The no-action letters offer only limited relief with respect to the CFTC’s swap documentation rules and other Dodd-Frank requirements.

On January 2, 2013, the U.S. Commodity Futures Trading Commission (CFTC) extended the compliance deadline by six months (to July 1, 2013) for swap dealers (SDs) and major swap participants (MSPs) to comply with certain internal business conduct standards (IBCS) and swap trading relationship documentation rules (STRD Rules).1 As this July 1, 2013 compliance deadline approached and the CFTC continues to implement its new regulatory regime over swaps, the CFTC has issued another flurry of no-action letters clarifying, and in certain instances extending, market participants’ compliance obligations under the IBCS and STRD rules applicable to swap dealers (SDs), major swap participants (MSPs) as well as other market participants under CFTC rulemakings promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). As detailed below, these no-action letters address a broad range of topics which include, among others:

  • Swap trading relationship and documentation requirements
  • Portfolio reconciliation requirements
  • External business conduct standards (EBCS)
  • Regulatory (Part 45) and real-time (Part 43) reporting requirements
  • The CFTC’s mandatory clearing requirement and the end-user exception

Because this Client Alert offers only a brief summary of these multi-page letters and guidance documents, please contact any of the authors identified below for further clarification.

In addition to the significant July 1 deadlines, a number of key dates are approaching. We expect that on or about the July 12, 2013 expiration date of the CFTC’s cross-border exemptive order, the CFTC will likely issue its final cross-border guidance and a further exemptive order providing market participants time to transition to the new guidance. It is also possible, however, that an additional, time limited exemptive order will be issued without final guidance, or that the current exemptive order will be allowed to expire even though final guidance is not available. Other pending developments include the implementation of the rules for swap execution facilities (SEFs) and the looming deadline for the pushout of swap businesses from financial institutions pursuant to Section 716 of the Dodd-Frank Act—where relief is expected but has not yet been granted to all affected institutions.

Included in this Client Alert is a brief chart showing selected significant dates relating to the ongoing implementation of CFTC rules (current as of the date of publication with imbedded hyperlinks to relevant CFTC documents). Please note that this chart is to provide general guidance only with respect to selected regulatory developments, and is not intended as a comprehensive summary of such rules and regulations.

Swap Trading Relationship Documentation (STRD)

Foreign Exchange Transactions

On September 11, 2012, the CFTC finalized rules prescribing, among other things, obligations of SDs/MSPs concerning swap trading relationship documentation.2 Under the STRD Rules, SDs/MSPs are required to have swap trading relationship documentation in place with all of their counterparties which includes “all terms governing the trading relationship between the [SD/MSP] and its counterparty, including, without limitation, terms addressing payment obligations, netting of payments, events of default or other termination events, calculation and netting of obligations upon termination, transfer of rights and obligations, governing law, valuation, and dispute resolution.”3 In practice, the CFTC has indicated that SDs/MSPs can satisfy many of these requirements by trading with their counterparties under an ISDA Master Agreement or other equivalent relationship documentation.4 Even for such relationship documentation, however, amendments are necessary to ensure full compliance.5 Moreover, the STRD Rules extend to transactions in physically settled foreign exchange forwards and foreign exchange swaps that have been exempted from the definition of “swap” by the Secretary of the Treasury (Exempt FX Transactions).6

Many foreign exchange transactions that are “swaps” (Swaps on FX) and Exempt FX Transactions (collectively, Covered FX Transactions), historically have not been documented under an ISDA Master Agreement or equivalent types of relationship documentation. Accordingly, in the foreign exchange markets, the lack of compliant documentation that satisfies the STRD Rules is particularly severe. On June 27 2013, the CFTC’s Division of Swap Dealer and Intermediary Oversight (DSIO) issued time-limited no-action relief to provide SDs/MSPs with additional time to comply with the STRD Rules for their Covered FX Transactions. Under this relief, DSIO will not recommend any enforcement action against an SD/MSP for failure to execute swap trading relationship documentation with a counterparty in compliance with CFTC Regulation 23.504 until (1) September 1, 2013 with respect to a counterparty that is an “active fund”;7 or (2) December 31, 2013 with respect to any other counterparty except a registered SD or MSP, subject to the following conditions:

