Commodity Futures Trading Commission staff recently released two no-action letters providing relief relating to the application of business conduct standards to prime brokers and swap dealers and disclosure of pre-trade mid-market mark with respect to certain transactions.

  • Business Conduct Standards: In CFTC Letter No. 13-11, the Division of Swap Dealer and Intermediary Oversight (DSIO) granted time-limited no-action relief for failure to comply with the CFTC’s external business conduct rules (CFTC Regulations 23.400-23.451), which became effective on May 1. The no-action relief, which expires on May 15, 2013, is available solely to prime brokers and executing dealers that are swap dealers (SDs) and that enter into prime brokerage agreements to trade either (1) swaps that are not required to be cleared under Section 2(h)(1)(A) of the Commodity Exchange Act or (2) physically settled foreign exchange forwards and swap agreements. Such entities may continue to claim this no-action relief after May 15 if certain conditions are met, including a condition that all of the external business conduct obligations required by the new regulations be allocated between the prime broker and executing dealer, resulting in no unaccounted-for required business conduct obligations.Industry groups are working to develop guidelines to help prime brokers and executing dealers with the allocation of business conduct obligations for such parties to use in satisfying the conditions of this no-action letter.CFTC Letter No. 13-11 is available here.
  • Disclosure of Pre-Trade Mid-Market Mark: In CFTC Letter No. 13-12, the DSIO granted no-action relief that allows an SD or a major swap participant (MSP) to enter into certain transactions without disclosing a pre-trade mid-market mark (PTM) to the other non-SD or non-MSP counterparty to the transaction, as otherwise required by CFTC Regulation 23.431(a)(3)(i). To qualify for relief under this no-action letter, such non-SD or non-MSP counterparty must, among other things, agree in writing in advance of the trade to waive the PTM disclosure requirement and the transaction must be either (a) a foreign exchange swap or forward that is physically settled, in a major currency with a maturity of one year or less, or (b) a vanilla foreign exchange option that is physically settled, in a major currency with a maturity or six months or less. This letter also extends no-action relief to SDs or MSPs for failure to comply with Regulation 23.431(a) and (b) relating to certain required disclosures in connection with an exempt foreign exchange transaction, so long as, among other things, the transaction is initiated on an electronic trading platform and the SD or MSP does not know the identity of its counterparty to the transaction.CFTC Letter No. 13-12 is available here.