No-Action Relief: Swaps Intended to be Cleared - Request for relief from certain disclosure and notice requirements and other duties imposed on swap dealers (SDs) and major swap participants (MSPs) pursuant to Commiss...

Summary: No-Action Relief: Swaps Intended to be Cleared - Request for relief from certain disclosure and notice requirements and other duties imposed on swap dealers (SDs) and major swap participants (MSPs) pursuant to Commission regulations 23.402, 23.430, 23.431, 23.432, 23.434, 23.440, 23.450, and 23.451, as well as certain documentation requirements imposed on SDs and MSPs pursuant to Commission regulation 23.504.

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. 13-33 Corrected

No-Action

June 27, 2013

Division of Swap Dealer and Intermediary Oversight

Re:

No-Action Relief: Swaps Intended to be Cleared

Ladies and Gentlemen:

This letter responds to requests received by the Division of Swap Dealer and

Intermediary Oversight (“Division”) of the Commodity Futures Trading Commission

(“Commission”) from the International Swaps and Derivatives Association (“ISDA”) and the

Asset Management Group of the Securities Industry and Financial Markets Association (“AMG”

and, together with ISDA, the “Requesting Associations”), each on behalf of its members who

enter into swaps that are intended to be submitted for clearing contemporaneously with

execution.1 For these swaps, the Requesting Associations seek relief from certain disclosure and

notice requirements and other duties imposed on swap dealers (“SDs”) and major swap

participants (“MSPs”) pursuant to Commission regulations §§ 23.402, 23.430, 23.431, 23.432,

23.434, 23.440, 23.450, and 23.451, as well as certain documentation requirements imposed on

SDs and MSPs pursuant to Commission regulation § 23.504.

I

e Requesting Associations seek relief from certain disclosure and

notice requirements and other duties imposed on swap dealers (“SDs”) and major swap

participants (“MSPs”) pursuant to Commission regulations §§ 23.402, 23.430, 23.431, 23.432,

23.434, 23.440, 23.450, and 23.451, as well as certain documentation requirements imposed on

SDs and MSPs pursuant to Commission regulation § 23.504.

I.

Background

On July 21, 2010, President Obama signed the Dodd-Frank Act.2 Title VII of the Dodd-

Frank Act3 amended the Commodity Exchange Act (“CEA”)4 to establish a comprehensive

1 Although the relief contained herein was requested by ISDA and AMG on behalf of their members, such relief is

available to all swap market participants that enter into swaps intended to be submitted for clearing

contemporaneously with execution, subject to the conditions set forth herein.

2 See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).

The text of the Dodd-Frank Act may be accessed at:

http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.

3 Pursuant to Section 701 of the Dodd-Frank Act, Title VII may be cited as the “Wall Street Transparency and

Accountability Act of 2010.”

4 7 U.S.C. 1 et seq.

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regulatory framework to reduce risk, increase transparency, and promote market integrity within

the financial system by, among other things: (1) providing for the registration and

comprehensive regulation of SDs and MSPs; (2) imposing clearing and trade execution

requirements on standardized derivative products; (3) creating rigorous recordkeeping and real-

time reporting regimes; and (4) enhancing the Commission’s rulemaking and enforcement

authorities with respect to all registered entities and intermediaries subject to the Commission’s

oversight

the registration and

comprehensive regulation of SDs and MSPs; (2) imposing clearing and trade execution

requirements on standardized derivative products; (3) creating rigorous recordkeeping and real-

time reporting regimes; and (4) enhancing the Commission’s rulemaking and enforcement

authorities with respect to all registered entities and intermediaries subject to the Commission’s

oversight.

In the nearly three years since its enactment, the Commission has finalized approximately

50 rules to implement Title VII of the Dodd-Frank Act. Earlier this year, the Commission,

jointly with the Securities and Exchange Commission, finalized the main foundational elements

of the Dodd-Frank regulatory framework by adopting regulations further defining the terms

“swap dealer” and “major swap participant,”5 as well as the regulations further defining the term

“swap.”6 The Commission also adopted regulations setting forth a comprehensive scheme for

the registration process for SDs and MSPs.7 Other finalized rules include various substantive

requirements applicable to SDs and MSPs under CEA section 4s,8 which address reporting and

recordkeeping,9 business conduct standards,10 documentation standards,11 duties,12 and

designation of chief compliance officers.13

Among other things, upon registration, an SD or MSP must submit documentation

demonstrating its compliance with any Commission regulation issued pursuant to section 4s(e),

requirements applicable to SDs and MSPs under CEA section 4s,8 which address reporting and

recordkeeping,9 business conduct standards,10 documentation standards,11 duties,12 and

designation of chief compliance officers.13

Among other things, upon registration, an SD or MSP must submit documentation

demonstrating its compliance with any Commission regulation issued pursuant to section 4s(e),

(f), (g), (h), (i), (j), (k), and (l) of the CEA that is applicable to it and for which the compliance

date has passed. Such Commission regulations include business conduct standards under subpart

H of part 23 of the Commission’s regulations promulgated under section 4s(h) of the CEA, and

5 See Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major

Security-Based Swap Participant,” and “Eligible Contract Participant,” 77 FR 30596 (May 23, 2012).