  1. The SD/MSP has established and is maintaining the written policies and procedures required under CFTC Regulation 23.504(a)(2)
  2. The only swaps that are currently in effect between the SD/MSP and the counterparty as of the date of the no-action letter are Covered FX Transactions
  3. From the date of the letter until the expiration of the no-action relief specified above, the SD/MSP only enters into swaps with the counterparty that are Covered FX Transactions
  4. As of the date of the no-action letter, the Covered FX Transactions currently in effect between the SD/MSP and the counterparty are not governed by relationship documentation that is, or is substantially similar to, an ISDA Master Agreement.8

Although the relief that has been granted under this letter is appreciated, it is narrower than the industry had sought and raises additional complexities. For instance, we understand that it is fairly common for relationship documentation for interest rate or other swaps to expressly carve out Covered FX Transactions—meaning that the client has compliant documentation for some asset classes but does not have compliant documentation to support Covered FX Transactions. The fourth condition described above appears to include such a circumstance. However, the second and third conditions provide that the relief is only available if the SD/MSP and the counterparty have no other outstanding non-FX swaps, and do not enter into other non-FX swaps during the period of the relief. Therefore, although SDs/MSPs are permitted to use this relief in connection with clients that have relationship documentation in place for non-FX swaps but do not have any trades outstanding under that documentation, we believe as a practical matter that very few clients maintain relationship documentation that they do not use. Thus, the conditions to the relief for such “partially documented” clients will often not be met and SD/MSPs will need to quickly execute relationship documentation for their Covered FX Transactions with such clients if they wish to be able to trade.

In addition, the definition of “active fund” is different than the definition used by the CFTC in its clearing determination schedules, most significantly by including Exempt FX Transactions in the calculation but excluding swaps that are not Covered FX Transactions. It may therefore be difficult for market participants to quickly determine which funds fall under the September 1 deadline.

Finally, as of June 30, 2013, about one-fourth of the counterparties that had signed up for the August 2012 ISDA Protocol had not yet entered into the March 2013 ISDA Protocol. The CFTC has not granted relief from compliance with the STRD Rules except in the narrow context described above.

Swaps Intended to Be Cleared

The STRD Rules contain an exception to the requirement that an SD/MSP execute swap trading relationship documentation with a counterparty prior to entering into a swap with such counterparty where the swap is executed on a designated contract market (DCM) or anonymously on a swap execution facility (SEF). For the SD/MSP to use this relief, the swap must be cleared by a derivatives clearing organization (DCO) and all terms of the swap must conform to the rules of the DCO and certain other CFTC regulations.9 In response to requests from various market participants, DSIO, in effect, extended the scope of this exception to cover swaps that are intended to be submitted for clearing contemporaneously with execution (Intended-To-Be-Cleared Swaps) even where the other conditions of the exception under Rule 23.504 (including that the swap be anonymous and that it be traded on a DCM or SEF) are not satisfied. The rationale for this relief is that, where the swap is intended to be cleared, the counterparties will not have an ongoing relationship with each other to which relationship documentation would apply.

Under the terms of the no-action letter, DSIO will not recommend an enforcement action against an SD/MSP for failing to comply with the STRD Rules in connection with Intended-To-Be-Cleared Swaps, if certain conditions are satisfied.10 Those conditions include requirements that address the availability of the swap to be traded on a DCM or SEF, the likelihood of clearing (e.g., a DCO clears swaps of this kind and appropriate clearing arrangements have been made), and the timeframe in which submission for clearing must be made. Most significantly, if the trade fails to clear, it cannot result in a bilateral agreement between the SD/MSP and the counterparty. Thus, the SD/MSP and its counterparty must have agreed in writing to a “fallback agreement” that addresses the scenario where a clearing member or a DCO fails to accept an Intended-To-Be-Cleared Swap and the agreement provides for resubmission or immediate termination of the swap, with or without allocation of costs or termination payments.11

Portfolio Reconciliation

Extension of Deadline

CFTC Regulation 23.502 requires SDs/MSPs to establish, maintain, and follow written policies and procedures reasonably designed to ensure they engage in portfolio reconciliation with each of their counterparties on a periodic basis. In response to concerns from industry participants that additional time is needed to implement the necessary infrastructure and processes for portfolio reconciliation among SDs/MSPs and their counterparties, DSIO granted time-limited no-action relief from CFTC Regulation 23.502 until August 23, 2013 for SDs/MSPs that fail to conduct the required portfolio reconciliations.12

