Finally the CFTC Approves Core Principles for SEFs

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Published Date : May 16, 2013

Today the CFTC announced issuance of long-expected core principles for Swap Execution Facilities. These principles will require, among other things, SEFs to maintain minimum trading functionality (ie, an order book) for all its market participants, and allows for trading through requests for quotes. Unlike the Commission's original proposal, the final core principles require that all RFQs be transmitted initially to a minimum of two unaffiliated market participants; after an interim period (ending during October 2014), this minimum rises to three. SEF's may provide electronic or voice execution.

The CFTC also today also announced issuance of procedures to establish minimum block sizes for swaps, and the process for a SEF or Designated Contract Market to make a swap available to trade ("MAT").

Regarding its block trading rule, the Commission anticipates a two-period phased in approach. The initial period will last one year during which the CFTC will analyze and use data to establish subsequent minimum block sizes. Block minimums will be derived from the notional value of the cleared relevant asset class. (Unlike futures, where block minimums are established by designated contract markets; block minimums for swaps are established by the CFTC.)

Under the CFTC's MAT process, a DCM or SEF will submit to the Commission a determination that a swap is available to trade either for approval or self-certification. Once a swap is determined to trade it would be subject to the mandatory trade execution requirement. According to Commissioner Jill Sommers, this approach may allow a single DCM or SEF to bind the marketplace even if liquidity is lacking.

At the same time, the CFTC issued interpretive guidance regarding anti-disruptive trading practices. Regrettably, this guidance does not contain a de minimis exception so that placing bids and offers away from the market for disaster hedging purposes (eg, with every intent and hope that the bids and offers will not be executed)  would appear to constitute spoofing; other legitimate trading practices may also be caught up by these prohibitions.

In his public comments, the Chairman of the CFTC also confirmed that the Commission is appealing the US District Court's September 2012 adverse ruling of its previously issued position limit rules, but at the same time is preparing new proposed rules on the subject.

Today's actions allowed the CFTC to proclaim that it had now finalized 90% of its Dodd Frank mandated rules.

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The information contained in this article is not legal advice. For legal advice, please consult with your attorney. The information in this article is derived from sources believed to be reliable as of May 16, 2013, but no representation or warranty is made regarding the accuracy of any statement. To ensure compliance with requirements imposed by U.S. Treasury Regulations, Gary DeWaal and Associates LLC informs you that any U.S. tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Gary DeWaal and Associates may represent one or more entities mentioned in this article.

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