6 See Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps;

Security-Based Swap Agreement Recordkeeping, 77 FR 48208 (Aug. 13, 2012).

7 See Registration of Swap Dealers and Major Swap Participants, 77 FR 2613 (Jan. 19, 2012).

8 7 U.S.C 6s.

9 See Swap Dealer and Major Swap Participant Recordkeeping, Reporting, and Duties Rules; Futures Commission

Merchant and Introducing Broker Conflicts of Interest Rules; and Chief Compliance Officer Rules for Swap

Dealers, Major Swap Participants, and Futures Commission Merchants, 77 FR 20128 (Apr. 3, 2012).

10 See Business Conduct Standards for Swap Dealers and Major Swap Participants With Counterparties, 77 FR 9734

(Feb. 17, 2012).

11 See Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship

Documentation Requirements for Swap Dealers and Major Swap Participants, 77 FR 55904 (Sept. 11, 2012).

12 See supra note 9.

13 Id.

7 FR 20128 (Apr. 3, 2012).

10 See Business Conduct Standards for Swap Dealers and Major Swap Participants With Counterparties, 77 FR 9734

(Feb. 17, 2012).

11 See Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship

Documentation Requirements for Swap Dealers and Major Swap Participants, 77 FR 55904 (Sept. 11, 2012).

12 See supra note 9.

13 Id.

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documentation standards under subpart I of part 23 of the Commission’s regulations promulgated

under section 4s(i) of the CEA.

Business Conduct Standards with Counterparties

With respect to business conduct standards with counterparties, section 4s(h) of the CEA

provides the Commission with both mandatory and discretionary rulemaking authority to impose

business conduct standards on SDs and MSPs 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 subpart H of part 23 of the Commission’s regulations.14 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, 2011.15 On February 17, 2012, the Commission

adopted as final rules subpart H to part 23, which set forth business conduct standards for swap

dealers and major swap participants in their dealings with counterparties (the “External

BCS”).16 SDs and MSPs were required to comply with the External BCS by May 1, 2013.17

Of note in relation to this letter, a number of the Commission’s rules under the External

BCS require SDs and MSPs to provide or obtain specific information from their counterparties,

to obtain specific representations in writing from their counterparties, and to perform certain due

diligence inquiries with respect to their counterparties prior to entering into (or in some cases,

offering

Of note in relation to this letter, a number of the Commission’s rules under the External

BCS require SDs and MSPs to provide or obtain specific information from their counterparties,

to obtain specific representations in writing from their counterparties, and to perform certain due

diligence inquiries with respect to their counterparties prior to entering into (or in some cases,

offering to enter into) a swap with such counterparties.18 Certain safe harbors under the External

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

(proposed Dec. 22, 2010).

15 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).

16 Business Conduct Standards for Swap Dealers and Major Swap Participants With Counterparties, 77 FR 9734

(Feb. 17, 2012).

17 The External BCS final rules required that SDs and MSPs must comply with the rules in subpart H of part 23 on

the later of 180 days after the effective date of these rules or the date no which swap dealers or major swap

participants are required to apply for registration pursuant to Commission rule 3.10. However, in subsequent

rulemakings, the compliance date for §§ 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 was deferred first until 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)), and then again until May 1, 2013 (see Business Conduct and

Documentation Requirements for Swap Dealers and Major Swap Participants; Extension of Compliance Date, 78 FR

17 (Jan. 2, 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)), and then again until May 1, 2013 (see Business Conduct and

Documentation Requirements for Swap Dealers and Major Swap Participants; Extension of Compliance Date, 78 FR

17 (Jan. 2, 2013)).

18 See Commission regulation § 23.402(b) (requiring SDs to obtain essential facts about their counterparty prior to

execution of a transaction); § 23.430(a) (requiring SDs and MSPs to verify that a counterparty meets the eligibility

standards for an eligible contract participant before offering to enter into or entering into a swap with such

counterparty); § 23.431(a) (requiring SDs and MSPs to provide material information concerning a swap to its

counterparty at a reasonably sufficient time prior to entering into the swap); § 23.431(b) (requiring SDs and MSPs to

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BCS permit SDs and MSPs to rely on written representations from their counterparties and

standardized disclosures, each of which may require amendments or supplements to an SD’s or

MSP’s relationship documentation with such counterparties prior to entering into a swap with

such counterparties.19

Swap Trading Relationship Documentation

Documentation standards for SDs and MSPs have been adopted by the Commission

pursuant to Section 4s(i)(1) of the CEA, which requires SDs and MSPs to “conform with such

standards as may be prescribed by the Commission by rule or regulation that relate to timely and

accurate confirmation, processing, netting, documentation, and valuation of all swaps,” and

Section 4s(i)(2) of the CEA, which requires the Commission to adopt rules “governing

documentation standards for swap dealers and major swap participants.” On February 8, 2011,

the Commission proposed regulations governing swap trading relationship documentation.20

