Time Limited Relief for Swap Dealers in Connection with Prime Brokerage Arrangements.

Summary: Time Limited Relief for Swap Dealers in Connection with Prime Brokerage Arrangements.

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5977

Facsimile: (202) 418-5407

gbarnett@cftc.gov

Division of Swap Dealer and

Intermediary Oversight

Gary Barnett

Director

CFTC Letter No. 13-11

No-Action

April 30, 2013

Division of Swap Dealer and Intermediary Oversight

Re:

Time Limited Relief for Swap Dealers in Connection with Prime Brokerage

Arrangements

Ladies and Gentlemen:

This letter is in response to requests for relief from market participants to the Division of

Swap Dealer and Intermediary Oversight (“Division”) of the Commodity Futures Trading

Commission (“Commission”) regarding the application of certain business conduct standards for

swap dealers (“SDs”) with counterparties1 in the context of prime brokerage arrangements

relating to swaps and certain foreign exchange transactions. Market participants have requested

that the Division provide no-action relief to SDs from some obligations under the External

Business Conduct Standards for certain transactions executed in accordance with prime

brokerage arrangements where the SD has (i) allocated certain obligations under the External

Business Conduct Standards to an executing dealer that is also an SD, or (ii) entered into prime

brokerage arrangements with executing dealers that are not SDs.

The relief provided in this letter applies to swaps, as defined in Section 1a(47) of the

Commodity Exchange Act (the “Act” or “CEA”) and Commission regulation 1.3(xxx) (other

than swaps subject to the clearing requirement of section 2(h)(1)(A) of the Act and part 50 of the

Commission’s regulations), and physically-settled foreign exchange forwards and swap

agreements that have been exempted from the definition of swap by the U.S

pplies to swaps, as defined in Section 1a(47) of the

Commodity Exchange Act (the “Act” or “CEA”) and Commission regulation 1.3(xxx) (other

than swaps subject to the clearing requirement of section 2(h)(1)(A) of the Act and part 50 of the

Commission’s regulations), and physically-settled foreign exchange forwards and swap

agreements that have been exempted from the definition of swap by the U.S. Department of the

Treasury2 (“Exempt FX Transactions” and together with such swaps, the “Covered

Transactions”).

1 See 17 CFR §§ 23.400-23.451 and Business Conduct Standards for Swap Dealers and Major Swap Participants

with Counterparties, 77 FR 9734, Feb. 17, 2012 (hereinafter, the “External Business Conduct Standards”).

2 Determination of Foreign Exchange Swaps and Foreign Exchange Forwards Under the Commodity Exchange Act,

77 Fed. Reg. 69694 (Nov. 20, 2012) (hereinafter, the “Treasury Determination”).

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Applicable Regulatory Requirements

Section 4s(h) of the CEA provides the Commission with both mandatory and

discretionary rulemaking authority to impose business conduct standards on SDs and major swap

participants in their dealings with counterparties, including Special Entities. Pursuant to section

4s(h) of the CEA, on December 22, 2010, the Commission published in the Federal Register

proposed Business Conduct Standards for Swap Dealers and Major Swap Participants with

Counterparties as subpart H of part 23 of the Commission’s regulations.3 There was a 60-day

period for the public to comment on the proposing release

with counterparties, including Special Entities. Pursuant to section

4s(h) of the CEA, on December 22, 2010, the Commission published in the Federal Register

proposed Business Conduct Standards for Swap Dealers and Major Swap Participants with

Counterparties as subpart H of part 23 of the Commission’s regulations.3 There was a 60-day

period for the public to comment on the proposing release. On May 4, 2011, the Commission

published in the Federal Register a notice to re-open the public comment period for an additional

30 days, which ended on June 3, 2011.4 On February 17, 2012, the Commission published in the

Federal Register final business conduct rules for SDs and major swap participants as subpart H

of part 23.5 The initial compliance date for the External Business Conduct Standards was the

later of 180 days after the effective date of the External Business Conduct Standards or “the date

on which swap dealers or major swap participants are required to apply for registration pursuant

to Commission rule 3.10.”6 The Commission subsequently postponed the compliance date for a

number of the provisions of the External Business Conduct Standards until May 1, 2013.7

In the adopting release for the External Business Conduct Standards, the Commission

recognized that counterparties may enter into swaps through a prime brokerage arrangement.

