On September 19, the Commodity Futures Trading Commission’s Division of Market Oversight (DMO) provided time-limited no-action relief to swap execution facilities (SEFs) from the requirement in CFTC Regulation 43.2 that block trades occur away from the SEF’s trading system or platform. The no-action position was adopted in order to facilitate compliance with CFTC regulations regarding pre-execution screening and prompt clearing of transactions.As explained by DMO, CFTC Regulation 1.73 requires a futures commission merchant (FCM) that is also a clearing member of a derivatives clearing organization (DCO) to (i) establish risk-based limits for all proprietary and customer accounts and (ii) screen orders for compliance with such limits before an order is executed on or subject to the rules of a SEF or a designated contract market. The Regulation applies to all orders, including block trades which, by definition, are not effected by or through a SEF’s trading system or platform. Additionally, CFTC Regulation 37.702(b) requires a SEF to have rules and procedures to facilitate prompt and efficient straight-through processing by DCOs, including facilitating pre-execution credit checks by each clearing FCM on an order-by-order basis. DMO acknowledged that, given the current state of technology, SEFs and FCMs may face challenges in facilitating pre-execution credit checks of block trades that occur away from a SEF’s trading system or platform. The no-action relief is designed to permit FCMs to conduct pre-execution credit checks of block trades by permitting trades that are executed on SEF trading systems or platforms to be traded as block trades under CFTC Regulation 43.2.
The relief is subject to the following conditions: (i) block trades cannot be executed on a SEF’s order book, as defined in CFTC Regulation 37.3(a)(3); (ii) the SEF must adopt rules for cleared block trades that indicate the SEF is relying upon this relief and require each cleared block trade to comply with the notional size and other requirements of CFTC Regulation 43.2; (iii) the FCM must complete a credit check at the time the order enters the SEF trading system or platform; and (iv) the block trade is subject to void ab initio requirements if the trade is rejected for clearing on the basis of credit.
CFTC Letter 14-118 is available here. This time-limited no-action relief will expire on December 15, 2015.