No-Action Relief as to “Material Terms”

In addition to extending the compliance deadline for portfolio reconciliation, DSIO clarified in a separate no-action letter that certain data which otherwise might be deemed “material terms” under the CFTC’s regulatory (Part 45) reporting rules is not required to be exchanged in the portfolio reconciliation process. In general, the information with respect to which relief has been granted — which includes data fields relating to items like whether the swap was subject to post-trade allocation, time stamps, and information about clearing arrangements and the end-user exception — does not relate to the ongoing risk management concerns and swap valuation process at which the portfolio reconciliation rules are aimed.13

External Business Conduct Standards (EBCS)

Swaps Intended to Be Cleared

Like the STRD Rules discussed above, the CFTC’s EBCS contain exceptions that apply where the SD/MSP does not know the identity of the counterparty prior to the execution of the swap, with such exceptions often specifically linked to the transaction occurring on a SEF or DCM.14 However, there are other circumstances in which a transaction may be done on an anonymous basis, making compliance with the EBCS impossible, but where these exceptions do not apply. DSIO agreed that compliance with certain of the EBCS, including those relating to know-your-customer requirements, institutional suitability and special entities, was not required for anonymous trades. Accordingly, in addition to the no-action relief provided to Intended-To-Be-Cleared Swaps from the CFTC’s STRD Rules, DSIO also granted no-action relief to SDs/MSPs for failure to comply with many of the CFTC’s EBCS15 in connection with Intended-To-Be-Cleared Swaps where the SD/MSP does not know the identity of the counterparty prior to execution of the swap.16 The same conditions apply to this relief as to the STRD Rules relief discussed above: specifically, conditions relating to the availability of the swap on a DCM or SEF, the likelihood of clearing, promptness of submission to clearing, and the existence of a written “fallback agreement” that requires resubmission or termination of a swap that fails to clear rather than an allowing the swap to continue as a bilateral trade.

Foreign Exchange Intermediated Prime Brokerage Arrangements

On April 30, 2013, DSIO issued a no-action letter that recognized the difficulty of complying with the EBCS under prime brokerage arrangements.17 This initial no-action letter covered two forms of prime brokerage arrangements. In the first form, the prime broker may grant limited agency powers to the counterparty, enabling the counterparty, as agent for the prime broker, to negotiate transactions with a number of approved executing dealers. In the second form, the counterparty is not granted agency powers, but rather agrees to specified limits and parameters with the prime broker for transactions that the counterparty will enter into with approved executing dealers, which will subsequently be “given up” to the prime broker. Under either form, however, the end result is two transactions with equal but opposite terms—one transaction will be between the prime broker and the counterparty and the other between the prime broker and the executing dealer. In response to concerns from market participants that it would be impracticable for prime brokers and executing dealers to fully comply with the EBCS because each entity has access to different information at different points of time, the CFTC provided no-action relief that permitted an SD engaging in a prime brokerage transaction to allocate certain EBCS to an executing dealer that is also an SD, provided that numerous conditions were satisfied. The no-action relief also permitted, albeit to a lesser extent, an SD engaging in prime brokerage transactions that are Exempt FX transactions to allocate certain EBCS to an executing dealer that is not an SD.

Notwithstanding this previous no-action letter, market participants explained that “intermediated” prime brokerage arrangements — where an intermediary acts as an agent for a prime broker that intermediates between a counterparty and an executing dealer — are also prevalent. As a practical matter, in these types of intermediated prime brokerage arrangements, it is only the intermediary that communicates with the counterparty prior to the time terms of a transaction are agreed. Accordingly, it would be impracticable for prime brokers and executing dealers that are SDs to fully comply with the EBCS in such intermediated arrangements, as each entity has access to different information at different points of time, and only the intermediary is in communication with the counterparty prior to determining the final terms of the transaction. Thus, to facilitate compliance with the EBCS, DSIO agree to provide further no-action relief under which it will not recommend an enforcement action against an SD for failure to comply with certain EBCS18 with respect to Covered FX Transactions entered into under an intermediated prime brokerage arrangement if certain conditions are met. The obligations that are not complied with by the prime broker SD must have been allocated to an intermediary that is an introducing broker (IB) or futures commission merchant (FCM) registered as such with the CFTC that has accepted such responsibilities. 19 As with the previous no-action letter, this relief is subject to a number of specific conditions, including that no apportionable EBCS may remain unallocated between the SD and the registered intermediary and the counterparty must be provided notice that the apportionable EBCS have been allocated among the SD and registered intermediary.20 Additionally, the SD and the registered intermediary must agree to severally comply with the CFTC’s rules on fraud, manipulation, and other abusive practices.21

