Gary DeWaal and Associates LLC

Gary DeWaal's Bridging the Week: February 10 to 14 and February 18, 2014 (Mandatory Swaps Execution – or Not; What is a Derivative?; MF Global Redux)

Bridging the Week    My View   
Published Date: February 20, 2014

Mandatory trading of certain interest rate swaps on swap execution facilities or designated contract markets has begun in the US, beginning the completion in this country of the September 2009 G-20 stated goal to have all standardized swaps cleared and centrally executed. However, package transactions involving multiple legs where only a portion may involve a swap required to be mandatorily executed on a SEF or DCM received a last minute reprieve last week from this requirements from the CFTC. And, among the locations where swaps subject to mandatory execution requirements may now be traded by US persons other than on SEFs or DCMs are on certain EU-based multilateral trading facilities – at least through March 24 and possibly beyond.

These developments and more are all covered this week on Gary DeWaal’s Bridging the Week:

Video Version:

Article Version:

CFTC Grants Delay for Package Transactions to be Traded on SEFs

Certain swaps’ trading is now mandated to occur on or subject to the rules of CFTC-registered swap execution facilities or designated contract markets, and the number of instruments required to be so traded will increase over the next few weeks. However swaps trades that are part of so-called “package transactions” are not subject to this mandatory trading requirement until the earliest of May 15. This is because of “no-action” relief granted last week by the CFTC.

Package transactions are multiple legged transactions involving more than one swap or financial instrument, where at least one leg – absent the CFTC granted relief – is subject to the mandatory execution requirement.

At a meeting of the CFTC’s Technology Advisory Committee held on February 3 (see additional article below, “One Very Unique Idea Raised at the CFTC TAC”), examples of package transactions that were identified included swap spreads (government bonds vs. swaps typically within similar tenors); invoice spreads (swaps vs. Treasury-note or Treasury-bond futures); cash/futures basis (swaps vs. Eurodollar futures bundles); swap curve (package of two swaps with differing tenors); and swap butterfly (package of three swaps with differing tenors), among others. Industry experts, including representatives from Citadel and trueEx, argued that executing transactions as packages is beneficial because it permits traders to obtain (1) tighter bid-offer spreads, (2) a single spread quote vs. multiple component quotes, and (3) more efficient transfer and hedging, while eliminating legging risk. However, the same representatives claimed that, currently there is no ability to track a package as a single unit; assess the risk of a package transaction in aggregate, or process and clear package trades as one unit, among other issues. This supported a delay including package transactions within mandatory execution requirements, concluded the representatives.

Separately, at the same time it granted this no-action relief, the CFTC also provided a convenient summary chart of all swaps subject to the mandatory execution requirement beginning February 15 and during the next few weeks:

CFTC Grants No Action Relief for Qualified EU Regulated Multilateral Trading Facilities from Having to Register as SEFs; Grants Time Delay for MTFs to Comply with New Exemption Requirements

Last week, on February 12, the CFTC and the European Commission reported “significant progress” in their effort to fashion a harmonized framework for CFTC regulated swap execution facilities and EU-overseen multilateral trading facilities.

On the same day, the CFTC granted “no action” relief that permits qualified MTFs from not having to register with the Commission SEFs in order to handle certain swap transactions on behalf of US persons. This relief was necessary because of  the mandatory trading requirements that went into effect on February that would have precluded executions of such swaps on non-CFTC registered MTFs by US persons.

The CFTC granted relief is in two phases: all MTFs overseen by an EU regulator are exempt from SEF registration:

  1. automatically through 11:59 pm on March 24, 2014 (unless they have received separate relief earlier from the CFTC’s Division of Market Oversight); and
  2. upon receipt of separate relief from the DMO, which should be issued upon the Division’s receipt of an MTF's request to be exempt from registration as a SEF which contains a certification that the MTF meets four basic conditions, mainly that the MTF:

Under the no-action relief, Swaps Dealers and Major Swap Participants that execute swap transactions on Qualifying MTFs are exempt from certain CFTC-mandated business conduct requirements; confirmation requirements; and swap trading relationship documentation requirements.

For more details, see, “CFTC Grants Conditional Relief for Swaps Trading on Certain MTFs at

My View: If the objective is to promote the liquidity of international markets and the cooperative enforcement of important international rules, it doesn’t work for one regulator to be the bully in the world sandbox and threaten to take away all the marbles of other participants that don’t play by its unilaterally imposed rules 100%. This was the clear message of an unprecedented outpouring of international regulators’ virulent comments to the CFTC’s proposed International Guidance issued during July 2012. In response, the CFTC and European regulators seem to have found a harmonized path forward on July 2013 to help eliminate tensions (see: “News Development – Peace is at Hand,” at

However, this path forward has taken numerous detours since then, most recently during November 2013, when the CFTC issued an Advisory regarding the arrangement of non-US swaps by non-US swap dealers, where aspects of the arrangement were handled by US personnel or agents (see article, “CFTC Issues Advisory Related to the Arrangement of Swaps, at

This new CFTC relief to accommodate swaps trading for US persons on EU-based MTF’s is a sensible compromise and holds great potential for the way the CFTC might once again cooperatively coordinate cross-border differences in regulatory approach going forward. In his opening remarks at last February 12’s Global Markets Advisory Committee, Acting Chairman Mark Wetjen suggested that the next area of coordination likely will involve data reporting, where “…the Commission has [still] failed to provide a clear path forward for market participants and foreign regulators. Today is the first day of trade reporting in the [EU] and the Commission still has not recognized the EU reporting regime for substituted compliance purposes.”

