On September 27, 2013, the CFTC issued three letters providing temporary relief for: (i) temporarily registered swap execution facilities1 (“SEFs”) from certain swap data reporting requirements;2 (ii) Reporting Counterparties3 trading on SEFs from reporting certain swap continuation data to a swap data repository (“SDR”);4 and (iii) temporarily registered SEFs from enforcement responsibilities under certain CFTC regulations with respect to market participants trading on those SEFs5 (each letter, a “No-Action Letter”). Each of the No-Action Letters delays requirements that were otherwise scheduled to go into effect on October 2, 2013.
The relief appears designed to address the fact that – until the CFTC published the final “core principles” for SEFs in May 2013 – many market participants had not expected that SEF registration would affect their trading in swaps prior to the CFTC determining that certain swaps were “made available to trade” on SEFs. However, the CFTC determined in May that the SEF registration provision of the Commodity Exchange Act should be read independently of the requirement for certain swaps to be traded on SEFs. As a result, several firms have sought to become registered as SEFs by October 2. Many market participants use execution portals that fall within the “SEF” definition and therefore have been signing up to become SEF members, so that they can continue transacting in swaps after that date. The consequence of doing so, however, is that those market participants will be subject to the rules of those SEFs, which in turn largely embody the CFTC’s final core principles for SEFs.
This alert summarizes key aspects of the CFTC’s relief.
SEF Reporting Relief
For temporarily registered SEFs the letter grants relief from the obligation to report swap data under Parts 43 and 45 of the CFTC’s regulations. Under Part 43, a SEF is responsible for transmitting, in real-time, swap transaction and pricing data to a SDR. Under Part 45, a SEF is required to generate and assign an unique swap identifier and report all relevant swap creation data (including the primary economic term data and confirmation data) to an SDR, as soon as technologically practicable after execution of the swap. The relief, which is subject to the conditions set forth in the chart below, grants relief from enforcement action for failures to report swap creation data pursuant to Parts 43 and 45 until October 30, 2013 for swaps within the FX asset class and December 2, 2013 for swaps within the equity and other commodity asset classes.
Reporting Relief for Reporting Counterparties
Reporting Counterparties are required, on an ongoing basis during the life of a swap, to report required swap continuation data electronically to the same SDR to which swap creation data was reported, for cleared swaps, by a SEF, or for uncleared swaps, by the Reporting Counterparty itself. The reporting of continuation data ensures that all data in the SDR concerning the swap remains current and accurate, including all changes to the primary economic terms of the swap. For Reporting Counterparties, the letter grants relief from enforcement action for limited types of reporting failures until the earlier of: 1) such time as the Reporting Counterparty can fulfill its continuation data reporting obligations; or 2) October 30, 2013 for affected swaps within the FX asset class and December 2, 2013 for affected swaps within the equity and other commodity asset classes. The relief applies so long as the Reporting Counterparty informs the SEFs of any issues in a timely manner, and retains all records related to problematic transactions.
SEF Enforcement Relief
Pursuant to CFTC regulations and SEF core principle 2, a SEF must establish and impartially enforce compliance with its rules, including but not limited to, (1) the terms and conditions of any swaps traded or processed on or through the SEF, (2) access to the SEF, (3) trade practice rules, (4) audit trail requirements, (5) disciplinary rules, and (6) mandatory trading requirements. SEFs must also compel all persons accessing the SEF to consent to its jurisdiction prior to granting that person access to the SEF’s trading facilities. For SEFs that provide temporary access to market participants who have not signed onboarding documentation, including user agreements and consent to jurisdiction agreements, the relief from enforcement responsibilities extends until November 1, 2013, and applies only to SEFs that are provisionally registered by the previous October 2, 2013 deadline.
Click here to see our table outlining the specific conditions to obtaining relief under the No-Action Letters.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:Sterling-Joshua
1 “Swap Execution Facility” or “SEF” is defined in the Commodity Exchange Act as a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce, including any trading facility, that (A) facilitates the execution of swaps between persons; and (B) is not a designated contract market. 7 U.S.C. § 1a(50).
2 CFTC No-Action Letter No. 13-55 (Amended) (September 30, 2013), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-55.pdf
3 “Reporting Counterparty” is defined in §45.1 of the CFTC’s Regulations as the party required to report swap data, as provided for in §45.8. Generally, with respect to uncleared, bilateral swaps, this obligation falls on the swap dealer.
4 CFTC No-Action Letter No. 13-56 (September 27, 2013), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-56.pdf
5 CFTC No-Action Letter No. 13-57 (September 27, 2013), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-57.pdf
This article was originally published by Bingham McCutchen LLP.