In recognition that compliance with the terms and conditions of the no-action letter may require SDs and registered intermediaries to complete new documentation, DSIO provided time-limited no-action relief for failure to comply with any apportionable business conduct obligations with respect to Covered FX Transactions until July 19, 2013, provided that such Covered FX Transactions are conducted under intermediated prime brokerage arrangements of such SD in existence on the date of the letter.22

Regulatory and Real-Time Reporting

Valuation Data for Cleared Swaps

In CFTC Letter No. 13-34, the CFTC’s Division of Market Oversight (DMO) extended until June 30, 2014 a temporary no-action letter it had issued on December 17, 2012 stating that it would not recommend enforcement action against SDs/MSPs for failure to report certain valuation data in connection with cleared swaps. In granting the relief, the DMO noted that it had been informed that SDs/MSPs lacked the necessary connectivity to report valuation data as set forth in CFTC Regulation 45.4(b)(2)(ii) to all Swap Data Repositories (SDRs) to which they would need to report.

Complex or Bespoke Products

CFTC Letter No. 13-35 extended until September 30, 2013 certain aspects of reporting relief that DMO had previously granted with respect to “bespoke” or “complex” products. “Bespoke” or “complex” products are defined as swaps that are (a) not listed for trading on a DCM; (b) not available to be traded on a SEF; (c) not eligible to be cleared by a DCO; (d) not eligible to be confirmed through an electronic matching confirmation system; and (e) not represented in Financial products Markup Language (FpML). The current version of FpML does not support bespoke or complex swaps, but an updated version is expected to be fully implemented by September 30, 2013. The letter also relates to the “Any other terms” data field and to the reporting of uncleared inter-affiliate swaps, in each case providing no-action relief until September 30, 2013.

CDS Clearing-Related Swaps

In CFTC Letter No. 13-36, DMO extended until December 31, 2013 the time-limited no-action relief it had provided to SDs/MSPS on December 19, 2012 with respect to certain off-facility, cleared credit default swaps (CDS) that are entered into pursuant to a derivatives clearing organization’s (DCO) rules related to its price submission process for determining end-of-day settlement prices for cleared CDS (CDS Clearing-Related Swaps).23 The existing no-action relief was set to expire on June 30, 2013. Conditions of the relief include the requirement that the relying SD/MSP be a clearing member of the relevant DCO and that the reporting counterparty and DCO must agree that the DCO will fulfill all of the reporting counterparty’s obligations with respect to reporting the CDS Clearing-Related Swaps.24

Masking Information for Entities Located in Certain Enumerated Jurisdictions

CFTC Letter No. 13-41 extends relief granted in CFTC Letter No. 12-46 in relation to conflicts of law between compliance with the CFTC’s swap reporting requirements and compliance with non-U.S. privacy laws. This relief, which allows the masking of information about entities located in certain enumerated jurisdictions, was set to expire on June 30, 2013. However, DMO has granted further time-limited no-action relief until the earlier of: (1) such time that the reporting counterparty no longer holds a reasonable belief that a regulatory or statutory prohibition precludes it from reporting the identifying information; or (2) June 30, 2014.25 Additionally, to rely on the no-action relief, market participants must satisfy numerous conditions, including that they must submit a request to the applicable non-U.S. regulator requesting clarification as to whether reporting the identifying information pursuant to the CFTC’s reporting rules would violate its laws.26

Clearing and the End-User Exception

Although the implementation schedule for the CFTC’s clearing determination generally does not require commercial end-users to clear their swaps (or to demonstrate the availability of an exception from clearing) until September 9, 2013, the implementation schedule included certain small banks and other financial entities in the June 10, 2013 clearing deadline, even if they will be able to rely on the end-user exception. In particular, banking institutions having total assets of $10 billion or less on the last day of their most recent fiscal years (Small Banks) are exempt from the definition of financial entity for purposes of Section 2(h)(7)(A) of the CEA if they satisfy the conditions of the end-user exception set forth in CFTC Regulation 50.50(a)-(c), but are included within the term “financial entity” for purposes of determining the relevant date on which they must begin clearing swaps in accordance with the clearing determination if they do not satisfy those conditions. Thus, Small Banks are already required to satisfy the end-user exception requirements, even though other end-users will not be required to do so for several months. The confusion resulting from this differential treatment may have been compounded by the fact that, as the CFTC’s Division of Clearing and Risk (DCR) notes, “in connection with announcing the Clearing Requirement, the Commission indicated that market participants electing an exception from the Clearing Requirement under Section 2(h)(7) of the CEA, which includes the End-User Exception, do not have to comply with the reporting requirements for electing the exception, including Regulation 50.50(b), until September 9, 2013.”27

