Staff of the Commodity Futures Trading Commission (CFTC) has issued a no-action letter to swap execution facilities (SEFs), through September 30, 2015, if a SEF:  1) incorporates by reference the terms of underlying previously-negotiated agreements between swap counterparties in its confirmation without receiving copies of those agreements by the time the trade is executed; or 2) fails to receive or maintain copies of the documents incorporated by reference in its confirmation.

CFTC Rule 37.6(b)

CFTC Rule 37.6(b) imposes a duty on SEFs to:

provide each counterparty to a transaction that is entered into on or pursuant to the rules of the [SEF] with a written record of all of the terms of the transaction which shall legally supersede any previous agreement and serve as a confirmation of the transaction.

The rule further requires that the confirmation take place at the same time the transaction is executed.

In footnote 195 of the preamble to the release adopting Rule 37.6, the CFTC stated that a SEF’s confirmation could incorporate by reference the privately-negotiated terms of agreements between the parties, provided that the agreements are submitted to the SEF prior to execution.  Other CFTC rules, in turn, require that a SEF receive and maintain copies of documents that are incorporated by reference in the SEF’s confirmation.

“All” means “all”

Some market participants have argued that the primary economic terms (PET) of a swap alone should suffice to satisfy the “all of the terms of the transaction” requirement of Rule 37.6(b).  The no-action letter flatly rejected this argument, noting that under the CFTC’s rules, confirmation data for uncleared swaps executed on a SEF includes more than just the PET of the swap.

No-action relief

But the staff did grant no-action relief, albeit to a limited extent.  Specifically, staff said that in the context of uncleared swaps executed on or pursuant to the rules of a SEF, it would not recommend enforcement action against a SEF that:

  • Incorporates terms from underlying previously-negotiated agreements of the parties by reference into its confirmation without complying with the condition of footnote 195 to receive copies of those agreements prior to execution of the swap; or
  • Fails to receive or maintain a copy of the documents incorporated by reference in the SEF’s confirmation as required by CFTC rules.

The no-action relief will expire at midnight on September 30, 2015.

Unrequited requests 

Staff acknowledged that it had received requests for broader relief than it was granting.  For example, some market participants stated that SEFs do not have access to the relevant non-economic terms of the transaction, and it is not clear how SEFs will be able to access documents that contain terms they need to include in their confirmations.

Staff provided no comfort in that regard.  SEFs must still find a way to access the confirmation data necessary to comply with Rule 37.6(b) – it’s just that under the no-action relief, until September 30, 2015, they can permit swaps to be executed and incorporate such data into their confirmations by reference, without obtaining copies of the referenced documents.