With respect to compliance with the External Business Conduct Standards in transactions entered

into through a prime brokerage arrangement, the Commission stated in the adopting release that

“[s]wap dealers and major swap participants will be permitted to arrange with third parties, such

as the counterparty’s prime broker, a method of providing disclosure or verifying that a Special

Entity has an independent representative to satisfy its obligations under the rules.”8 However,

3 Business Conduct Standards for Swap Dealers and Major Swap Participants With Counterparties, 75 FR 80638

(proposed Dec

rrange with third parties, such

as the counterparty’s prime broker, a method of providing disclosure or verifying that a Special

Entity has an independent representative to satisfy its obligations under the rules.”8 However,

3 Business Conduct Standards for Swap Dealers and Major Swap Participants With Counterparties, 75 FR 80638

(proposed Dec. 22, 2010).

4 Reopening and Extension of Comment Periods for Rulemakings Implementing the Dodd-Frank Wall Street

Reform and Consumer Protection Act, 75 FR 25274 (May 4, 2011).

5 See supra note 1.

6 External Business Conduct Standards at 9734.

7 In September 2013, the Commission changed the compliance date of §§ 23.402; 23.410(c); 23.430; 23.431(a)–(c);

23.432; 23.434(a)(2), (b), and (c); 23.440; and 23.450 to January 1, 2013. See Confirmation, Portfolio

Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation Requirements for Swap

Dealers and Major Swap Participants, 77 FR 55904, 55942 (Sept. 11, 2012). The Commission later changed the

compliance date for these provisions to May 1, 2013. See Business Conduct and Documentation Requirements for

Swap Dealers and Major Swap Participants; Extension of Compliance Date, 78 FR 17, 20 (Jan. 2, 2013).

8 External Business Conduct Standards at 9741.

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the Commission made clear that “the swap dealer or major swap participant [that offers to enter

into a swap with the counterparty] will remain responsible for compliance with the rules.”9

With respect to the Exempt FX Transactions, pursuant to Section 1a(47)(E) of the CEA,10

the Secretary of the Treasury (“Secretary”) is vested with the authority to determine whether

foreign exchange swaps and foreign exchange forwards should be regulated as swaps under the

CEA, provided that the Secretary makes a written determination satisfying certain criteria

specified in CEA Section 1b

With respect to the Exempt FX Transactions, pursuant to Section 1a(47)(E) of the CEA,10

the Secretary of the Treasury (“Secretary”) is vested with the authority to determine whether

foreign exchange swaps and foreign exchange forwards should be regulated as swaps under the

CEA, provided that the Secretary makes a written determination satisfying certain criteria

specified in CEA Section 1b. On November 16, 2012, the Secretary issued a written

determination that foreign exchange swaps and forwards should not be regulated as swaps under

the CEA.11 Nonetheless, CEA Section 1a(47)(E)(iv) provides that, notwithstanding the

Secretary’s written determination, “any party to a foreign exchange swap or forward that is a

swap dealer or major swap participant shall conform to the business conduct standards contained

in section 4s(h) [of the CEA].”12 Thus, SDs and major swap participants are required to comply

with the External Business Conduct Standards with respect to Exempt FX Transactions,

including those for which the compliance date is May 1, 2013.

Description of Prime Brokerage Arrangements

As explained by market participants, prime brokerage arrangements in Covered

Transactions currently operate in two distinct forms, but each begins with a market participant

who is not a SD (the “counterparty”) opening an account (or otherwise entering into an

arrangement) with a prime broker that may be an SD. Prior to approving and entering into the

prime brokerage arrangement, the prime broker will conduct due diligence and know-your

customer reviews with respect to the counterparty.

In the first form of prime brokerage, prevalent in the market for Covered Transactions

involving foreign exchange, the prime broker may grant limited agency powers to the

counterparty, enabling the counterparty, as an agent for the prime broker, to negotiate Covered

Transactions with a number of other approved counterparties known as executing dealers,

subject to specified limits and parameters

n the first form of prime brokerage, prevalent in the market for Covered Transactions

involving foreign exchange, the prime broker may grant limited agency powers to the

counterparty, enabling the counterparty, as an agent for the prime broker, to negotiate Covered

Transactions with a number of other approved counterparties known as executing dealers,

subject to specified limits and parameters.

