Enter to open, tab to navigate, enter to select
CFTC Issues Limited Relief to SEFs, DCOs, DCMs from Certain Dodd-Frank Rules
Practical Law Legal Update 1-583-2765 (Approx. 4 pages)
CFTC Issues Limited Relief to SEFs, DCOs, DCMs from Certain Dodd-Frank Rules
by Practical Law Finance
| Published on 08 Oct 2014 • USA (National/Federal) |
The CFTC issued a series of no-action letters providing relief to SEFs, DCOs and DCMs from certain rules in connection with block trades, CDS clearing-related swaps and package transactions.
No-action Relief for SEFs from Certain Block Trade Requirements
On September 19, 2014, the CFTC issued No-action Letter 14-118 (No-action 14-118), which provides relief to swap execution facilities (SEFs) from the requirement under CFTC Regulation 43.2 that a block trade must occur away from a registered SEF's or designated contract market's trading system or platform.
A block trade is a large notional swap that is executed on a swap exchange (a SEF or a DCM) that is registered with the CFTC. Due to technological concerns about the feasibility of adherence to CFTC Regulation 43.2 while also complying with credit and straight-through processing requirements under CFTC Regulations 1.73 and 37.702(b) for block trades executed away from the facility, the relief provides time for SEFs to evaluate and address technology and other pre-execution credit check issues.
The relief is subject to the following conditions:
- The block trade is not executed using the SEF's order book functionality under CFTC Regulation 37.3(a)(3).
- The SEF must adopt rules that indicate reliance on No-action 14-118 and require that each cleared block trade executed on a non-order-book trading system or platform complies with requirements of CFTC Regulation 43.2.
- A futures commission merchant (FCM) that is a clearing member of a registered derivatives organization (RDO) must complete a pre-execution credit check as required by CFTC Regulation 1.73 at the time the order of a block trade enters the SEF's non-order-book trading system or platform.
- The block trade must be subject to "void ab initio" requirements if the swap is rejected on the basis of credit (as detailed in the Staff Guidance on Swaps Straight-Through Processing issued by the CFTC on September 26, 2013).
This relief expires on December 15, 2015.
Extension of No-action Relief to DCOs and Their Clearing Members from Certain Rules in Connection with CDS Clearing-related Swaps
On September 29, 2014, the CFTC issued No-action Letter 14-119, which provides an extension of relief to certain cleared credit default swaps (CDS) that are entered into "off-facility" – that is, not a SEF or DCM – pursuant to a derivatives clearing organization's (DCO) price-submission-process rules to determine end-of-day settlement prices for cleared CDS. These CDS are known as clearing-related swaps (see Legal Update, CFTC Issues No-action Letters Giving Swap Dealers More Time to Comply with Dodd-Frank Rules).
Relief is granted to:
- DCOs for failure to register as a SEF under CFTC Regulation 37.3.
- Any DCO clearing member that enters into a swap through the DCO's CDS settlement price process instead of on a SEF or a DCM, even if the swap is subject to mandatory exchange-trading requirements under CEA Section 2(h)(8), subject to certain conditions.
- A reporting counterparty to the swap that fails to comply with obligations to report swap data under Part 45 (SDR data reporting) for CDS clearing-related swaps.
The relief expires on the earlier of September 30, 2015 or the effective date of any action to facilitate a longer-term approach to establishing settlement prices for CDS. This relief was previously granted in No-action Letter 13-86 and was set to expire on September 30, 2014 (see Practice Note, US Derivatives Regulation: Compliance Calendar: September 30, 2014).
Extension of No-action Relief for SEFs and DCMs from Certain Rules in Connection with Package Transactions
On September 30, 2014, the CFTC issued No-action Letter 14-121 (No-action 14-121), which extends relief to SEFs and DCMs from certain requirements for packaged transactions under CFTC Regulations 37.9(a)(2), 37.203(a) and 38.152. Relief from these requirements was originally granted under No-action Letter 14-62 (see Legal Update, Exchange-trading Timeline for Package Swaps Set by CFTC), which established a "new trade, old terms" procedure that permits a SEF or DCM to resubmit a trade that is rejected for clearing under terms and conditions that match the original trade other than the time of execution.
The relief provided under No-action Letter 14-62 was set to expire on September 30, 2014. No-action 14-121 extends this relief to February 16, 2015 to provide more time for market participants to develop and implement technological solutions to allow for the legs of a package transaction to be measured together. This relief is subject to certain conditions listed in the letter.