The Commodity Futures Trading Commission’s Division of Market Oversight has extended previously granted relief for Swap Execution Facilities (SEFs) with respect to requirements for certain transactions in uncleared swaps.
CFTC Regulation 37.6(b) requires that a SEF provide each counterparty to a transaction entered into on or pursuant to the rules of the SEF with a written record of all terms of the transaction, which shall legally supersede any previous agreement. Such record will also serve as a confirmation of the transaction. In the adopting release of CFTC Regulation 37.6(b), the CFTC noted that, with respect to uncleared swaps, SEFs can meet this requirement by incorporating by reference the terms set forth in agreements previously negotiated by counterparties, provided that such agreements were submitted to the SEF ahead of execution.
In response to concerns raised, the CFTC grants relief and will not recommend enforcement action if, in a confirmation provided pursuant to CFTC Regulation 37.6(b), a SEF incorporates by reference terms from previously negotiated agreements between counterparties, without first having been supplied such agreements.
The CFTC also will not recommend enforcement action against a SEF for failure to maintain a copy of agreements incorporated by reference in the SEF’s confirmation as otherwise would be required under CFTC Regulations 37.0000, 37.1001, and 45.2(a), or to report certain confirmation data pursuant to Regulation 45.3(a), where such confirmation data is contained solely in underlying agreements that are incorporated by reference.
Such relief is premised upon the SEF-establishing rules, which require:
- a confirmation to state, where applicable, that it incorporates by reference the terms of underlying previously negotiated agreements;
- a confirmation to state that, in the event of inconsistency between the confirmation and an underlying previously negotiated agreement, the terms of the confirmation legally supersede any contradictory terms;
- participants to provide the underlying previously negotiated agreement to the SEF on request;
- the SEF to request from participants the underlying previously negotiated agreements and provide such agreements to the CFTC upon request; and
- the SEF to report primary economic term data pursuant to CFTC Regulation 45.3(a)(1).
Furthermore, in order to take advantage of the CFTC’s relief, SEFs may not modify their trading, confirmation, or reporting processes in a manner that would reduce the amount of primary economic terms data reported.
Such relief will be effective until the earlier of (1) March 31, 2017 or (2) the effective date of revised CFTC regulations to establish a permanent and practical SEF confirmation solution.
The CFTC’s No Action Letter is available here.