In the second form of prime brokerage, the counterparty is not granted agency powers,

but rather agrees to specified limits and parameters with the prime broker for Covered

Transactions that the counterparty will enter into with approved executing dealers, which will

subsequently be “given up” to the prime broker. In this respect, the prime broker will also enter

into “give-up” agreements with the approved executing dealers in which the executing dealers

either agree to negotiate Covered Transactions within specified parameters with the counterparty,

9 Id. at 9741.

10 7 U.S.C. 1a(47)(E).

11 See Treasury Determination, supra note 2.

12 Additionally, foreign exchange swaps and forwards are subject to reporting obligations, pursuant to Section

1a(47)(E)(iii) of the CEA, 7 U.S.C. § 1a(47)(E)(iii).

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who is acting as an agent for the prime broker, or agree to “give-up” Covered Transactions

entered with the counterparty to the prime broker.

The counterparty, or an asset manager or other representative of the counterparty, will

seek bids or offers for a desired Covered Transaction from one or more of the approved

executing dealers within the parameters established by the prime broker for the counterparty and

executing dealer. Once the counterparty and executing dealer agree on the terms, the

counterparty and executing dealer will either provide a notice of the terms to the prime broker (in

the first form of prime brokerage) or enter into the Covered Transaction themselves (in the

second form)

pproved

executing dealers within the parameters established by the prime broker for the counterparty and

executing dealer. Once the counterparty and executing dealer agree on the terms, the

counterparty and executing dealer will either provide a notice of the terms to the prime broker (in

the first form of prime brokerage) or enter into the Covered Transaction themselves (in the

second form).

If the counterparty and executing dealer do not enter into a Covered Transaction

themselves, they will provide the prime broker with notice of the terms negotiated. As long as

the Covered Transaction is with an approved executing dealer, the terms are within the

parameters established by the prime broker, and other conditions that may have been agreed

among the parties are satisfied, upon receiving notice of the negotiated terms the prime broker

will be obligated, either by contract or custom, to face the counterparty in a Covered Transaction

with the same terms agreed upon by the executing dealer and counterparty. Once this first

Covered Transaction is entered into by the prime broker, the prime broker will enter into a

second Covered Transaction with equal but opposite terms with the executing dealer.

If the counterparty and executing dealer enter into a Covered Transaction themselves, and

the Covered Transaction falls within the parameters set by the prime broker, the prime broker

would be obligated to become a party to the Covered Transaction with the counterparty (or the

executing dealer) through a novation. The prime broker will subsequently enter into a second

Covered Transaction with the executing dealer (or the counterparty) with equal but opposite

terms to the Covered Transaction with the other party.

In either form of prime brokerage, the end result would be two Covered Transactions

with equal but opposite terms

action with the counterparty (or the

executing dealer) through a novation. The prime broker will subsequently enter into a second

Covered Transaction with the executing dealer (or the counterparty) with equal but opposite

terms to the Covered Transaction with the other party.

In either form of prime brokerage, the end result would be two Covered Transactions

with equal but opposite terms. One Covered Transaction will be between the prime broker and

the counterparty (“Counterparty-PB Transaction”) and the other between the prime broker and

the executing dealer (the “ED-PB Transaction”).

A number of market participants have described the benefits of prime brokerage

arrangements. They have represented that prime brokerage arrangements (1) increase market

liquidity and allow market participants to obtain more favorable pricing from an executing dealer

with whom the market participant may not have a credit relationship; (2) permit market

participants who are customers of SDs to simplify management of counterparty risk by

minimizing the number of firms they face; (3) lower costs for market participants by eliminating

the need to enter into extensive trading documentation with each executing dealer with which

they want to trade; (4) increase collateral efficiencies by permitting prime brokers to net

collateral obligations across all trades for a market participant handled by the prime broker; and

rparty risk by

minimizing the number of firms they face; (3) lower costs for market participants by eliminating

the need to enter into extensive trading documentation with each executing dealer with which

they want to trade; (4) increase collateral efficiencies by permitting prime brokers to net

collateral obligations across all trades for a market participant handled by the prime broker; and

(5) decrease operational risk.

Summary of Request for Relief

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Market participants have represented to the Division that it would be difficult or

impracticable for prime brokers and executing dealers to fully comply with the External Business

Conduct Standards as each entity has access to different information at different points of time.

