1, 2013 for swaps within the equity and other commodity asset classes.18
Confirmations. Under CFTC Regulation 37.6(b), a SEF must provide each counterparty to a swap transaction with a written confirmation that includes all of the final terms of the transaction (“Confirmation”). In requesting temporary no-action relief from this requirement for Non-Cleared Swaps,19 SEFs noted various difficulties in obtaining all of the information necessary to issue Confirmations for Non-Cleared Swaps, since these swaps currently contain non-standardized terms agreed by the parties in advance of execution. Pursuant to the Confirmations Letter, the Division will not recommend enforcement action against a registered SEF that does not provide a Confirmation to counterparties of swap transactions executed on or pursuant to the rules of the SEF for the period from October 2, 2013 to October 29, 2013 for Non-Cleared Swaps in the FX, interest rate, and credit asset classes and from October 2, 2013 to December 1, 2013 for Non-Cleared Swaps in the equity and other commodity asset classes.20