On November 5, the Commodity Futures Trading Commission held an open meeting to consider the following matters relating to swaps and swap execution facilities:
- Final Rule: Amending the De Minimis Exception to the Swap Dealer Definition
- Proposed Rule: Amendments to Regulations on Swap Execution Facilities and Trade Execution Requirement
- Request for Comment Regarding the Practice of “Post-Trade Name Give-Up” on Swap Execution Facilities
CFTC Adopts Permanent $8 Billion De Minimis Exception to the Swap Dealer Definition
In a 5-0 vote, the CFTC adopted an amendment to the definition of the term “swap dealer” to set the permanent aggregate gross notional amount threshold for the de minimis exception at $8 billion in swap dealing activity entered into by a person over the preceding 12 months.
In the exercise of its authority under Section 1a(49) of the Commodity Exchange Act (CEA), the CFTC had excluded from the definition of a “swap dealer,” as set out in Section 1.3 of the CFTC’s regulations, persons whose activities falling within the definition of a swap dealer did not exceed an aggregate gross notional amount (AGNA) threshold of $3 billion (measured over the prior 12-month period), subject to a phase-in period during which the AGNA threshold was set at $8 billion (the “de minimis exemption”). The phase-in period was originally scheduled to terminate on December 31, 2017, but was extended, via successive orders, to December 31, 2019. Therefore, absent further CFTC action, market participants would be required to begin counting towards a lower threshold on January 1, 2019.
CFTC Releases Notice of Proposed Rulemaking on Swap Execution Facilities and the Trade Execution Requirement
In a 4-1 vote, the CFTC proposed to amend existing requirements and propose new requirements pertaining to swap execution facilities (SEFs) and the trade execution requirement, as set forth in the CEA. The proposed rules also codify a number of existing staff guidance documents and staff no-action relief letters.
Among other provisions, the proposed amendments would:
- Require certain swaps broking entities, including interdealer brokers and aggregators of single-dealer platforms, to register as SEFs. (Domestic swaps broking entities would receive a six-month delay from the SEF registration requirement; foreign swaps broking entities would receive a two-year delay from the SEF registration requirement.)
- Amend the SEF registration requirement to clarify that entities that meet the SEF definition would be required to register as an SEF, whether or not the swaps that they list for trading are subject to the trade execution requirement.
- Eliminate the “made available to trade” (MAT) determination process for SEFs and DCMs and establish a new approach based on a revised interpretation of the trade execution requirement in CEA section 2(h)(8). The trade execution requirement would apply to swaps that are both (1) subject to the clearing requirement and (2) listed by a SEF or DCM for trading. Based on this approach, a number of new interest rate swaps and credit default swaps would be subject to the trade execution requirement.
- Authorize a SEF to offer flexible methods of execution for all listed swaps, including swaps subject to the trade execution requirement. In conjunction with an SEF’s ability to offer flexible execution methods, the exceptions to the prohibition on pre-arranged trading would be eliminated.
- Establish requirements for “SEF trading specialists” (i.e., SEF employees) who perform core functions that facilitate swaps trading and execution for an SEF. The proposed rules would also establish an SEF duty of supervision over SEF trading specialists.
- Allow an SEF to structure participation criteria and trading practices, including fee schedules, in a manner that align with the swaps market practices. Such criteria must be transparent, fair and non-discriminatory, and applied to all or “similarly situated” market participants in a “fair and non-discriminatory” manner, which means that such criteria should be non-arbitrary and based on objective, pre-established requirements or limitations.
- Codify existing staff guidance that requires SEFs to facilitate pre-execution credit screening for swaps intended to be cleared; and require market participants to identity a clearing futures commission merchant (FCM) before each order.
- Amend the financial resources requirements to clarify that an SEF would only need to maintain adequate financial resources to cover the operating costs needed to comply with the SEF core principles and CFTC regulations for a one-year period, as calculated on a rolling basis.
- Reduce the existing liquid resource requirement from six months of an SEF’s operating costs to the greater of (1) three months of an SEF’s projected operating costs; or (2) the projected costs for an SEF to wind down its business, as determined by the SEF. In determining projected operating costs, an SEF would be permitted to follow new proposed Acceptable Practices, which are based on staff guidance, that identify various operating costs that an SEF may exclude or pro-rate in its projected operating cost calculations. This calculation would be based on an SEF’s current business model and any anticipated changes. An SEF’s quarterly financial reports would be required to identify all of its expenses, including those that it has excluded from its calculations, and provide the basis for any amounts excluded or pro-rated from its projected operating costs.
- Streamline many SEF self-regulatory organization obligations and provide an SEF with the ability to tailor its rule enforcement program, disciplinary procedures and sanctions to its trading operations and market. Under the proposed rules, an SEF would also be able to choose additional types of entities to serve as a regulatory service provider to assist with fulfilling its compliance responsibilities.
- Streamline an SEF chief compliance officer’s (CCO) existing duties, simplify the preparation and submission of an SEF’s annual compliance report, and provide an SEF’s senior officer (i.e., the CEO or equivalent officer) with the same oversight responsibilities over the CCO as the SEF’s board.
The full notice regarding the proposed rule is available here.
CFTC Requests Comment on Post-Trade Name Give-Up
By a 5-0 vote, the CFTC also issued a request for comment that seeks public views as to the necessity or utility of post-trade name give-up practices in facilitating swaps trading where swap transactions are anonymously executed and intended to be cleared.
The full notice regarding the request for comment is available here.