Time-limited no-action relief granted by DMO to swap execution facilities (SEFs) for incorporating by reference previously-negotiated freestanding agreements into SEF-generated confirmations for uncleared swap transac...

Summary: Time-limited no-action relief granted by DMO to swap execution facilities (SEFs) for incorporating by reference previously-negotiated freestanding agreements into SEF-generated confirmations for uncleared swap transactions, executed on or pursuant to the rules of a SEF, without the SEF receiving the freestanding agreements prior to execution or maintaining them afterwards, as required in sections 36.7(b) and 45.2(a) of the Commission’s regulations.

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5000

Facsimile: (202) 418-5521

www.cftc.gov

CFTC Letter No. 14-108

No-Action

August 18, 2014

Division of Market Oversight

Re:

Staff No-Action Position Regarding SEF Confirmations and Recordkeeping

Requirements under Certain Provisions Included in Regulations 37.6(b) and 45.2

This letter responds to requests received from multiple parties1 by the Division of Market

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

“Commission”) for no-action relief from the confirmation provisions in Commission regulation

37.6(b)2 and the portions of Part 37 of the Commission’s regulations that discuss the

incorporation of terms by reference in these confirmations.3 As set forth below, the Division is

granting conditional time-limited no-action relief.

Background

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the

“Dodd-Frank Act”)4 amended the Commodity Exchange Act (“CEA”)5 to establish a

comprehensive new regulatory framework for swaps

tions that discuss the

incorporation of terms by reference in these confirmations.3 As set forth below, the Division is

granting conditional time-limited no-action relief.

Background

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the

“Dodd-Frank Act”)4 amended the Commodity Exchange Act (“CEA”)5 to establish a

comprehensive new regulatory framework for swaps. Among other responsibilities, CEA

section 5h requires the Commission to promulgate rules for swap execution facilities (“SEFs”).6

Part 37 of the Commission’s regulations contains the general provisions governing SEFs,

including the fifteen Core Principles.7

1 This letter responds to no-action relief requested in, among others, the following: (1) Jointly-submitted Letter

from Bloomberg SEF LLC, ICE Swap Trade, LLC, INFX SEF, Inc., MarketAxess SEF Corporation, SwapEx, LLC,

TeraExchange, LLC, 360T Trading Networks Inc., Thomson Reuters (SEF) LLC, and Global FX Division of the

Global Financial Markets Association (GFMA), Request for Time-Limited No-Action Relief Relating to

Confirmations for Swaps Not Required or Intended to Clear (March 7, 2014); (2) Letter from the International

Swaps and Derivatives Association, Inc. (ISDA), Request for Relief for Confirmation Requirements under Part 37

for Swaps Executed on Swap Execution Facilities (March 10, 2014); and (3) Letter from Wholesale Markets’

Brokers Association Americas, Request for Relief from Certain Requirements under Parts 37 and 45 Related to

Trade Confirmations for Swaps Not Required or Intended to be Cleared (March 12, 2014). Notwithstanding the

scope of relief sought in any of these particular requests, relief is limited to that provided herein.

2 17 C.F.R. § 37.6(b) (2013).

3 See Core Principles and Other Requirements for Swap Execution Facilities, 78 Fed. Reg. 33491-92 (June 4, 2013).

4 Pub. L. 111-203, 124 Stat. 1376 (2010).

5 7 U.S.C. 1, et seq. (2012)

6 CEA § 5h; 7 U.S.C

o be Cleared (March 12, 2014). Notwithstanding the

scope of relief sought in any of these particular requests, relief is limited to that provided herein.

2 17 C.F.R. § 37.6(b) (2013).

3 See Core Principles and Other Requirements for Swap Execution Facilities, 78 Fed. Reg. 33491-92 (June 4, 2013).

4 Pub. L. 111-203, 124 Stat. 1376 (2010).

5 7 U.S.C. 1, et seq. (2012)

6 CEA § 5h; 7 U.S.C. 7b-3 (2012).

7 17 C.F.R. part 37 (2013).

August 18, 2014

Page 2

Among the requirements for a SEF is the duty under Commission regulation 37.6(b) to

“provide each counterparty to a transaction that is entered into on or pursuant to the rules of the

[SEF] with a written record of all of the terms of the transaction which shall legally supersede

any previous agreement and serve as a confirmation of the transaction”8 (the “Confirmation”).