There was a 60-day comment period for the proposal

rmation, processing, netting, documentation, and valuation of all swaps,” and

Section 4s(i)(2) of the CEA, which requires the Commission to adopt rules “governing

documentation standards for swap dealers and major swap participants.” On February 8, 2011,

the Commission proposed regulations governing swap trading relationship documentation.20

There was a 60-day comment period for the proposal. On September 11, 2012, the Commission

issued final rules governing swap trading relationship documentation (§ 23.504).21 Commission

regulation § 23.504 requires that an SD or MSP execute swap trading relationship documentation

meeting the requirements of the rule with a counterparty prior to or contemporaneously with

entering into a swap transaction with such counterparty.22

Regarding the content of swap trading relationship documentation, each SD and MSP

must establish policies and procedures reasonably designed to ensure that the parties have agreed

in writing to all terms governing their trading relationship, including, among other things, terms

related to credit support arrangements, such as initial and variation margin requirements and

custodial arrangements, and terms addressing payment obligations, netting of payments, events

of default or other termination events, calculation and netting of obligations upon termination,

transfer of rights and obligations, governing law, valuation, and dispute resolution.23 With

provide notice to counterparties that they can request and consult on the design of a scenario analysis; § 23.431(d)

(requiring SDs and MSPs to provide notice to counterparties of the right to receive the daily mark from a DCO for

cleared swaps); § 23.432 (requiring SDs and MSPs to provide notice to counterparties of the right to select clearing

and the DCO on which a swap is to be cleared); § 23.434 (requiring SDs and MSPs tha

hat they can request and consult on the design of a scenario analysis; § 23.431(d)

(requiring SDs and MSPs to provide notice to counterparties of the right to receive the daily mark from a DCO for

cleared swaps); § 23.432 (requiring SDs and MSPs to provide notice to counterparties of the right to select clearing

and the DCO on which a swap is to be cleared); § 23.434 (requiring SDs and MSPs that recommend a swap to have

a reasonable basis to believe that the swap is suitable for the counterparty); § 23.440 (requiring SDs and MSPs that

act as an advisor to a Special Entity to act in such entity’s best interest); § 23.450 (requiring SDs and MSPs to

inquire into the knowledge and status of a representative of a counterparty that is a Special Entity); and § 23.451

(prohibiting SDs from entering into swaps with certain governmental entities if it has made political contributions to

an official of such entity).

19 See § 23.402(d), (e), and (f).

20 Swap Trading Relationship Documentation for Swap Dealers and Major Swap Participants, 76 FR 6715 (proposed

Feb. 8, 2011).

21 Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation

Requirements for Swap Dealers and Major Swap Participants, 77 FR 55904 (Sept. 11, 2012).

22 See § 23.504(a)(2).

23 See § 23.504(b)(1) and (3).

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respect to valuation of swaps, SDs and MSPs must include agreement on the process for

determining the value of each swap at any time from execution to the termination, maturity, or

expiration of the swap, for the purposes of complying with: (1) the margin requirements under

section 4s(e) of the CEA and Commission regulations; and (2) the risk management

requirements under section 4s(j) of the CEA and Commission regulations.24 The documentation

also must include either: (1) alternative methods for determining the value of the swap, in the

event of the unavailability or other failure of any input required to value the swap; or (2) a

valuation dispu

irements under

section 4s(e) of the CEA and Commission regulations; and (2) the risk management

requirements under section 4s(j) of the CEA and Commission regulations.24 The documentation

also must include either: (1) alternative methods for determining the value of the swap, in the

event of the unavailability or other failure of any input required to value the swap; or (2) a

valuation dispute resolution process.25 SDs and MSPs are also required to perform a periodic

audit of their swap trading relationship documentation, and the audit must be sufficient to

identify any material weakness in documentation policies and procedures.26

Straight-Through-Processing of Cleared Swaps

A number of Commission regulations, acting in concert, require that swaps that are

intended to be cleared are in fact cleared within a reasonably short period of time. Ensuring a

short period between swap execution and acceptance for clearing by a derivatives clearing

organization (“DCO”) mitigates the credit risk that exists from the swap prior to novation to the

DCO.27

Relevant for this letter, Commission regulation § 23.506 (Swap processing and clearing)

requires each SD and MSP to have the capacity to route swap transactions intended to be cleared,

but not executed on a SEF or DCM28, to a DCO in coordination with the DCO to facilitate

prompt and efficient swap transaction processing in accordance with the requirements of

Commission regulation § 39.12(b)(7) (Time frame for clearing).29 For swaps subject to

24 See § 23.504(b)(4)(i).

25 See § 23.504(b)(4)(ii).

26 See § 23.504(c).

27 See Customer Clearing Documentation, Timing of Acceptance for Clearing, and Clearing Member Risk

Management, 77 FR 21278, 21284 (Apr. 9, 2012), stating:

Minimizing the time between trade execution and acceptance into clearing is an important risk

mitigant

to

24 See § 23.504(b)(4)(i).

25 See § 23.504(b)(4)(ii).

26 See § 23.504(c).

27 See Customer Clearing Documentation, Timing of Acceptance for Clearing, and Clearing Member Risk

Management, 77 FR 21278, 21284 (Apr. 9, 2012), stating:

Minimizing the time between trade execution and acceptance into clearing is an important risk

mitigant. This time lag potentially presents credit risk to the swap counterparties, clearing

members, and the DCO because the value of a position may change significantly between the time

of execution and the time of novation, thereby allowing financial exposure to accumulate in the

absence of daily mark-to-market. Among the purposes of clearing are the reduction of risk and the

enhancement of financial certainty, and this time lag diminishes the benefits of clearing swaps that

Congress sought to promote in the Dodd-Frank Act.

28 Pursuant to Commission regulations §§ 37.702 and 38.601, each SEF and DCM must coordinate with each DCO

to which it submits transactions for clearing in the development of rules and procedures to facilitate prompt and

efficient transaction processing to meet the requirements § 39.12(b)(7). Commission regulation § 39.12(b)(7)(ii)

requires a DCO to accept or reject swaps executed on a SEF or DCM for clearing “as quickly after execution as

would be technologically practicable if fully automated systems were used.” See id. at 21309.

29 See 17 CFR §§ 23.506(a) and Customer Clearing Documentation, Timing of Acceptance for Clearing, and

Clearing Member Risk Management, 77 FR 21278, 21307 (Apr. 9, 2012).

n § 39.12(b)(7)(ii)

requires a DCO to accept or reject swaps executed on a SEF or DCM for clearing “as quickly after execution as

would be technologically practicable if fully automated systems were used.” See id. at 21309.

29 See 17 CFR §§ 23.506(a) and Customer Clearing Documentation, Timing of Acceptance for Clearing, and

Clearing Member Risk Management, 77 FR 21278, 21307 (Apr. 9, 2012).

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mandatory clearing, an SD or MSP must submit the swap to the DCO as soon as technologically

practicable but no later than the close of business on the day of execution; swaps not subject to

mandatory clearing must be submitted by the next business day after execution of the swap.30

Regulation § 39.12(b)(7) in turn requires DCOs to accept or reject swaps not executed on

a SEF or DCM “as quickly after submission to the derivatives clearing organization as would be

technologically practicable if fully automated systems were used.”31 In addition, Commission

regulation § 1.74 (FCM acceptance for clearing) requires each futures commission merchant

(“FCM”) that is a clearing member of a DCO to establish systems that enable the FCM to accept

or reject each trade submitted to the DCO by the FCM for a customer of the FCM as quickly as

would be technologically practicable if fully automated systems were used.32

Finally, Commission regulation § 1.35 (Records of commodity interest and cash

commodity transactions) allows for bunched orders to be executed in a single trade with the

intention that the position will be allocated among multiple counterparties after execution (such

as when an asset manager executes a single swap with the intention to allocate the swap to

multiple accounts under its management)

nally, Commission regulation § 1.35 (Records of commodity interest and cash

commodity transactions) allows for bunched orders to be executed in a single trade with the

intention that the position will be allocated among multiple counterparties after execution (such

as when an asset manager executes a single swap with the intention to allocate the swap to

multiple accounts under its management). For such bunched orders in swaps not executed on a

SEF or DCM, but submitted for clearing by a DCO, the swap must be allocated “no later than a

time sufficiently before the end of the day the order is executed to ensure that clearing records

identify the ultimate customer for each trade.”33

II.

Relief Requested

The Requesting Associations note that many of the Commission’s regulations under the

External BCS do not apply either (i) when the SD or MSP does not know the identity of the

counterparty to a swap prior to the execution of the swap, or (ii) when the swap is initiated on a

designated contract market (“DCM”) or swap execution facility (“SEF”) and the SD or MSP

does not know the identity of the counterparty to a swap prior to the execution of the swap.34

30 See 17 CFR §§ 23.506(b) and Customer Clearing Documentation, Timing of Acceptance for Clearing, and

Clearing Member Risk Management, 77 FR 21278, 21307-08 (Apr. 9, 2012). See also 17 CFR § 50.2 and Clearing

Requirement Determination Under Section 2(h) of the CEA, 77 FR 74284, 74335-36 (Dec. 13, 2012) (requiring all

swaps subject to a clearing requirement to be submitted to a DCO as soon as technologically practicable after

execution, but in any event by the end of the day of execution).

31 See 17 CFR §§ 23.506(a) and 39.12(b)(7)(iii), and Customer Clearing Documentation, Timing of Acceptance for

Clearing, and Clearing Member Risk Management, 77 FR 21278, 21306-10 (Apr

-36 (Dec. 13, 2012) (requiring all

swaps subject to a clearing requirement to be submitted to a DCO as soon as technologically practicable after

execution, but in any event by the end of the day of execution).