They have represented that only the prime broker usually maintains detailed credit and other

portfolio information regarding the counterparty. On the other hand, the executing dealer will

often not know the identity of the underlying counterparty. In many instances, an asset manager

or other representative of the counterparty will negotiate the terms of a Covered Transaction with

the executing dealer on behalf of a number of counterparties and allocate the transaction to the

counterparties only after the execution of the Counterparty Mirror Transaction. Thus, market

participants argue that the prime broker is in the best position to take responsibility for

compliance with the External Business Conduct Standards that relate to the general relationship

between the SD and its counterparty, such as “know-your-counterparty” obligations under

§ 23.402.

Conversely, the executing dealer, but not the prime broker, often will have access to

timely trade information and information about the inherent risks relating to both the ED-PB

Transaction and the Counterparty Mirror Transaction

ness Conduct Standards that relate to the general relationship

between the SD and its counterparty, such as “know-your-counterparty” obligations under

§ 23.402.

Conversely, the executing dealer, but not the prime broker, often will have access to

timely trade information and information about the inherent risks relating to both the ED-PB

Transaction and the Counterparty Mirror Transaction. As a result, market participants argue that

the executing dealer (assuming that such dealer is a SD)13 is in the best position to take

responsibility for compliance with External Business Conduct Standards that are transaction

specific, such as providing the pre-trade mid-market quote and risk disclosures under § 23.431.

To facilitate compliance with the External Business Conduct Standards in the context of

prime brokerage arrangements, market participants have proposed that SDs be permitted to

allocate responsibility between two SDs for compliance with certain obligations to counterparties

under the External Business Conduct Standards. In addition, relief has also been requested for

SDs acting as prime brokers from compliance with certain External Business Conduct Standards

altogether when an executing dealer is not required to be registered with the Commission as a

SD.14 In such circumstances, the executing dealer is not required to comply with any part of the

External Business Conduct Standards and thus has nothing to allocate to a prime broker in return

for accepting an allocation of certain obligations of the prime broker. The Division notes that

there is no request to relieve SDs from, or permit an allocation of, the anti-fraud, fair dealing,

confidentiality, and other general conduct requirements under the External Business Conduct

Standards, which would be complied with by both the SD acting as prime broker and an SD

acting as executing dealer as applicable to their activities

bligations of the prime broker. The Division notes that

there is no request to relieve SDs from, or permit an allocation of, the anti-fraud, fair dealing,

confidentiality, and other general conduct requirements under the External Business Conduct

Standards, which would be complied with by both the SD acting as prime broker and an SD

acting as executing dealer as applicable to their activities.

13 The External Business Conduct Standards apply only to SDs and major swap participants. See, e.g., § 23.400 and

CEA Section 1a(47)(E)(iv).

14 Not all dealers in the Covered Transactions are required to be registered with the Commission as SDs. For

example, dealers in swaps that have not entered into swaps with an aggregate notional amount above a de minimis

threshold set by Commission regulations are not required to be registered with the Commission as SDs. See 17 CFR

§ 1.3(ggg)(4). In addition, entities that are dealers exclusively in Covered Transactions that are Exempt FX

Transactions are not required to register as SDs.

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Market participants have represented to the Division that unless SDs are permitted to

allocate compliance with the External Business Conduct Standards between the prime broker and

the executing dealer, it will be impossible to continue existing prime brokerage arrangements or,

at a minimum, such arrangements will be significantly impacted. To comply with the External

Business Conduct Standards, trading that currently occurs through prime brokerage

arrangements would need to occur bilaterally between the executing dealer and the counterparty

in full compliance with the External Business Conduct Standards

possible to continue existing prime brokerage arrangements or,

at a minimum, such arrangements will be significantly impacted. To comply with the External

Business Conduct Standards, trading that currently occurs through prime brokerage

arrangements would need to occur bilaterally between the executing dealer and the counterparty

in full compliance with the External Business Conduct Standards. Since many executing dealers

do not, and, due to risk limits, will not, have bilateral contractual relationships covering

compliance with the External Business Conduct Standards with many counterparties, they would

need to negotiate and enter into the necessary documentation or forego transacting with prime

brokerage customers, which would, if a significant number of executing dealers did forego such

transactions, decrease price competition and, at a minimum, disrupt trading for a significant

period of time.

