CFTC Issues Guidance on SEF "Equal Access" and Required Registration of Non-US Platforms | Practical Law

CFTC Issues Guidance on SEF "Equal Access" and Required Registration of Non-US Platforms | Practical Law

The CFTC issued guidance indicating that non-US swaps trading platforms offering swaps to US persons are required to register as swap execution facilities (SEFs) with the CFTC and adhere to Title VII SEF rules. The CFTC issued further guidance advising that under Title VII, SEFs must ensure equal access for market participants.

CFTC Issues Guidance on SEF "Equal Access" and Required Registration of Non-US Platforms

by Practical Law Finance
Published on 19 Nov 2013 • USA (National/Federal)
The CFTC issued guidance indicating that non-US swaps trading platforms offering swaps to US persons are required to register as swap execution facilities (SEFs) with the CFTC and adhere to Title VII SEF rules. The CFTC issued further guidance advising that under Title VII, SEFs must ensure equal access for market participants.
On November 15, 2013, the CFTC's Division of Market Oversight (DMO) issued guidance clarifying that swaps trading platforms located outside the US that provide persons located inside the US, including personnel and agents of non-US persons, with the ability to trade or execute swaps must register with the CFTC as either a designated contract market (DCM) or swap execution facility (SEF) and adhere to applicable Dodd-Frank Title VII rules. This guidance applies primarily to smaller platforms, which will need to register with the CFTC as SEFs, rather than to large exchanges, most of which have already registered as DCMs. The CFTC found that non-US SEFs that offer swap execution to US persons could create a "direct and significant" effect on US commerce and should therefore be subject to Title VII rules.
Under the November 15, 2013 SEF cross-border guidance, the DMO expects that:
  • Clearing members that guarantee swaps intended to be cleared on a SEF consent to the SEF's jurisdiction.
  • SEFs will not condition market access on an eligible contract participant (ECP) consenting to the SEF's use of the data it collects to fulfill CFTC regulatory requirements for the SEF's own marketing or business purposes (only ECPs may enter into swaps on SEFs). To condition access in this way would be in violation of CFTC Regulation 37.7.
  • Any emergency powers a SEF may exercise under CFTC Regulation 37.800 will only be exercised in an "emergency" as defined in CFTC Regulation 40.1(h) and will not be exercised for any event that falls outside of that definition. SEF internal definitions of an "emergency" may not override the CFTC definition.
Additionally, on November 14, 2013, the CFTC issued joint guidance emphasizing the requirement that, under Title VII, SEFs must provide "equal access" to their trading members. This position was reiterated by Chairman Gary Gensler during his November 18, 2013 remarks at the New York SEF-CON. The guidance and Gensler's remarks emphasize that SEFs are providing banks and swap dealers with too much control over who they trade with, promoting the dealer exclusivity that SEFs are designed to combat. Gensler specifically stated that current policies at three trading platforms, Tradeweb Markets LLC, MarketAxess Holdings Inc. and the Bloomberg SEF, are in violation of the Dodd-Frank Act and CFTC Regulations, which were intended to promote transparency and facilitate free exchanges where all market participants have equal access to swaps trading.
As discussed by Thomson Reuters IFRAsia, the joint guidance and statements are seen as prompting a shift in the swaps industry towards agency-style models of execution, as currently utilized in the futures markets. While certain banks and swap dealers are averse to the shift because open transparency curbs dealer-to-dealer exclusivity and the dealer's ability to keep certain market participants out of specific liquidity pools, other banks have reacted positively to the prospect of increased access to liquidity across exchanges. Without access restrictions, the agency execution framework allows market participants to use an intermediary to trade across multiple SEFs to obtain greater liquidity and to avoid certain burdensome requirements associated with direct SEF trading (such as certain reporting and recordkeeping requirements). By utilizing an intermediary, buy-side swaps market participants may rely on the intermediary's policies and procedures to fulfill some of Title VII exchange-trading requirements without expending their own energy or resources to create their own regulatory compliance structure.
For more information on swap exchange trading, see Practice Note, Summary of the Dodd-Frank Act: Swaps and Derivatives: Swap Clearing and Exchange Trading under Title VII.