31 See 17 CFR §§ 23.506(a) and 39.12(b)(7)(iii), and Customer Clearing Documentation, Timing of Acceptance for

Clearing, and Clearing Member Risk Management, 77 FR 21278, 21306-10 (Apr. 9, 2012). As stated in the

adopting release, these rules, taken as a whole, “require SEFs, DCMs, SDs, MSPs, and DCOs to coordinate in order

to facilitate real time acceptance or rejection of trades for clearing.” Id. at 21296.

32 See id. at 21307.

33 See 17 CFR § 1.35(b)(5)(iv)(A) and Adaptation of Regulations to Incorporate Swaps, 77 FR 66288, 66326 (Nov.

2, 2012).

34 See § 23.402(b) and (c) (requiring SDs and MSPs to obtain and retain certain information only about each

counterparty “whose identity is known to the SD or MSP prior to the execution of the transaction”), § 23.430(e) (not

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Similarly, the Requesting Associations observe that § 23.504 contains an exception to the

requirement that an SD or MSP execute swap trading relationship documentation with a

counterparty prior to or contemporaneously with entering into a swap transaction with such

counterparty. Section 23.504(a)(1) states that such documentation is not required with respect to

swaps executed on a DCM or anonymously on a SEF if such swaps are cleared by a DCO and all

terms of the swaps conform to the rules of the DCO and § 39.12(b)(6) of the Commission’s

regulations.35

The Division recognizes that rationales for these exceptions include: (i) the impossibility

or impracticability of compliance with certain rules, or the full extent of certain rules, by an SD

or MSP when the identity of the counterparty is not known prior to execution; (ii) the likelihood

that swaps initiated anonymously on a DCM or SEF will be standardized and, thus, information

about the material risks and characteristics of

ales for these exceptions include: (i) the impossibility

or impracticability of compliance with certain rules, or the full extent of certain rules, by an SD

or MSP when the identity of the counterparty is not known prior to execution; (ii) the likelihood

that swaps initiated anonymously on a DCM or SEF will be standardized and, thus, information

about the material risks and characteristics of such swaps is likely to be available from the DCM

or SEF or other widely available source (including the product specifications of a DCO if the

swaps are accepted for clearing); and (iii) the fact that following clearing of a swap, the SD or

MSP and its counterparty have no further obligations to each other, so there is no on-going

relationship that would be governed by the trading relationship documentation required by

Commission regulation § 23.504. The Division also notes that relief from certain requirements

of the External BCS for swaps initiated anonymously on a DCM or SEF would provide an

incentive to transact on such platforms, enhancing transparency in the swaps market, a major

policy goal of the Dodd-Frank Act. Similarly, the relief from the swap trading relationship

documentation requirements for swaps submitted for clearing would provide an incentive to clear

swaps, another major policy goal of the Dodd-Frank Act.

requiring SDs and MSPs to verify counterparty eligibility when a transaction is entered on a DCM or SEF and the

SD or MSP does not know the identity of the counterparty prior to execution), § 23.431(c) (not requiring disclosure

of material information about a swap if initiated on a DCM or SEF and the SD or MSP does not know the identity of

the counterparty prior to execution), § 23.450(h) (not requiring SDs and MSPs to have a reasonable basis to believe

that a Special Entity has a qualified, independent representative if the

w the identity of the counterparty prior to execution), § 23.431(c) (not requiring disclosure

of material information about a swap if initiated on a DCM or SEF and the SD or MSP does not know the identity of

the counterparty prior to execution), § 23.450(h) (not requiring SDs and MSPs to have a reasonable basis to believe

that a Special Entity has a qualified, independent representative if the transaction with the Special Entity is initiated

on a DCM or SEF and the SD or MSP does not know the identity of the Special Entity prior to execution), and

§ 23.451(b)(2)(iii) (disapplying the prohibition on entering into swaps with a governmental Special Entity within

two years after any contribution to an official of such governmental Special Entity if the swap is initiated on a DCM

or SEF and the SD or MSP does not know the identity of the Special Entity prior to execution).

35 Section 39.12(b)(6) of the Commission’s regulations provides:

(6) A derivatives clearing organization that clears swaps shall have rules providing that, upon

acceptance of a swap by the derivatives clearing organization for clearing:

(i) The original swap is extinguished;

(ii) The original swap is replaced by an equal and opposite swap between the derivatives

clearing organization and each clearing member acting as principal for a house trade or acting

as agent for a customer trade;

(iii) All terms of a cleared swap must conform to product specifications established under

derivatives clearing organization rules; and

ng:

(i) The original swap is extinguished;

(ii) The original swap is replaced by an equal and opposite swap between the derivatives

clearing organization and each clearing member acting as principal for a house trade or acting

as agent for a customer trade;

(iii) All terms of a cleared swap must conform to product specifications established under

derivatives clearing organization rules; and

(iv) If a swap is cleared by a clearing member on behalf of a customer, all terms of the swap,

as carried in the customer account on the books of the clearing member, must conform to the

terms of the cleared swap established under the derivatives clearing organization’s rules.