In addition, the Division understands that counterparties in prime brokerage arrangements

may receive price quotes for an Exempt FX Transaction from 20-30 executing dealers or more,

and that some counterparties transact in large block sizes that can only be filled by many

executing dealers each taking a part of the counterparty’s large block trade. For Exempt FX

Transactions, many executing dealers may not be SDs registered with the Commission. As non-

registered dealers, these executing dealers do not have any obligations under the External

Business Conduct Standards, so a prime broker that is a registered SD would bear the entire

burden of compliance with such standards. The Commission understands that due to this burden,

prime brokers may cease to participate in prime brokerage arrangements with executing dealers

that are not registered SDs, eliminating a portion of executing dealers that provide counterparties

with competitive pricing. In the market for Exempt FX Transactions, the portion of executing

dealers eliminated could be significant

such standards. The Commission understands that due to this burden,

prime brokers may cease to participate in prime brokerage arrangements with executing dealers

that are not registered SDs, eliminating a portion of executing dealers that provide counterparties

with competitive pricing. In the market for Exempt FX Transactions, the portion of executing

dealers eliminated could be significant.

In sum, counterparties that currently depend on prime brokerage arrangements to meet

their needs fear that the implementation of the External Business Conduct Standards will

eliminate or severely curtail their ability to seek prices from a wide range of executing dealers,

leaving them with only their prime broker(s) as potential counterparties. Indeed, the Division

understands that some counterparties have already been contacted by executing dealers

informing them that the executing dealer will not trade with the counterparty following the

compliance date for the relevant External Business Conduct Standards. Such counterparties

recognize that their prime broker(s) will be aware of their limited ability to seek competitive

prices, and fear that this may lead to higher prices for the counterparty. In addition, the

implementation of the External Business Conduct Standards may cause a large number of

executing dealers to be eliminated from the prime brokerage portion of the market for Exempt

FX Transactions or to have their ability to transact with a wide range of counterparties

significantly curtailed. Market participants argue that as a result of the foregoing, the market

will suffer reduced liquidity through a sudden drop in the number of participants in the markets,

a large number of

executing dealers to be eliminated from the prime brokerage portion of the market for Exempt

FX Transactions or to have their ability to transact with a wide range of counterparties

significantly curtailed. Market participants argue that as a result of the foregoing, the market

will suffer reduced liquidity through a sudden drop in the number of participants in the markets,

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the management of counterparty credit risk will be more difficult for non-SD market participants,

and such non-SD market participants will experience decreased collateral efficiency.15

Division No-Action Position

Based on the representations made by market participants, the Division believes that no-

action relief is warranted with respect to the External Business Conduct Standards as they relate

to Covered Transactions executed under prime brokerage arrangements where the prime broker

and the executing dealer are each SDs. Accordingly, the Division will not recommend that the

Commission commence an enforcement action against a SD for failure to comply with the

obligations of the SD under Commission regulations §§ 23.402(b)-(f) (Know your counterparty,

True name and owner, Reasonable reliance on representations, Manner of disclosure and

Disclosures in a standard format, respectively), 23.430 (Verification of counterparty eligibility),

23.431 (Disclosures of material information), 23.432(b) (Clearing disclosures for swaps not

required to be cleared—right to clearing), 23.434 (Recommendations to counterparties--

institutional suitability), 23.440 (Requirements for swap dealers acting as advisors to Special

Entities), 23.450 (Requirements for swap dealers and major swap participants acting as

counterparties to Special Entities), and 23.451 (Political contributions by certain swap dealers)

(collectively, the “apportionable business conduct obligations”) with respect to a Covered

Transaction with a counterparty executed under a prime brokerage arrangement to the exte

acting as advisors to Special

Entities), 23.450 (Requirements for swap dealers and major swap participants acting as

counterparties to Special Entities), and 23.451 (Political contributions by certain swap dealers)

(collectively, the “apportionable business conduct obligations”) with respect to a Covered

Transaction with a counterparty executed under a prime brokerage arrangement to the extent any

such obligations have been allocated to another SD and such other SD has accepted such

allocation, subject to the following conditions:

(a)

The prime brokerage arrangement meets the following description: An arrangement

between or among two SDs and the counterparty evidenced by written agreements

pursuant to which:

(1)

With respect to the first type of prime brokerage arrangement:

(i)

One SD (the “executing dealer”), together with the counterparty, commits

to the material terms and conditions of a Covered Transaction;

(ii)

Upon satisfaction of certain conditions, the second SD (the “prime

broker”) is required to enter into two Covered Transactions, one with the

counterparty and one with the executing dealer; and

(iii)

