CFTC Extends Further Relief to EU Derivatives Trading Facilities from Dodd-Frank Rules | Practical Law

CFTC Extends Further Relief to EU Derivatives Trading Facilities from Dodd-Frank Rules | Practical Law

The CFTC issued no-action relief to EU multilateral trading facilities (MTFs) from Dodd-Frank SEF rules that were scheduled to take effect for EU MTFs on May 15, 2014. MTFs are non-US derivatives trading platforms that offer swaps to US persons. The relief also exempts swaps involving US market participants entered into on EU MTFs from certain mandatory Title VII exchange-trading requirements, and exempts swap dealers from certain Dodd-Frank business conduct standards with respect to these swaps.

CFTC Extends Further Relief to EU Derivatives Trading Facilities from Dodd-Frank Rules

by Practical Law Finance
Published on 17 Apr 2014 • USA (National/Federal)
The CFTC issued no-action relief to EU multilateral trading facilities (MTFs) from Dodd-Frank SEF rules that were scheduled to take effect for EU MTFs on May 15, 2014. MTFs are non-US derivatives trading platforms that offer swaps to US persons. The relief also exempts swaps involving US market participants entered into on EU MTFs from certain mandatory Title VII exchange-trading requirements, and exempts swap dealers from certain Dodd-Frank business conduct standards with respect to these swaps.
On April 9, 2014, the CFTC's Divisions of Market Oversight (DMO) and Swap Dealer and Intermediary Oversight released joint No-action Letter No. 14-46 (No-action 14-46), which grants relief to EU multilateral trading facilities (MTFs) from Dodd-Frank rules for swap execution facilities (SEFs) that were scheduled to take effect for EU MTFs on May 15, 2014. MTFs are non-US derivatives trading platforms that offer swaps to US persons. The relief also exempts swaps involving US market participants entered into on EU MTFs from certain mandatory Title VII exchange-trading requirements, and exempts swap dealers (SDs) from certain Dodd-Frank business conduct standards with respect to these swaps.
In order for an MTF to take advantage of extended relief from SEF registration requirements after May 14, 2014 (and providing the associated relief to market participants trading on the MTF), an MTF must submit the required request to the CFTC by 11:59 on May 14, 2014, as outlined in No-action Letter No. 14-31. For details on how an MTF may submit a request for the relief, see MTF Requirements for Obtaining the Relief. MTFs must comply with CFTC Regulations Part 45 creation data reporting and Part 43 real-time data reporting in order to qualify their platform for this no-action relief (see Practice Note, US Derivatives Regulation: Practical Guide to Over-the-Counter (OTC) Swap Data Reporting: CFTC Reporting Compliance: Creation Data Reporting Under Part 45).
Note that parties entering into swaps on a Qualifying MTF must still comply with certain Dodd-Frank requirements relating to those swaps, including certain swap data reporting obligations, even after May 14, 2014 (see Requirements for Parties Entering into Swaps on a Qualifying MTF).

Relief Granted

No-action 14-46 extends and supersedes previous no-action relief granted to EU MTFs in No-action Letter No. 14-16 (see Legal Update, CFTC and European Commission Agree on Swap Exchange Trading) and No-action Letter No. 14-31 (see Legal Update, CFTC Gives Non-US Swaps Trading Platforms More Time to Comply with Dodd-Frank SEF Rules).
Specifically, No-action 14-46:
This relief expires upon the effective date of any final rules that implement the CFTC's authority to exempt facilities that are subject to substituted compliance for SEF regulation under the laws of its home country.

MTF Requirements for Obtaining the Relief

Availability of the above-described relief is contingent on the MTF submitting a written request for relief to the CFTC on or before May 14, 2014 that includes certifications that the MTF:
  • Is subject to and compliant with regulatory requirements established by the governmental authorities in the home country of the MTF that are in accordance with certain CFTC SEF regulatory requirements on trading methodology.
  • Is subject to and compliant with regulatory requirements established by the home country of the MTF that are comparable to certain SEF requirements on non-discriminatory access by market participants.
Additionally, MTFs must, among other things:
  • Meet certain requirements related to swap data reporting and swap clearing, including the reporting of Part 45 creation data and Part 43 data, beginning on May 15, 2014. MTFs not seeking relief under this no-action letter need not otherwise report under these sections.
  • Not allow US persons that are not eligible contract participants (ECPs) to trade on its exchange.
This no-action relief is triggered for a particular MTF by DMO's issuance of a letter acknowledging receipt of that MTF's request for relief. However, the CFTC retains the right to modify or terminate the relief upon a finding that the MTF's certification is inaccurate. This relief expires upon the effective date of final rules that implement the CFTC's authority, under section 5h(g) of the CEA, to exempt MTFs that qualify for substituted compliance for SEF regulation in their home countries. For details on substituted compliance, see Practice Note, US Derivatives Regulation: Cross-Border Application of Swaps Rules.

Requirements for Parties Entering into Swaps on a Qualifying MTF

Counterparties that enter into swaps on a Qualified MTF, which has been the subject of a letter from the DMO acknowledging receipt of the MTF's relief request, even if the MTF has submitted to the CFTC the required documentation for relief, must still meet existing and continuing obligations related to:

Exemptions for SDs and MSPs Entering into Swaps on a Qualifying MTF

Additionally, SDs and MSPs that enter into swaps on a Qualifying MTF and that:
  • Do not know the identity of their counterparty prior to execution of the swap and that execute the swap in accordance with the rules of the Qualifying MTF are also exempt from final CFTC Title VII EBC rules relating to:
  • Execute swaps that are intended to be cleared (ITBC Swaps) pursuant to the rules of the Qualifying MTF where the ITBC Swap is either a type of swap that was accepted for clearing by a DCO as of November 15, 2013 or is a type of swap that is required to be cleared under Section 2(h)(1) of the CEA and Part 50 of the CFTC Regulations as of the date of its execution, are also exempt from requirements relating to:
    • know your counterparty, true name and owner, reasonable reliance on representations, manner of disclosure, and disclosures in a standard format (17 CFR 23.402(b)-(f));
    • verification of counterparty eligibility (17 CFR 23.430);
    • material risks, characteristics, incentives, mid-market mark (17 CFR 23.431(a));
    • scenario analysis (17 CFR 23.431(b));
    • notice of right to receive daily mark from DCO for cleared swaps (17 CFR 23.431(d)(1));
    • notice of right to select DCO (17 CFR 23.432(a));
    • notice of right to clearing (17 CFR 23.432(b));
    • recommendations to counterparties-institutional suitability (17 CFR 23.434);
    • requirements for swap dealers acting as advisors to special entities (17 CFR 23.440);
    • requirements for swap dealers and major swap participants acting as counterparties to Special Entities (17 CFR 23.450); and
    • political contributions by certain SDs (17 CFR 23.451).
  • Execute ITBC swaps pursuant to the rules of the Qualifying MTF where the ITBC Swap is not a type of swap that was accepted for clearing by a DCO as of November 15, 2013 and the ITBC Swaps is a type of swap that is not required to be cleared under 2(h)(1) of the CEA and Part 50 of the CFTC Regulations as of the date of its execution, are also exempt from requirements relating to:
For more details on these rules, see Practice Note, US Derivatives Regulation: External Business Conduct (EBC) Rules for Swap Dealers and MSPs.