On November 14th the CFTC Division of Market Oversight extended time-limited No-Action relief for Swap Execution Facilities (SEFs) from certain block trade requirements. Shortly after on November 20th, the Division issued No-Action Relief for SEF Chief Compliance Officer Annual Compliance Reports and SEF fourth Quarter Financial Reports timing requirements extension for up to 90 days.

Time-Limited No-Action Relief for SEFs from certain block trade requirements

On a November 14 press release the CFTC’s Division of Market Oversight responded to a request from the Wholesale Markets Broker’s Association, Americas (WMBAA) with a letter announcement. The WMBAA pointed out that Future Commission Merchants (“FCMs”) have no guidelines to perform pre-execution credit checks for block trades that are executed away from a SEF. The SEFs perform credit checks after a swap has been executed away from the SEF, or before a swap has been executed on the SEF. The current CFTC definition and treatment of block trades causes uncertainties to FCMs and other market participants. The WMBAA requested a permanent solution and that an extension of no-action reliefs would would allow their member firms and other participants, including the Commission, enough time to develop best practices until the commission effectively addresses block trades.

The Division announced on CFTC letter No. 17-60 that, time-limited no-action relief for Swap Execution Facilities would be extended for certain block trade requirements. The letter focused on the definition of “block trade,” highlighting that it is:

A publicly traded reportable swap transaction that “occurs away from the registered SEF’s or designated contract market’s (DCM) trading system or platform and is executed pursuant to the registered SEF’s or DCM’s rules and procedures.”

The announcement emphasized the “occurs away” requirement and clarified the language of rule making establishing appropriate minimum sizes for block trades, “[a]ny swap that is executed on a SEF[’s]… trading system or platform, regardless of whether it is for a size at or above the appropriate minimum block size for such swap, is not a block trade under this definition….”

Thus the Division has acquiesced to extend the no-action relief and will not recommend that the Commission take enforcement action against SEFs with compliance with execution of block trades that are intended to be cleared, and that the following conditions are met:

• The block trade is not executed on the SEF’s Order Book functionality, as defined in CFTC regulation 37.3(a)(3);
• The SEF adopts rules pertaining to cleared blocks that indicate that the SEF is relying on the relief provided in the no-action letter and that require each cleared block trade executed on a non-Order Book trading system or platform to comply with the other requirements in the block trade definition in CFTC regulation 43.2;
• The FCM completes the pre-execution credit check pursuant to CFTC regulation 1.73 at the time the order for a block trade enters the SEF’s non-Order Book trading system or platform; and
• The block trade is subject to void ab initio requirements where the swap is rejected on the basis of credit.

Extended until November 15, 2020.

To comply with Commission regulation 37.702(b) and ensure there is a pre-execution credit check for all intended to be cleared swaps, staff notes that a SEF must have a rule, filed pursuant to part 40, which provides that an intended to be cleared swap cannot be executed before there has been a credit check. Staff will reach out to SEFs to confirm that these rules exist or are implemented, as appropriate.

Parties to an intended to be cleared block trade who do not use the SEF functionalities provided by this letter must ensure the required credit check occurs before execution.

In both the Press Release and announcement letter the CFTC makes it clear that this no-action position does not excuse affected persons from compliance with any other applicable requirements of the Commodity Exchange Act or the Commission’s usual regulations. These are the views of the Division of Market Oversight only, not the Commission’s or any other division. For contact information and full announcement, please refer to the CFTC Letter No. 17-60 here.

No-Action Relief from Certain Timing Requirements for SEF Chief Compliance Officer Annual Compliance Reports and Fourth Quarter Financial Reports

A November 20th CFTC press release announced a no-action relief from the Division of Market Oversight in CFTC Letter No. 17-61 responding to requests from a multiple registered SEFs.

The Commodity Exchange Act requires the Chief Compliance Officer (CCO) of a SEF to prepare and sign an annual compliance report to the commission, concurrently with the filing of the SEF’s fourth fiscal quarter financial report. Regulations mandate a SEF’s CCO has to file no later than 60 calendar days after the end of the SEF’s fiscal year, and so must fourth fiscal quarter financial reports also be filed within the same time frame.

Multiple registered SEFs requested no-action relief permitting both a SEF CCO and fourth fiscal quarter financial reports filing extended to 90 calendar days after the fiscal year-end.

The Division recognized the “time and resource constraints in gathering information from numerous sources and completing multiple year-end reports” that SEFs cited in their request. SEFs stated that annual reports are based upon annual testing plans not concluded until the end of the fiscal year and therefore not issued until sometime during the first quarter of the following fiscal year:

“[a]n extension is needed not only to address the difficulties in preparing these reports but is needed each year in order to conduct the substantive reviews required by the Commission in order to create an in-depth, substantial discussion on the state of the compliance program and financial status with the SEF’s senior management and board of directors.”

The Division also acknowledged that other Commission regulations currently require CCOs of Derivatives Clearing Organizations as well as swap dealers, major swap participants, and futures commission merchants to file annual reports no later than 90 days after fiscal year end.

Therefore, the Division determined the no-action relief is justified and will not recommend that the Commission take enforcement action against any SEF or SEF CCO for exceeding the 60 day period. However; the Division believes that an extra 30 day period is enough to gather the resources required for both SEF CCO annual reports and SEF fourth quarter financial report. Thus, no-action relief for SEFs and SEF CCOs are extended to no later than 90 days after the end of the SEF’s fiscal year.

This no-action relief expires on November 30, 2020.

Again, the letter states that these are the views of the Division of Market Oversight and not necessarily that of the Commission or other divisions. As a reminder, Market participants should be aware that the no-action positions taken herein do not excuse affected persons from compliance with any other applicable requirements contained in the Act or the Commission’s regulations thereunder.

For the full announcement and further contact information please refer to No-Action Letter No. 17-61 here.