On September 29, the Commodity Futures Trading Commission’s Division of Market Oversight (DMO) issued No-Action Letter No. 14-119 extending no-action relief previously granted to derivatives clearing organizations (DCOs), clearing members and reporting counterparties from certain requirements in connection with credit default swaps (CDS) entered into pursuant to a DCO’s rules regarding its price submission process (CDS Settlement Price Process) for determining end-of-day settlement prices for cleared CDS (CDS Clearing-Related Swaps). DMO stated that DCO rules for CDS clearing generally require clearing members as part of the CDS Settlement Price Process to submit price quotes for any cleared CDS product in which the clearing member or its customers has open interest at the end of each day. To ensure the quotes submitted are reliable and reflect current market conditions, DMO stated that DCOs require clearing members to, on occasion, enter into “firm” or “forced” trades of CDS at the submitted price quotes. DMO stated that, absent relief, the CDS Settlement Price Process would require a DCO to register as a swap execution facility (SEF) or designated contract market (DCM) under Commodity Exchange Act (CEA) Section 5h(a)(1) and CFTC Regulation 37.3, adhere to trade execution requirements under CEA Section 2(h)(8) and CFTC Regulations 37.10 and 38.12, and meet swap data reporting requirements under CEA Section 2(a)(13)(G). DMO also stated that, absent relief, a reporting counterparty could be required to report swap data for off-facility swaps under CFTC Regulation 45.8.
DMO previously granted time-limited relief to DCOs, clearing members and reporting counterparties from the above requirements in CFTC No-Action Letter No. 13-86, which was to expire on September 30. Letter No. 14-119 extends the relief for parties meeting certain requirements. First, DMO will not recommend enforcement action against a DCO for failing to register as a SEF or DCM or against a clearing member for entering into CDS Clearing-Related Swaps through a DCO’s CDS Settlement Price Process, subject to the following conditions: (i) the relief applies only to CDS Clearing-Related Swaps arising from a DCO’s Settlement Price Process as required by DCO rules; (ii) each trade must involve a clearing member that is eligible to clear CDS indices and that participates in the CDS Settlement Price Process, and must be carried out such that the DCO’s net exposure remains unchanged; (iii) the CDS Clearing-Related Swap trade is initiated solely by the DCO; and (iv) the DCO relying on the relief must make information regarding the CDS Settlement Price Process available upon request.
DMO also will not recommend enforcement action against a reporting counterparty for failure to comply with Part 45 swap data reporting obligations for CDS Clearing-Related Swaps, subject to the following conditions: (i) the reporting party participates in the CDS Settlement Price Process;(ii) the relief applies only to CDS Clearing-Related Swaps arising from a DCO’s Settlement Price Process as required by DCO rules; and (iii) the reporting counterparty and DCO agree that the DCO will fulfill all of the reporting counterparty’s obligations under Part 45 for CDS Clearing-Related Swaps.
The no-action relief will expire on September 30, 2015.
CFTC Letter No. 14-119 is available here.