Section 37.6(b) requires the Confirmation to take place at the same time as execution.9

The preamble to the Part 37 final rules (“Preamble”) discusses the reasoning behind the

confirmation requirement in Section 37.6(b).10 The Commission requires, for uncleared

transactions executed on or pursuant to the rules of a SEF, that the SEF “must have all terms,

including possible long-term credit support arrangements, agreed to no later than execution, such

that the SEF can provide a written confirmation inclusive of those terms at the time of execution

and report complete, non-duplicative, and non-contradictory data to an SDR as soon as

technologically practicable after execution.”11 This requirement “is necessary to provide market

participants who execute swap transactions on or pursuant to the rules of a SEF with legal

certainty with respect to such transactions, and to promote the Commission’s policy goals of

achieving ‘straight-through processing’ of swap transactions in order to facilitate orderly

markets, whether bilateral or facility traded.”12

Footnote 195 in the Preamble 13 (“Footnote 195”) observes that there is “no reason, under

certain specified

s on or pursuant to the rules of a SEF with legal

certainty with respect to such transactions, and to promote the Commission’s policy goals of

achieving ‘straight-through processing’ of swap transactions in order to facilitate orderly

markets, whether bilateral or facility traded.”12

Footnote 195 in the Preamble 13 (“Footnote 195”) observes that there is “no reason, under

certain specified circumstances, why a SEF’s written confirmation agreement cannot incorporate

by reference the privately negotiated terms from a freestanding master agreement. 14 Though

Footnote 195 only cites the incorporation by reference of master agreements, staff notes that

other previously-negotiated freestanding agreements and templates similarly may contain swap

transaction terms relevant to the Confirmation. Therefore, staff anticipates that SEFs may

incorporate swap transaction terms from these agreements. In order to incorporate by reference

terms from these freestanding agreements, staff expects that the agreement containing the terms

to be incorporated must be “submitted to the SEF ahead of execution” and that the counterparties

ensure that nothing in the confirmation terms contradicts the standardized terms intended to be

incorporated from the agreement, as provided in Footnote 195.15

Requested Relief

8 17 C.F.R. §37.6(b).

9 Id.

10 78 Fed. Reg. at 33491-92.

11 Id. at 33491.

12 Id. at 33491-92.

13 Id. at 33491, FN 195.

14 Id. (The relevant text of footnote 195 states “There is no reason why a SEF’s written confirmation terms cannot

incorporate by reference the privately negotiated terms of a freestanding master agreement for these types of

transactions, provided that the master agreement is submitted to the SEF ahead of execution and the

counterparties ensure that nothing in the confirmation terms contradict the standardized terms intended to be

incorporated from the master agreement.”).

15 Id.

onfirmation terms cannot

incorporate by reference the privately negotiated terms of a freestanding master agreement for these types of

transactions, provided that the master agreement is submitted to the SEF ahead of execution and the

counterparties ensure that nothing in the confirmation terms contradict the standardized terms intended to be

incorporated from the master agreement.”).

15 Id.

August 18, 2014

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The requesting parties raised questions regarding compliance obligations under

Commission regulation 37.6(b) generally and the interaction of this regulation with other

Commission regulations, including Part 45. Each requesting party proposed no-action relief

suspending enforcement of Section 37.6 for various periods of time.

Requesting parties stated, for example, that not all SEFs are prepared to issue

confirmations that include all terms of a swap transaction. Some participants stated that SEFs do

not have access to the relevant non-economic terms of the transaction, and it is not clear how

SEFs will be able to access the ISDA Master Agreements that contain terms that need to be

included in the Confirmation, such as ISDA templates, definitions, and the terms negotiated by

the counterparties with respect to the templates and definitions. Requestors also sought

clarification as to which individual terms must be included in the Confirmation and requested

time to standardize terms to be included in a Confirmation. Requesting parties were particularly

concerned that the lack of certainty over what terms must be included in a Confirmation would

lead to legal uncertainty over the terms of executed transactions, because the terms in the

Confirmation legally supersede any contradictory terms.

The requesting parties therefore have requested no-action relief from the requirements of

Commission regulation 37.6(b), as well as Commission regulation 45.2

at the lack of certainty over what terms must be included in a Confirmation would

lead to legal uncertainty over the terms of executed transactions, because the terms in the

Confirmation legally supersede any contradictory terms.

The requesting parties therefore have requested no-action relief from the requirements of

Commission regulation 37.6(b), as well as Commission regulation 45.2.