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Recognizing the exceptions to the documentation requirements and the External BCS

outlined above, and encouraged by the pre-clearing risk mitigation provided by compliance with

the Commission’s regulations for straight-through-processing of swaps intended to be cleared in

parts 1, 23, 39, and 50 of the Commissions regulations, the Requesting Associations are seeking

relief that would extend such exceptions based on the same rationales outlined above. Thus, the

Requesting Associations seek relief from certain requirements under the External BCS and

certain aspects of the documentation requirements of Commission regulation § 23.504 that the

Requesting Associations find superfluous, and therefore unduly burdensome, in the execution

and post-trade processing of swaps that are not executed on a SEF or DCM, but (i) are executed

without the SD or MSP knowing the identity of the counterparty, in some instances, and (ii)

intended to be submitted for clearing contemporaneously with execution, in all instances (such

swaps, “Intended-To-Be-Cleared Swaps” or “ITBC Swaps”)

erfluous, and therefore unduly burdensome, in the execution

and post-trade processing of swaps that are not executed on a SEF or DCM, but (i) are executed

without the SD or MSP knowing the identity of the counterparty, in some instances, and (ii)

intended to be submitted for clearing contemporaneously with execution, in all instances (such

swaps, “Intended-To-Be-Cleared Swaps” or “ITBC Swaps”).

As noted above, many of the External BCS require SDs and MSPs to provide notices or

disclosures to, or obtain specific information or representations from, their counterparties prior to

entering into (or in some cases, offering to enter into) a swap with such counterparties.36

Knowledge of its counterparty’s identity is, of course, essential to comply with these

requirements under the External BCS, but the Requesting Associations argue that these

requirements meant to protect counterparties are either impossible to perform if the

counterparty’s identity is not known prior to execution of an ITBC Swap, or only meaningful or

effective where an SD or MSP has an on-going relationship with the counterparty, which it will

not in the case of ITBC Swaps.

Similarly the Requesting Associations argue that the swap trading relationship

documentation required by § 23.504 is not relevant for ITBC Swaps because there is no on-going

relationship between the SD or MSP and its counterparty once the swap is accepted for clearing

by a DCO.

With respect to the acceptance for clearing by a DCO, the Requesting Associations

acknowledge that the consequences of the failure of an ITBC Swap to clear may raise issues with

respect to both the External BCS and the swap trading relationship documentation requirement

re is no on-going

relationship between the SD or MSP and its counterparty once the swap is accepted for clearing

by a DCO.

With respect to the acceptance for clearing by a DCO, the Requesting Associations

acknowledge that the consequences of the failure of an ITBC Swap to clear may raise issues with

respect to both the External BCS and the swap trading relationship documentation requirement.

Specifically, if the result of the failure of an ITBC Swap to clear is that the SD or MSP and its

36 See Commission regulation § 23.402(b) (requiring SDs to obtain essential facts about their counterparty prior to

execution of a transaction); § 23.430(a) (requiring SDs and MSPs to verify that a counterparty meets the eligibility

standards for an eligible contract participant before offering to enter into or entering into a swap with such

counterparty); § 23.431(a) (requiring SDs and MSPs to provide material information concerning a swap to its

counterparty at a reasonably sufficient time prior to entering into the swap); § 23.431(b) (requiring SDs and MSPs to

provide notice to counterparties that they can request and consult on the design of a scenario analysis; § 23.431(d)

(requiring SDs and MSPs to provide notice to counterparties of the right to receive the daily mark from a DCO for

cleared swaps); § 23.432 (requiring SDs and MSPs to provide notice to counterparties of the right to select clearing

and the DCO on which a swap is to be cleared); § 23.434 (requiring SDs and MSPs that recommend a swap to have

a reasonable basis to believe that the swap is suitable for the counterparty); § 23.440 (requiring SDs and MSPs that

act as an advisor to a Special Entity to act in such entity’s best interest); § 23.450 (requiring SDs and MSPs to

inquire into the knowledge and status of a representative of a counterparty that is a Special Entity); and § 23.451

(prohibiting SDs from entering into swaps with certain governmental entities if it has made political contri

r the counterparty); § 23.440 (requiring SDs and MSPs that

act as an advisor to a Special Entity to act in such entity’s best interest); § 23.450 (requiring SDs and MSPs to

inquire into the knowledge and status of a representative of a counterparty that is a Special Entity); and § 23.451

(prohibiting SDs from entering into swaps with certain governmental entities if it has made political contributions to

an official of such entity).

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Cleared Swaps

counterparty will be deemed to have entered into a bilateral swap, with on-going obligations to

each other, than the rationales for relief from the External BCS and documentation requirements

are not present.