For years the CFTC spearheaded an enlightened regime that successfully permitted US persons to access international derivatives markets with few if any problems under its Part 30 rules, promoting global liquidity. It seems that the lights may be shining brighter at the Commission once again. Let’s hope so.

Some Defendants and Former Accounting Firm Dismissed in Private Class Action Lawsuit Involving Customers of MF Global; Not John Corzine and Certain Other Former Officers

In a no-holds barred decision reflecting his frustration at the pace of the litigation, the judge hearing the customer class action lawsuit against MF Global and certain of its officers arising from the Firm’s collapse in October 2011, dismissed causes of actions in their entirety against some of the Firm’s former officers (Laurie Ferber and Christine Serwinski) and against its former accounting firm, PricewaterhouseCoopers LLP, but not against former officers John Corzine , Henri Steenkamp, Bradley Abelow, Edith O’Brien, David Dunn and Vinay Mahajan. Some charges were also dismissed against these former officers too, however.

Clearly frustrated with both sides to this litigation, the Hon. Victor Marrero of the  Federal District Court hearing this matter in NYC expressed his exasperation that this case has not been resolved by now:

“Instead of coming together to resolve this matter in a just and efficient way, the parties continue to file lengthy motions and oppositions as the list itemized in the appendix attests, almost two dozen submissions --failing to concede any ground to each other even in the light of clear, controlling case law that should generate agreement and consensus among people moved by reason, good faith, and common sense. While this wasteful and rancorous litigation unfolds, investment customers harmed by these unfortunate events must wait for any compensation due them, without knowing how much they will recover or when they will receive any assets they wrongfully lost because of the violations of law claimed in this litigation.”

The charges dismissed against the former officers included claims of direct violation of the Commodity Exchange Act and breach of fiduciary duty. Charges remaining to be resolved involve claims that the former officers aided and abetted violations of the CEA and a breach of fiduciary duty, as well as negligence, tortious interference with contract or business advantage, conversion and aiding and abetting conversion.

The decision followed motions made by all of the defendants to dismiss all of the charges against them. To survive this motion, plaintiffs only needed to demonstrate that “it is plausible” that the defendants are liable for the alleged misconduct. Judge Marrero determined this was the case in some instances:

“In a spectacular financial collapse of the magnitude that Plaintiffs exhaustively detail in their amended complaint, an account that draws from and is supported by reports issued by legislative and regulatory bodies on the public record, it is reasonable to infer that someone, somewhere, at some time did something wrong to set in motion such an extraordinary chain of events causing such extensive harms to so many people and interests.”

And briefly:

My View: Coming less that two weeks after the National Futures Association sought comment on possible capital requirements and enhanced customer protection requirements for registered commodity pool operators and commodity trading advisors, these cases serve as a reminder that no capital requirements or customer protection provisions for registrants will protect customers from fraud, including misappropriation, by non-registrants. Only a diligent enforcement program by regulators and other law enforcement personnel can deal with these miscreants and help protect the public.

And Even More Briefly:

My View: This may sound like an odd request at this late time, but the Commodity Exchange Act, enacted in 1936, still does not define “futures contract.” Maybe the EC can provide this definition too.

My View: As I sat through the CFTC’s Technology Advisory Committee’s discussion on Swaps Data Reporting, I could not help to think back to the Depository Trust and Clearing Corporation’s end of summer publication on the most significant systemic risks impacting the financial services industry (see “Summer Reading You May Have Missed -- An Important Article on Systemic Risks by DTCC: But Did They Identify the Top Risks?” at ) as well as the activities of Edward Snowden who showed how easily and frequently governments can monitor non-public information. I kept wondering, how secure is all the data now being required to be transmitted to Swap Data Repositories as well as government agencies, particularly after CFTC staff indicated in one of their presentations that they use laptops and remote systems to help access CFTC data during “examinations and crisis situations.” The SEC’s proposed roundtable will be an excellent opportunity to discuss cyber security concerns and issues not only for private sector participants but for government agencies too.

For more, see:

CFTC Fraud Judgments:

Elite Management Holdings Corp. and others:

Harbor Light and others:

CME 3d Party Trading Platform Rules:
CFTC Grants Certain EU MTFs Condition Relief from SEF Registration:

Press statement:

CFTC cheat sheet:

No action relief:

For MTFs (generally):

Time delay:

CFTC Global Markets Advisory Committee: Opening Statement of Acting Commissioner Mark Wetjen:
CFTC Grants Delay for Package Transactions to be Subject to the Mandatory Execution Requirement:

Package Transactions (presentation by Citadel):

Package Transactions (presentation by trueEx):

Staff Update on SDR Reporting:

The High-Frequency Trading Arms Race (Eric Budish and others):

CME 3d Party Trading Platform Rules:
ESMA Letter to EC Regarding Definition of Derivatives:
ESMA Updates Reporting Q&As:
FCA: Benjamin Wilson Sentencing:
FINRA ATS Reporting Requirement:
FINRA Revised Interpretations regarding SEC Capital and Operational Rules:
FINRA Cyber Security Targeted Examination Letter:
SEC Cyber security Roundtable:

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 February 15, 2014, 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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