Discussion

Under Commission regulation 37.6(b), all terms of the swap transaction are required to

be included in the Confirmation. Terms included in other documents governing the transaction

are not superseded by the Confirmation if such terms do not conflict with the swap terms

included in the Confirmation. However, if specific terms of the swap transaction conflict with

specific terms from the previously-negotiated freestanding agreement(s), the swap terms will

legally supersede the conflicting previously-negotiated terms incorporated by reference from

such agreements. Further, all transaction terms included in previously-negotiated freestanding

agreements existing at the time of execution of the swap transaction shall be superseded by the

Confirmation unless they are not expressly included, or incorporated by reference in the

Confirmation.

In regard to the interaction of Commission regulations 37.6(b) and 45.3, SEFs have an

obligation to report swap confirmation data to an SDR under Part 45 of the Commission’s

regulations. Some market participants have asserted to the Commission that the Primary

Economic Terms (“PET”) of a swap transaction alone should be sufficient to satisfy the “all the

terms of the transaction” requirement of Section 37.6(b).16 However, the terms that must be

included in the Confirmation under Section 37.6, include terms that are not primary economic

16 17 C.F.R

nts have asserted to the Commission that the Primary

Economic Terms (“PET”) of a swap transaction alone should be sufficient to satisfy the “all the

terms of the transaction” requirement of Section 37.6(b).16 However, the terms that must be

included in the Confirmation under Section 37.6, include terms that are not primary economic

16 17 C.F.R. § 37.6(b) (“A swap execution facility shall provide each counterparty to a transaction that is entered

into on or pursuant to the rules of the swap execution facility with a written record of all of the terms of the

transaction which shall legally supersede any previous agreement and serve as a confirmation of the

transaction.”)

August 18, 2014

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terms of the transaction. Examples of such terms include, but are not limited to, the date of the

confirmation, the type of agreement (i.e., ISDA Master, CSA, etc.), additional information

regarding settlement, additional payment details, options exercise, maturity and definitional

terms.

For uncleared swaps executed on or pursuant to the rules of a SEF, Commission

regulation 45.3(a)(1) requires that the SEF “report all required swap creation data, as soon as

technologically practicable after execution of the swap. This report must include all

confirmation data for the swap…and all primary economic terms data for the swap, as defined in

§ 45.1.” Section 45.1 defines “Required Swap Creation Data” (or “Creation Data”) to include all

confirmation data for the swap…and all primary economic terms data for the swap.17 The same

section also defines “Primary Economic Terms” as “all of the terms of a swap matched or

affirmed by the counterparties in verifying the swap.…”18 In addition, § 45.1 defines

“Confirmation Data” as “all of the terms of a swap matched and agreed upon by the

counterparties in confirming the swap.”19

Where a SEF has incorporated the swap’s governing documents by reference into the

Confirmation under Commission regulati

y Economic Terms” as “all of the terms of a swap matched or

affirmed by the counterparties in verifying the swap.…”18 In addition, § 45.1 defines

“Confirmation Data” as “all of the terms of a swap matched and agreed upon by the

counterparties in confirming the swap.”19

Where a SEF has incorporated the swap’s governing documents by reference into the

Confirmation under Commission regulation 37.6(b), the SEF must glean all confirmation data

from the terms of the incorporated documents and report the confirmation data to an SDR. The

specific individual terms contained in the referenced documents would be included in the

confirmation data that the SEF must report. The Confirmation Data reporting requirement of

Section 45.3(a)(1) resulting from creation of the Section 37.6(b) Confirmation includes

additional terms that are not reportable to an SDR as PET. Further, the preamble to the Part 37

Notice of Final Rulemaking also indicates that the SEF’s Confirmation should contain all of the

terms of the transaction, “including possible long-term credit support arrangements.”20 The

terms included in long-term credit support agreements, if not “matched and affirmed by the

counterparties in verifying the swap,” are not required to be reported as PET data, but are

required to be reported as confirmation data.

Conditional Time-Limited No-Action Relief

As described in more detail below, the Division will grant time-limited no-action relief to

a SEF,21 in the context of uncleared swap transactions executed on or pursuant to the rules of the

SEF, from the following requirements:

17 17 C.F.R. § 45.1 (2013) (definition of “Required Swap Creation Data”).

18 17 C.F.R. § 45.1 (2013) (definition of “Primary Economic Terms”).

19 17 C.F.R. § 45.1 (2013) (definition of “Confirmation Data”).

