The Commodity Futures Trading Commission (the “CFTC”) has announced implementation of the trade execution requirement for certain interest rate and credit default swaps. Beginning May 16, 2014, managers executing swaps subject to the trade execution requirement that are part of a “package transaction” must be traded on a Swap Execution Facility (“SEF”) or Designated Contract Market (“DCM”), pursuant to the phased compliance timeline discussed in this Alert. The CFTC had previously provided no-action relief for certain swaps that otherwise were required to be traded on a SEF or DCM related to package transactions.
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In addition, SEFs and DCMs will be permitted to implement rules that establish a “new trade, old terms” procedure. Market participants pointed out that clearing occurs on a leg-by-leg basis and that individual legs may be rejected by a clearing house because the risk of that leg, measured in isolation, could cause the trader to exceed its credit limit. Market participants stated that if the legs of the package trade are measured together, then the net risk may not exceed the credit limit. Accordingly, market participants requested relief from the straight-through processing requirements currently in place. The CFTC granted SEFs and DCMs time-limited no-action relief from methods of execution for required or permitted transactions, and CFTC regulations that prohibit pre-arranged trading, if a SEF or DCM permits a new trade, with terms and conditions that match the terms and conditions of the original trade, other than the time of execution, to be submitted for clearing. This no-action relief shall commence on May 16, 2014 and be provided until Sept. 30, 2014.