Exchange-trading Timeline for Package Swaps Set by CFTC | Practical Law

Exchange-trading Timeline for Package Swaps Set by CFTC | Practical Law

The CFTC issued no-action relief providing a phased compliance timeline for mandatory exchange trading under Title VII of the Dodd-Frank Act of certain package transactions in which swaps are included, as relief for these transaction is otherwise set to expire on May 15, 2014. The CFTC also provided relief to SEFs and DCMs from certain related regulatory requirements.

Exchange-trading Timeline for Package Swaps Set by CFTC

Practical Law Legal Update 6-567-1005 (Approx. 4 pages)

Exchange-trading Timeline for Package Swaps Set by CFTC

by Practical Law Finance
Published on 06 May 2014 • USA (National/Federal)
The CFTC issued no-action relief providing a phased compliance timeline for mandatory exchange trading under Title VII of the Dodd-Frank Act of certain package transactions in which swaps are included, as relief for these transaction is otherwise set to expire on May 15, 2014. The CFTC also provided relief to SEFs and DCMs from certain related regulatory requirements.
On May 1, 2014, the CFTC's Division of Market Oversight (DMO) and Division of Clearing and Risk (DCR) issued No-action Letter 14-62 (No-action 14-62), providing a phased compliance timeline under which so-called "package transactions," in which swaps are included, must be executed on a swap execution facility (SEF) or designated contract market (DCM) under Title VII of the Dodd-Frank Act. Prior no-action relief from mandatory Title VII swap exchange-trading (trade execution) requirements for swaps that are part of package transactions is otherwise set to expire on May 15, 2014.
Packaged transactions are defined as transactions involving two or more instruments that:
  • Are executed between two or more counterparties.
  • Are priced or quoted as one economic transaction with simultaneous or near simultaneous execution of all components.
  • Have at least one component that is a swap that is made available to trade and therefore is subject to trade execution requirements under section 2(h)(8) of the Commodity Exchange Act (CEA).
  • The execution of each component is contingent upon the execution of all other components.
No-action 14-62 was issued in response to various requests for relief expressing concerns that applying the trade execution requirements to package transactions would present challenges to trade "facilitation." It provides relief from:
On February 10, 2013, the DMO issued No-action Letter 14-12, which provided relief until May 15, 2014 for swaps executed as part of a package transaction from the trade execution requirement and the CFTC regulations which implement the requirements. The CFTC has decided to provide additional relief from the trade execution requirements and implementing regulations in the form of a phased compliance timeline for certain package transactions to become subject to the trade execution requirement. No-action 14-62 therefore, provides the following compliance timeline for compliance with the trade execution requirement for packaged swaps:
  • May 16, 2014. Package transactions in which all components are swaps that have been made available to trade (MAT) (see Legal Update, MAT Summary: CFTC Swap Exchange-trading Mandates and Effective Dates) were not granted additional relief and must comply with applicable trade execution requirements by May 16, 2014.
  • June 2, 2014. Package transactions in which the components include at least one swap component that has been made available to trade and that is subject to the mandatory Title VII trade execution requirement and all other components are swaps subject to the mandatory Title VII swap clearing requirement under section 2(h)(1)(A) of the CEA and 50.4 of the CFTC's Regulations must comply with applicable trade execution requirements by June 2, 2014 (see Legal Update, Final Clearing Determination for CDS and Interest Rate Swaps Issued by CFTC).
  • June 16, 2014. Package transactions in which each of the swap components have been made available to trade and are subject to the mandatory Title VII trade execution requirements and all other components are US Treasury securities must comply with applicable trade execution requirements by June 16, 2014.
  • November 16, 2014. Package transactions (excluding US dollar swap spreads) in which at least one of the swap components has been made available to trade and is subject to the mandatory Title VII trade execution requirement and at least one component that is not a swap must comply with applicable trade execution requirements by November 16, 2014.
  • November 16, 2014. Package transactions in which the components include at least one swap component that has been made available to trade and is subject to the mandatory Title VII trade execution requirement and at least one swap component that is under the CFTC's exclusive jurisdiction and not subject to the mandatory Title VII clearing requirement under section 2(h)(1)(A) of the CEA and 50.4 of the CFTC's regulations must comply with applicable trade execution requirements by November 16, 2014.
No-action 14-62 also granted relief to SEFs and DCMs until September 30, 2014 from requirements under CFTC Regulations 37.9(a)(2), and 37.203(a) and 38.152 which implement Title VII trade execution requirements. Under the CFTC's straight-through processing requirements, swaps that are rejected from clearing for credit-related reasons are treated as void. Since packaged swaps are cleared on a "leg-by-leg" basis, an individual "leg" of a package transaction may be rejected for exceeding its credit risk when measured in isolation, even though when measured as a package trade, the net risk may not exceed the credit limit. No-action 14-62 permits, until September 30, 2014, a SEF or DCM to resubmit a rejected trade for clearing under terms and conditions that match the original trade other than the time of execution. This "new trade, old terms" procedure is subject to various conditions such as the requirement:
  • to resubmit the trade within 60 minutes;
  • to obtain consent on a case-by-case from both clearing members and the customer; and
  • that SEFs and DCMs must implement rules specifying that if the new trade is also rejected, it is void and the parties may not have a second opportunity to resubmit the trade.