20 78 Fed. Reg. at 33491

of uncleared swap transactions executed on or pursuant to the rules of the

SEF, from the following requirements:

17 17 C.F.R. § 45.1 (2013) (definition of “Required Swap Creation Data”).

18 17 C.F.R. § 45.1 (2013) (definition of “Primary Economic Terms”).

19 17 C.F.R. § 45.1 (2013) (definition of “Confirmation Data”).

20 78 Fed. Reg. at 33491.

21 An entity not registered with the Commission as a SEF, but reporting swap transaction data to an SDR in the time

and manner as a SEF would report consistent with parts 43 and 45 of Commission regulations, as a condition of

existing no-action relief, such as Qualifying Multilateral Trading Facilities under CFTC NAL 14-46, may rely

on the relief with associated conditions provided in this Letter.

August 18, 2014

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(1) Requirement that freestanding previously-negotiated agreements incorporated

by reference into the Confirmation are submitted to the SEF prior to execution of the

relevant swap transaction.22

During the period of relief, the Division will not recommend that the Commission take

enforcement action if a SEF incorporates terms from underlying previously-negotiated

freestanding agreements of the counterparties by reference into the Confirmation generated and

transmitted to the counterparties to a swap transaction as required under Commission regulation

37.6(b), without copies of the underlying previously-negotiated freestanding agreements being

submitted to the SEF prior to execution of the swap transaction.23 A SEF must still provide a

Confirmation as required under Commission regulation 37.6(b). This relief is conditioned upon

all previously-negotiated freestanding agreements incorporated by reference into the

Confirmations being available to Commission staff upon request within a reasonable period of

time. This relief only applies to uncleared swap transactions executed on or pursuant to the rules

of the SEF

l provide a

Confirmation as required under Commission regulation 37.6(b). This relief is conditioned upon

all previously-negotiated freestanding agreements incorporated by reference into the

Confirmations being available to Commission staff upon request within a reasonable period of

time. This relief only applies to uncleared swap transactions executed on or pursuant to the rules

of the SEF. The relief provided in this paragraph shall expire at midnight, Eastern Standard

Time, on September 30, 2015.

(2) Requirement that SEF keep a record of the documents incorporated by

reference in the Confirmation pursuant to §§ 37.1000, 37.1001, and 45.2(a) of the

Commission’s regulations.

During the period of relief, the Division will not recommend that the Commission take

enforcement action against a SEF for failure to receive or maintain a copy of the documents

incorporated by reference in the SEF’s Confirmation as a record currently required under

Commission regulations 37.1000, 37.1001, and 45.2(a). This relief is conditioned upon the

documentation being available to Commission staff upon request within a reasonable period of

time. This relief only applies to uncleared transactions executed on or pursuant to the rules of

the SEF. The relief provided in this paragraph shall expire at midnight, Eastern Standard

Time, on September 30, 2015.24

This letter, and the no-action positions taken herein, represent the views of the Division

only, and do not necessarily represent the positions or views of the Commission or of any other

division or office of the Commission’s staff. The no-action positions taken herein do not excuse

affected persons from compliance with any other applicable requirements of the Commodity

Exchange Act or the Commission’s regulations thereunder. As with all no-action letters, the

Division retains the authority to further condition, modify, suspend, terminate, or otherwise

restrict the terms of the no-action relief provided herein, in its discretion

ction positions taken herein do not excuse

affected persons from compliance with any other applicable requirements of the Commodity

Exchange Act or the Commission’s regulations thereunder. As with all no-action letters, the

Division retains the authority to further condition, modify, suspend, terminate, or otherwise

restrict the terms of the no-action relief provided herein, in its discretion.

If you have any questions concerning this correspondence, please contact Laurie Gussow,

Special Counsel, Division of Market Oversight, at (202) 418-7623 or lgussow@cftc.gov; Ben

22 See 78 Fed. Reg. at 33491, FN 195.

23 See id. (Currently, the agreements to be incorporated by reference must be submitted to the SEF prior to

execution).

24 Although broader relief was requested from the recordkeeping and reporting requirements of Part 45, the Division

finds it appropriate, in this letter, to limit the relief solely to those specific matters addressed herein.

August 18, 2014

Page 6

DeMaria, Attorney Advisor, Division of Market Oversight, at (202) 418-5988 or

bdemaria@cftc.gov; or David P. Van Wagner, Chief Counsel, Division of Market Oversight, at

(202) 418-5481 or dvanwagner@cftc.gov.

Sincerely,

Vincent A. McGonagle

Director

Division of Market Oversight