One of the requirements for claiming the end-user exception, for an entity that is a publicly traded company (or controlled by a publicly traded company), is that the board of directors (or an appropriate committee thereof) has approved the use of the end-user exception. Many Small Banks found it difficult to obtain board approval in time for the June 10, 2013 deadline. To provide Small Banks with more time to comply with the end-user exception’s requirement to obtain the requisite board approval, DCR issued a temporary no-action letter under which it will not recommend an enforcement action against a Small Bank who utilizes the end-user exception after June 10, 2013 without obtaining prior board approval so long as the Small Bank obtains the necessary board approval no later than July 10, 2013.28

Swap Execution Facilities

In CFTC Letter No. 13-28, the DMO extended the relief it had previously given under a no-action letter to prevent undue disruption to facilities that had been operating trading platforms, such as exempt commercial markets (ECMS) and exempt boards of trade (EBOTs), in compliance with CEA Section 2(d), 2(e), 2(g), 2(h), or 5d (as those sections were in effect prior to July 16, 2011) pending finalization of the SEF rules. This no-action relief was set to expire on June 30, 2013, but the SEF rules do not take effect until August 5, 2013 and compliance with those rules is not required until October 2, 2013. Thus, absent further relief, facilities relying on DMO’s previous no-action letter that intend to submit an application to become a SEF would not be able to continue operating for a period of time during the pendency of their application reviews and would not have the benefit of the October 2 compliance deadline. In order to ensure that industry practices continue not to be unduly disrupted, DMO extended the previous no-action letter to preserve the regulatory status quo until October 2, 2013.29


In addition to the no-action letters outlined above, various CFTC divisions granted relief in June 2013 with respect to a number of other compliance requirements as well. A short summary of these additional no-action letters is as follows:

  • CFTC Letter No. 13-22. DCR will not recommend an enforcement action against certain “treasury affiliates” of commercial end-users for failure to comply with the CFTC’s mandatory clearing requirements. The no-action relief is subject to a significant number of conditions that entities must satisfy in order to rely on the relief.
  • CFTC Letter No. 13-29. DSIO will not recommend an enforcement action against a sponsoring entity based on the failure to submit a fingerprint card on behalf of non-US “associated persons,” provided that the sponsoring entity submits a certification which provides, among other things, that it conducted a reasonable criminal history background check that did not reveal any disqualifications
  • CFTC Letter No. 13-30. While the CFTC works to finalize its rulemaking exempting certain qualifying cooperatives from the mandatory clearing requirement, DCR will not recommend an enforcement action, provided, among other conditions, that (x) one of the parties is an exempt cooperative that is (a) formed under federal or state law as a cooperative; and (b) a “financial entity; (y) each member of the cooperative is not a “financial entity” and (z) the swap is entered into with a member of the exempt cooperative in connection with the origination of a loan that hedges or mitigates commercial risk. The relief expires on July 19, 2013.
  • CFTC Letter No. 13-32. DSIO will not recommend an enforcement action against SDs that are not registrants of the SEC or regulated by a U.S. prudential regulator and which ended their fiscal year on March 31, 2013 if such SDs submit an annual report that does not satisfy all of the conditions of CFTC Rule 3.3(e) and (f), provided that the annual report satisfies certain minimum requirements.
  • CFTC Letter No. 13-37. DSIO will not recommend an enforcement action against any entity engaged in floor trading activity for failure to include, prior to the compliance date for the CFTC’s SEF Rules (October 2, 2013), in its calculation of the aggregate gross notional amount of swaps connected with its swap dealing activity, a swap that is submitted to a registered DCO for clearing, provided that specific conditions are met. Entities relying on the relief must file a claim to use the no-action relief prior to July 1, 2013.

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