On December 3, the Commodity Futures Trading Commission’s (CFTC) Division of Clearing and Risk (DCR) and Division of Market Oversight (DMO, and collectively, the Divisions) issued CFTC Letter No. 20-43, an interpretation regarding Sections 2(h)(1) and 2(h)(8) of the Commodity Exchange Act (CEA) and the CFTC regulations thereunder.
Section 2(h)(1)(A) of the CEA prohibits a person from engaging in a swap that is required to be cleared unless that person submits such swap for clearing to a derivatives clearing organization (DCO) that is either registered or exempt from registration under the CEA. CFTC Regulation 50.4 enumerates classes of swaps that are required to be cleared.
Section 2(h)(8) of the CEA requires that swap transactions that are subject to the clearing requirement must be executed on a designated contract market or a swap execution facility that is either registered or exempt from registration under the CEA, unless no such entities make the swap available for trade or the relevant swap transaction is subject to the clearing exception under CEA Section 2(h)(7).
At the request of the Chicago Mercantile Exchange, the Divisions confirmed that Sections (2)(h)(1) and 2(h)(8) of the CEA do not subject to the clearing and trade execution requirements certain swaps transactions entered into by a DCO to reduce and manage the risk associated with a clearing member default.
On the same day, the Divisions issued CFTC Letter No. 20-44, responding to a request from LCH Limited (LCH) on behalf of its futures commission merchant (FCM) clearing members, for relief from compliance with certain trade execution requirements under Section 2(h)(8) of the CEA. Specifically, LCH requested the Divisions to confirm that, in the event of a customer default, an FCM clearing member may effect swap transactions subject to the trade execution requirement under Section 2(h)(8) of the CEA without executing such transactions on (1) a swap execution facility (SEF); (2) a SEF that is exempt from SEF registration; or (3) a designated contract market.
CFTC Staff Letter 20-43 is available here.
CFTC Staff Letter 20-44 is available here.