Because it is possible that an ITBC Swap may, due to unforeseen circumstances, fail to

be accepted for clearing by a DCO, for purposes of this relief the Requesting Associations have

represented that the result of such failure will not, in any event, be a bilateral swap between the

SD or MSP and its counterparty. Rather, the Requesting Associations have represented that an

ITBC Swap that fails to be accepted for clearing by a DCO will be subject to an agreement

between the SD or MSP and its counterparty requiring either:

(i)

That the ITBC Swap will immediately be resubmitted for clearing with:

(A)

The clearing member for the SD or MSP as party to the ITBC Swap if the SD or

MSP is responsible for the ITBC Swap’s failure to clear; or

(B)

The clearing member for the counterparty as party to the ITBC Swap if the

counterparty is responsible for the ITBC Swap’s failure to clear; or

(C)

Both the clearing member for the SD or MSP and the clearing member for the

counterparty as parties to the ITBC Swap if both the SD or MSP and the

counterparty are responsible for the ITBC Swap’s failure to clear; or

ilure to clear; or

(B)

The clearing member for the counterparty as party to the ITBC Swap if the

counterparty is responsible for the ITBC Swap’s failure to clear; or

(C)

Both the clearing member for the SD or MSP and the clearing member for the

counterparty as parties to the ITBC Swap if both the SD or MSP and the

counterparty are responsible for the ITBC Swap’s failure to clear; or

(ii) That the ITBC Swap is void or automatically terminated as of the time that the ITBC Swap

fails to clear, with any cost or other amount attributable to automatic termination to be

payable as agreed between the parties.

III.

Staff Position

Based on the foregoing, the Division believes that no-action relief for SDs and MSPs is

warranted with respect to certain External BCS requirements (enumerated below) and the swap

trading relationship documentation requirement under Commission regulation § 23.504 in the

context of an ITBC Swap where the SD or MSP does not know the identity of the counterparty to

the ITBC Swap. In addition, the Division believes that no-action relief for SDs and MSPs is

warranted with respect to the swap trading relationship documentation requirement under

Commission regulation § 23.504 in the context of an ITBC Swap, even if the SD or MSP knows

the identity of the counterparty.

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

enforcement action against an SD or MSP for either (A) failure to comply with the requirements

of the External BCS specified on Appendix A attached hereto, or the requirements of

Commission regulation § 23.504 (Swap trading relationship documentation) with respect to an

ITBC Swap where the SD or MSP does not know the identity of the counterparty prior to

execution of the swap (an “Anonymous ITBC Swap”), or (B) failure to comply with the

requirements of Commission regulation § 23.504 (Swap trading relationship documentation)

ix A attached hereto, or the requirements of

Commission regulation § 23.504 (Swap trading relationship documentation) with respect to an

ITBC Swap where the SD or MSP does not know the identity of the counterparty prior to

execution of the swap (an “Anonymous ITBC Swap”), or (B) failure to comply with the

requirements of Commission regulation § 23.504 (Swap trading relationship documentation)

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Cleared Swaps

with respect to an ITBC Swap where the SD or MSP does know the identity of the counterparty

prior to the execution of the swap, subject to the following conditions:

1.

If the ITBC Swap is an Anonymous ITBC Swap, such swap is not of a type that:

(a)

Has been listed on any DCM for more than thirty (30) days;

(b)

Is a required transaction37 that is listed on any SEF; or

(c)

Is a permitted transaction38 that has been listed on any SEF for more than thirty

(30) days;

2.

Such ITBC Swap is of a type accepted for clearing by a DCO;

3.

The SD or MSP is either a clearing member of such DCO, or has entered into an

agreement with a clearing member of such DCO for clearing of swaps of the same type as

the ITBC Swap;

4.

The SD or MSP has a reasonable basis to conclude that the counterparty is either a

clearing member of such DCO, or has entered into an agreement with a clearing member

of such DCO for clearing of swaps of the same type as the ITBC Swap;

5.

Prior to execution of the ITBC Swap:

(a)

The SD or MSP and the counterparty (or the counterparty’s duly authorized

representative) have agreed in writing that the ITBC Swap will be submitted for

clearing by both the SD or MSP and the counterparty to either the DCO, or to

their respective clearing members as quickly after execution as technologically

practicable; or

s the ITBC Swap;

5.

Prior to execution of the ITBC Swap:

(a)

The SD or MSP and the counterparty (or the counterparty’s duly authorized

representative) have agreed in writing that the ITBC Swap will be submitted for

clearing by both the SD or MSP and the counterparty to either the DCO, or to

their respective clearing members as quickly after execution as technologically

practicable; or

(b)

In the case of an Anonymous ITBC Swap executed as a bunched order by an

eligible account manager (as defined in Commission regulation § 1.35(b)(5)39),

the SD or MSP, the counterparty (or the counterparty’s duly authorized

representative), and such eligible account manager have agreed in writing that:

(i)

The Anonymous ITBC Swap will be submitted for clearing by both the

SD or MSP and the counterparty to either the DCO, or to their respective

clearing members within:

37 As defined in Commission regulation § 39.7. See Core Principles and Other Requirements for Swap Execution

Facilities at 431, available at

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister051613b.pdf.

