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CFTC Further Extends SEF Block Trade Relief
Practical Law Legal Update w-000-7520 (Approx. 4 pages)
CFTC Further Extends SEF Block Trade Relief
by Practical Law Finance
| Published on 12 Nov 2015 • USA (National/Federal) |
The CFTC extended until November 15, 2016 no-action relief temporarily allowing block trades to be executed on swap execution facility (SEF) trading systems and platforms.
On November 2, 2015, the CFTC issued No-Action Letter 15-60 (No-Action 15-60), which further extends until November 15, 2016 relief previously granted to swap execution facilities (SEFs) from the requirement under CFTC Regulation 43.2 (17 CFR 43.2) that a block trade must occur away from the trading system or platform of a registered SEF or designated contract market (DCM).
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 but which "[o]ccurs away from the registered (SEF)'s or (DCM)'s trading system or platform and is executed pursuant to the registered (SEF)'s or (DCM)'s rules and procedures."
This no-action relief permits SEFs to execute block trades on SEF trading systems and platforms until the relief expires.
The extension is subject to the same conditions as the previous relief, which require that:
- The block trade is not executed using the SEF's order book functionality under CFTC Regulation 37.3(a)(3) (17 CFR 37.3(a)(3)).
- The SEF must adopt rules that indicate reliance on No-Action 15-60 and require that each cleared block trade executed on a non-order-book trading system or platform complies with the 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 (17 CFR 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 this FCM credit check (as detailed in the Staff Guidance on Swaps Straight-Through Processing issued by the CFTC on September 26, 2013).
The relief was extended due to ongoing 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. No-Action 15-60 provides additional time for the CFTC to:
- Review and evaluate SEF trading practices and functionalities for pre-execution credit checks.
- Consider, develop, and evaluate best practices and more permanent solutions to the issues involved in screening block trade orders for compliance with risk-based limits.
The prior no-action relief, granted under No-Action Letter 14-118, was scheduled to expire on December 15, 2015 (see Legal Update, CFTC Issues Limited Relief to SEFs, DCOs, DCMs from Certain Dodd-Frank Rules). The extension was requested in a letter from the Wholesale Markets Brokers' Association, Americas on September 30, 2015.