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CFTC Grants Conditional Relief for Swaps Trading on Certain Multilateral Trading Facilities Overseen by EU Regulators

News Developments Between Bridges

Published Date: February 13, 2014

The US Commodity Futures Trading Commission granted “no action” relief on February 12, 2014, that allows qualified Multilateral Trading Facilities overseen by EU regulators from not having to register with the Commission as Swap Execution Facilities in order to handle certain swap transactions on behalf of US persons. The relief is in two phases: all MTFs overseen by an EU regulator are exempt from SEF registration:

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
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:

is subject to and complies with its relevant regulator’s requirements that are “in accordance with” CFTC‘s requirements regarding trading methodology required for SEFs (i.e., (i) there must be an order book for all swaps traded on the platform; (ii) other execution means must conform to execution methods SEFs are permitted to provide (e.g., no RFQ to 1); and (iii) block trade levels are the same as established for SEFs);
is subject to oversight by its relevant regulator that is as comparable to and as comprehensive as requirements SEFs are subject to regarding (i) non-discriminatory access by market participants and (ii) oversight (e.g., has rules and processes to ensure rule enforcement; monitoring; and system safeguards);
reports all swap transactions to a CFTC registered Swap Data Repository as if it were a SEF, and that if a transaction is required to be cleared, the MTF routes such transactions to a Designated Clearing Organization, an exempt DCO or a Central Counterparty Clearing House (CCP) with appropriate relief; and
does not permit trading by persons who are not so-called "Eligible Contract Participants."

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.

This relief is especially necessary at this time because as of February 15, certain swap transactions involving non-exempted US persons must be executed on or subject to the rules of a SEF or DCM. These swaps are those that have been certified as “Made Available to Trade.” This requirement would preclude execution of such swaps on non-CFTC registered MTFs by US persons absent relief.

However, according to the CFTC, without this relief, MTFs that permit execution of swaps transactions by US persons are required to register as a SEF or DCM even if the swaps are not subject to a MAT certification.

Importantly, the conditions an MTF must be subject to qualify for the no action relief must be imposed by the MTF’s relevant regulator; they cannot be achieved by the MTF amending its own rules only.

For convenience, the CFTC has provided a specific form of Certification that MTFs should use to solicit relief. In describing how local requirements are comparable and as comprehensive as CFTC requirements applicable to SEFs, the CFTC does not expect the relevant regulator to have identical requirements. Instead the MTF may follow an “outcomes-based approach” to show that by application of the relevant regulator's requirements, the same regulatory objectives are met as the parallel SEF regulatory requirements.

For more information see:

CFTC Press Release:
http://www.cftc.gov/PressRoom/PressReleases/pr6857-14.

CFTC Cheat Sheet:
http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/mtf_nalsummary021214.pdf.

Relevant No Action Letters:

a. Principle Letter (containing form of MTF Certification)
http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-16.pdf.
b. Other:
http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-15.pdf.

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 13, 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.