38 As defined in Commission regulation § 39.7. See id at 433.

39 See Adaptation of Regulations to Incorporate Swaps, 77 FR 66288, 66325 (Nov. 2, 2012).

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Cleared Swaps

(A)

Two (2) hours after execution during the 60 day period from the

date of this letter; or

(B)

One (1) hour after execution during the 30 day period beginning 60

days from the date of this letter; or

(C)

As quickly after execution as technologically practicable from and

after the date that is 90 days after the date of this letter; and

(Nov. 2, 2012).

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Cleared Swaps

(A)

Two (2) hours after execution during the 60 day period from the

date of this letter; or

(B)

One (1) hour after execution during the 30 day period beginning 60

days from the date of this letter; or

(C)

As quickly after execution as technologically practicable from and

after the date that is 90 days after the date of this letter; and

(ii)

The eligible account manager has agreed to be responsible for any

obligations of the counterparty under the ITBC Swap, whether in the form

of trade breakage costs or as otherwise agreed between the eligible

account manager and the SD or MSP, from execution until the swap is

accepted or rejected for clearing by the counterparty’s clearing member,

an interim clearing member, or the DCO; and

(c)

The SD or MSP and the counterparty (or the counterparty’s duly authorized

representative) have agreed in writing (a “fallback agreement”) that in the event

the ITBC Swap fails to be accepted for clearing by a clearing member or the

DCO:

(i)

The ITBC Swap will be:

(A)

Immediately resubmitted for clearing by the DCO under alternative

arrangements agreed40 in the fallback agreement;

(B)

Void as of execution, with no cost or other amount payable to

either party; or

(C)

Automatically terminated as of the time that the ITBC Swap fails

to clear, with costs or other amounts attributable to such automatic

termination to be payable as agreed between the SD or MSP and

the

counterparty

(or

the

counterparty’s

duly

authorized

representative), if any; and

agreement;

(B)

Void as of execution, with no cost or other amount payable to

either party; or

(C)

Automatically terminated as of the time that the ITBC Swap fails

to clear, with costs or other amounts attributable to such automatic

termination to be payable as agreed between the SD or MSP and

the

counterparty

(or

the

counterparty’s

duly

authorized

representative), if any; and

(ii)

If the ITBC Swap fails to be accepted for clearing by a clearing member or

the DCO under the alternative arrangements agreed in the fallback

agreement, the ITBC Swap will be:

(A)

Void as of execution, with no cost or other amount payable to

either party; or

40 Such alternative arrangements may consist of multiple fallback arrangements (i.e., a so-called “waterfall”) so long

as each fallback is applied immediately upon the failure of the previous fallback and the arrangements have been

agreed in good faith and not with the intention to delay clearing of the ITBC Swap.

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Cleared Swaps

(B)

Automatically terminated as of the time that the ITBC Swap fails

to clear, with costs or other amounts attributable to such automatic

termination to be payable as agreed between the SD or MSP and

the

counterparty

(or

the

counterparty’s

duly

authorized

representative), if any; and

6.

Each SD or MSP that relies on this letter makes and retains a record of each fallback

agreement required by this letter in accordance with Commission regulation § 23.203

(Records; retention and inspection).

For the avoidance of doubt, no SD or MSP may fail to comply with the External BCS or

the swap trading relationship documentation requirements in reliance on this letter unless it shall

first have entered into a fallback agreement that meets the conditions of this letter with the

applicable counterparty (or its duly authorized representative)

ion § 23.203

(Records; retention and inspection).

For the avoidance of doubt, no SD or MSP may fail to comply with the External BCS or

the swap trading relationship documentation requirements in reliance on this letter unless it shall

first have entered into a fallback agreement that meets the conditions of this letter with the

applicable counterparty (or its duly authorized representative).

This letter, and the positions taken herein, represent the view of this 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 persons relying on it

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

Regulations issued thereunder, including all antifraud provisions of the Act. Specifically, 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 representations made to the

Division. Any different, changed or omitted material facts or circumstances might render this

no-action relief void.

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

Frank Fisanich, Chief Counsel, at 202-418-5949.

Very truly yours,

Gary Barnett

Director

Division of Swap Dealer and

Intermediary Oversight

cc:

Regina Thoele, Compliance

National Futures Association, Chicago

or circumstances might render this

no-action relief void.

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

Frank Fisanich, Chief Counsel, at 202-418-5949.

Very truly yours,

Gary Barnett

Director

Division of Swap Dealer and

Intermediary Oversight

cc:

Regina Thoele, Compliance

National Futures Association, Chicago

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Cleared Swaps

APPENDIX A

Specified External BCS Requirements

Commission Regulation

Subject Matter

§ 23.402(b)-(f)

Know your counterparty, True name and

owner, Reasonable reliance on representations,

Manner of disclosure, and Disclosures in a

standard format

§ 23.430

Verification of counterparty eligibility

§ 23.431(a)

Material risks, characteristics, incentives, mid-

market mark

§ 23.431(b)

Scenario analysis

§ 23.431(d)(1)

Notice of right to receive daily mark from

DCO for cleared swaps

§ 23.432(a)

Notice of right to select DCO

§ 23.432(b)

Notice of 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

§ 23.451

Political contributions by certain swap dealers