As a result of the foregoing:

(A)

The prime broker and the counterparty are parties to a Covered

Transaction in which all material terms and conditions are

substantially identical (other than adjustments attributable to

intermediation fees charged by the prime broker) to the terms and

conditions to which the counterparty and the executing dealer

previously committed; and

15 As support for these representations, a swap industry trade association has represented that approximately 18% of

swaps in the credit and interest rate asset classes are executed under prime brokerage arrangements

ged by the prime broker) to the terms and

conditions to which the counterparty and the executing dealer

previously committed; and

15 As support for these representations, a swap industry trade association has represented that approximately 18% of

swaps in the credit and interest rate asset classes are executed under prime brokerage arrangements. For the foreign

exchange asset class, the percentage of trades that have been represented as executed under prime brokerage

arrangements appears to vary widely by currency pair and type of transaction, but ranges from an average of

approximately 10% for foreign exchange options to almost 30% for non-deliverable forwards.

Prime Brokerage No-Action

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(B)

The prime broker and the executing dealer are parties to a Covered

Transaction with substantially equal but opposite terms and

conditions to the Covered Transaction between the prime broker

and the counterparty; or

(2)

With respect to the second type of prime brokerage arrangement:

(i)

One SD (the “executing dealer”) enters into a Covered Transaction with

the counterparty (the “original Covered Transaction”);

(ii)

Upon satisfaction of certain conditions, the second SD (the “prime

broker”) is required to accept novation of the original Covered

Transaction; and

(iii)

As a result of the foregoing:

(A)

The executing dealer and the counterparty are no longer parties to

the original Covered Transaction;

(B)

The prime broker and the counterparty are parties to a Covered

Transaction in which all material terms and conditions are

substantially identical (other than adjustments attributable to

intermediation fees charged by the prime broker) to the terms and

conditions of the original Covered Transaction; and

(C)

The prime broker and the executing dealer are parties to a Covered

Transaction with substantially equal but opposite terms and

conditions to the Covered Transaction between the prime broker

and the counterparty.

antially identical (other than adjustments attributable to

intermediation fees charged by the prime broker) to the terms and

conditions of the original Covered Transaction; and

(C)

The prime broker and the executing dealer are parties to a Covered

Transaction with substantially equal but opposite terms and

conditions to the Covered Transaction between the prime broker

and the counterparty.

(b)

The apportionable business conduct obligations with respect to the counterparty are

allocated between the two SDs and no apportionable business conduct obligation is left

unallocated between such SDs.

(c)

The counterparty with respect to which apportionable business conduct obligations have

been so allocated (or its duly authorized representative) is provided with notice of the

apportionable business conduct obligations that have been allocated to each SD prior to

the time at which any such obligation is required to be performed.

(d)

The allocation of the apportionable business conduct obligations is in writing and

includes an agreement by each SD that:

(1)

It will perform or otherwise be responsible for each apportionable business

conduct obligation it has agreed to be allocated to it to the full extent of such

obligation;

(2)

It will not be responsible for the compliance of the other SD with the

apportionable business conduct obligations allocated solely to such other SD; and

(3)

The counterparty (or its duly authorized representative) will be provided notice of

any expiration or termination of the allocation of apportionable business conduct

obligations no later than 30 days prior to such expiration or termination, and each

SD will remain responsible for fulfilling all applicable apportionable business

conduct obligations allocated to it until such expiration or termination.

Prime Brokerage No-Action

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sentative) will be provided notice of

any expiration or termination of the allocation of apportionable business conduct

obligations no later than 30 days prior to such expiration or termination, and each

SD will remain responsible for fulfilling all applicable apportionable business

conduct obligations allocated to it until such expiration or termination.

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(e)

Each SD makes and retains a record of the applicable prime brokerage arrangement, the

written allocation of apportionable business conduct obligations, and the delivery of

notice of such written allocation to the applicable counterparty (if the obligation to

deliver such notice shall have been allocated to it) in accordance with Commission

regulation § 23.203 (Records; retention and inspection), and makes such records

available to the Commission upon request.

