On May 1, the Commodity Futures Trading Commission’s Divisions of Market Oversight and Clearing and Risk (Divisions) issued No-Action Letter No. 14-62 extending relief previously granted to market participants, swap execution facilities (SEFs) and designated contract markets (DCMs) from the trade execution requirement in Commodity Exchange Act (CEA) Section 2(h)(8) and from CFTC Regulations 37.9(a)(2), 37.203(a) and 38.152 with respect to certain package transactions. Under Letter 14-62, a “package transaction” is a transaction: (i) between two or more counterparties involving two or more instruments; (ii) priced or quoted as one economic transaction with simultaneous or near-simultaneous execution of all components; (iii) that contains at least one component that is subject to the trade execution requirement; and (iv) where the execution of each component is contingent upon the execution of all other components.As previously reported in the Corporate and Financial Weekly Digest edition of February 14, 2014, the Division of Market Oversight had issued No-Action Letter No. 14-12, in which it granted relief from the trade execution requirement with respect to all package trades until May 15, to enable market participants to continue their efforts toward compliance with the trade execution requirement and to enable CFTC staff to address the issues surrounding package transactions where at least one component is not subject to the trade execution requirement. In Letter No. 14-62, the Divisions confirmed that package transactions in which all components are swaps that are subject to the trade execution requirement are subject to such requirement by May 15. The Divisions also extended their relief from the trade execution requirement for the following categories of package transactions for the time periods indicated:  

  • Package transactions in which (i) at least one swap component has been made available to trade and is subject to the trade execution requirement and (ii) each of the other swap components is subject to the clearing requirement under CEA Section 2(h)(1)(A) and CFTC Regulation 50.4 must comply with the trade execution requirement by June 1.
  • Package transactions in which (i) all swap components have been made available to trade and are subject to the trade execution requirement and (ii) all other components are US Treasury securities must comply with the trade execution requirement by June 15.
  • Package transactions in which (i) at least one swap component has been made available to trade and is subject to the trade execution requirement and (ii) at least one swap component is under the CFTC’s exclusive jurisdiction and not subject to the clearing requirement under CEA Section 2(h)(1)(A) and CFTC Regulation 50.4 must comply with the trade execution requirement by November 15.
  • Package transactions in which (i) at least one swap component has been made available to trade and is subject to the trade execution requirement and (ii) at least one swap component is not under the CFTC’s exclusive jurisdiction (e.g., mixed swaps, security-based swaps) must comply with the trade execution requirement by November 15.
  • Package transactions in which (i) at least one swap component has been made available to trade and is subject to the trade execution requirement and (ii) at least one component is not a swap must comply with the trade execution requirement by November 15. (This category specifically excludes situations where all other components are US Treasury securities, in which case compliance is required by June 15.) 

Additionally, No-Action Letter No. 14-62 also provides time-limited no-action relief to SEFs and DCMs from the CFTC’s straight-through processing requirements, which generally provide that a swap transaction which is rejected from clearing for credit-related reasons (Rejected Transaction) must be treated as being void ab initio. Because package transactions are currently cleared on a leg-by-leg basis instead of as a whole, a derivatives clearing organization may reject an individual leg due to its risk exceeding its credit limit even though the net risk of the package may not exceed the limit. Accordingly, the Divisions will not recommend enforcement action against a SEF or DCM that permits a Rejected Transaction to be resubmitted for clearing on the same terms and conditions other than the time of execution if the Rejected Transaction was not accepted for clearing due to the sequencing of submission of the legs of a package transaction. Such resubmission must be made within 60 minutes, and SEFs and DCMs that desire to rely on this latter relief must satisfy a number of other conditions as well, including a requirement that their rules provide that if the resubmitted trade is also rejected, it is void ab initio without a second opportunity to submit a new trade. 

The no-action relief to SEFs and DCMs regarding the CFTC’s straight-through processing requirements expires on September 30.  

CFTC Letter No. 14-62 is available here.  

CFTC Letter No. 14-12 is available here.