On April 22 and 23, 2015, CFTC staff issued two no-action letters and one guidance letter applicable to swap execution facilities (SEFs). These letters are likely to be an early installment in a broader set of actions from the CFTC intended to improve the new SEF regulatory framework and encourage trading on SEFs.
Correcting Errors: The first no-action letter, CFTC Letter 15-24, enables SEFs and designated contract markets (DCMs) facilitating swaps to correct clerical or operational errors with respect to swaps that have been rejected for clearing, or that were accepted for clearing with errors. Pursuant to a prior CFTC staff interpretation, a swap that is rejected for clearing is void ab initio. But if a swap is rejected for clearing due to clerical or operational mistakes, the parties may wish to fix the mistake and re-submit the swap for clearing under the original terms. CFTC Letter 15-24 therefore permits SEFs and DCMs to enable their participants to execute a new trade under the original terms without complying with CFTC requirements regarding method of execution, and without violating the CFTC’s prohibition against pre-arranged trading. Previous staff letters had provided similar relief, but CFTC Letter 15-24 goes further by allowing SEFs and DCMs to permit members to enter into pre-arranged trades in order to fix errors even in swaps that have already been accepted for clearing.
Confirmations: The second no-action letter, CFTC Letter 15-25, extends relief previously provided in CFTC Letter 14-108—regarding SEF-produced confirmations—until March 31, 2016. Specifically, CFTC Letter 15-25 permits SEFs to incorporate terms from previously-negotiated freestanding agreements (e.g., ISDA Master Agreements) by reference into a SEF-generated confirmation, without copies of such agreements being submitted to the SEF prior to execution of the swap transaction (which would otherwise be required pursuant to footnote 195 of the CFTC’s rule regarding SEFs). CFTC Letter 15-25 goes further than the earlier relief, however, because it also relieves SEFs from the requirement to report confirmation data contained in freestanding agreements if the SEF does not possess such confirmation data.
SEF Financial Resources: The staff guidance relates to a SEF’s calculation of projected operating costs, which in turn impacts the amount of capital that a SEF must maintain to meet its financial resources requirements. Specifically, the guidance states that voice-based SEFs need not include in the calculation of their operating costs any variable commissions such SEFs might pay to their employee-brokers that are based on a percentage of transaction revenue generated by the SEF.
Developing the SEF Marketplace: These staff actions, together with statements the same week by CFTC Chairman Timothy Massad and the other Commissioners, indicate that the CFTC is actively working to address concerns that have been voiced regarding operational difficulties, and fractured liquidity, in standing up the new SEF trading environment. On April 23, 2015, Chairman Massad stated that the changes described above are “not meant to be a final list. We are continuing to consider what types of changes can help achieve the goals I outlined earlier for SEF trading, and we welcome the public’s input on these matters.” Each of the other CFTC Commissioners also released a separate statement supporting continued work on various SEF issues. Most pointedly, Commissioner Mark Wetjen stressed that “the Commission should take more steps to fulfill Congress’ instruction to promote the trading of swaps on SEFs.”