Further, with respect to the market for Exempt FX Transactions where the Division

understands there is significant participation by executing dealers that are not required to be

registered as SDs, the Division believes that no-action relief is warranted with respect to the

External Business Conduct Standards as they relate to Exempt FX Transactions executed under

prime brokerage arrangements where the prime broker is an SD, but the executing dealer is not

an SD. However, the Division believes that such relief should be limited to relief, for the SD

acting as prime broker, from the obligations under Commission regulations §§ 23.431(a)(3)(i)

and 23.431(b), which require the disclosure of the mid-market mark of the Exempt FX

Transaction, and that the SD provide its counterparty with a scenario analysis if requested. The

Division believes that these are the only obligations of an SD acting as prime broker in a prime

brokerage arrangement with an executing dealer that is not an SD that would be impossible or

impracticable for such SD to perform

), which require the disclosure of the mid-market mark of the Exempt FX

Transaction, and that the SD provide its counterparty with a scenario analysis if requested. The

Division believes that these are the only obligations of an SD acting as prime broker in a prime

brokerage arrangement with an executing dealer that is not an SD that would be impossible or

impracticable for such SD to perform. The Division is not persuaded that such SD should be

given relief from the remainder of the External Business Conduct Standards at this time.

Accordingly, the Division will not recommend that the Commission commence an enforcement

action against a SD for failure to comply with the obligations of the SD under Commission

regulations §§ 23.431(a)(3)(i) or 23.431(b) with respect to an Exempt FX Transaction with a

counterparty executed under a prime brokerage arrangement, subject to the following conditions:

(a)

The SD (as prime broker) has entered into a prime brokerage arrangement that meets the

description above but for the fact that the executing dealer is not a SD; and

(b)

Prior to entering into the Exempt FX Transaction, the SD notifies the counterparty that it

will not perform its obligations under Commission regulations §§ 23.431(a)(3)(i)

(disclosure of the price and mid-market mark) or § 23.431(b) (scenario analysis) with

respect to Exempt FX Transactions entered under the applicable arrangement in reliance

on this letter.

The Division recognizes that the conditions of the no-action relief described above may

require SDs to complete new documentation and provide certain notices to qualify for such

relief

23.431(a)(3)(i)

(disclosure of the price and mid-market mark) or § 23.431(b) (scenario analysis) with

respect to Exempt FX Transactions entered under the applicable arrangement in reliance

on this letter.

The Division recognizes that the conditions of the no-action relief described above may

require SDs to complete new documentation and provide certain notices to qualify for such

relief. To allow time for such conditions to be met and to avoid market disruption in the

meantime, the Division will not recommend that the Commission commence an enforcement

action against a SD for failure to comply with any apportionable business conduct obligations (as

defined in this letter) with respect to Covered Transactions until May 15, 2013, provided that

such Covered Transactions are conducted under prime brokerage arrangements of such SD in

existence on the date of this letter. Such relief does not apply to Covered Transactions with any

counterparty not executed under a prime brokerage arrangement in existence on the date of this

letter. All relief in this letter is time-limited and will end at 12:01 eastern time on the later of the

effective date or the compliance date of any final rule or final order providing relief from the

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External Business Conduct Standards as they relate to Covered Transactions executed under

prime brokerage arrangements, as described in this letter.

This letter, and the positions taken herein, represent the view of the Division only, and do

not necessarily represent the position or view of the Commission or of any other office or

division of the Commission. The relief issued by this letter does not excuse the affected persons

from compliance with any other applicable requirements contained in the CEA or in the

Commission’s regulations issued thereunder

d the positions taken herein, represent the view of the Division only, and do

not necessarily represent the position or view of the Commission or of any other office or

division of the Commission. The relief issued by this letter does not excuse the affected persons

from compliance with any other applicable requirements contained in the CEA or in the

Commission’s regulations issued thereunder. For example, and without limitation, the relief

issued by this letter does not relieve any person from an obligation to report a swap or

information concerning a swap under part 43 or part 45 of the Commission’s regulations.

Further, this letter, and the relief contained herein, is based upon the information made available

to the Division. Any different or changed material facts or circumstances might render this letter

void.

Should you have any questions, please do not hesitate to contact me at (202) 418-5977;

Frank Fisanich, Chief Counsel, at (202) 418-5949; Adam Kezsbom, Special Counsel, at (202)

418-5372, or Jason Shafer, Attorney-Advisor, at (202) 418-5097.

Very truly yours,

Gary Barnett

cc:

Regina Thoele, Compliance

National Futures Association, Chicago

Jamila A. Piracci, OTC Derivatives

National Futures Association, New York