The Division of Market Oversight and the Division of Clearing and Risk are issuing a no-action letter that provides relief similar to that provided in No-Action Letters 13-66 and 14-50 by permitting swap execution fac...

Summary: The Division of Market Oversight and the Division of Clearing and Risk are issuing a no-action letter that provides relief similar to that provided in No-Action Letters 13-66 and 14-50 by permitting swap execution facilities (SEFs) and designated contract markets (DCMs) to address clerical or operational errors that cause a swap to be rejected from clearing. The relief provided in this letter also permits SEFs and DCMS to address clerical or operational errors discovered after a swap has been cleared.

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 15-24

No-Action

April 22, 2015

Division of Market Oversight

Division of Clearing and Risk

Re: No-Action Relief for Swap Execution Facilities and Designated Contract Markets in

Connection with Swaps with Operational or Clerical Errors Executed on a Swap

Execution Facility or Designated Contract Market

Ladies and Gentlemen:

This letter responds to a request received by the Division of Market Oversight and the

Division of Clearing and Risk (together, the “Divisions”) of the Commodity Futures Trading

Commission (the “Commission”) from the Wholesale Markets Brokers’ Association,

Americas (“WMBAA”)1 for no-action relief for swap execution facilities (“SEFs”) from certain

of the requirements under Commission Regulations 37.9(a)(2) and 37.203(a)2 to enable SEFs to

correct clerical or operational errors of swaps that have been rejected for clearing and separately

to correct operational or clerical errors identified after clearing.3 The no-action relief, which

applies to SEFs and designated contract markets (“DCMs”),4 shall commence on the date of

issuance of this letter and shall expire at 11:59 p.m. (Eastern Time) June 15, 2016

03(a)2 to enable SEFs to

correct clerical or operational errors of swaps that have been rejected for clearing and separately

to correct operational or clerical errors identified after clearing.3 The no-action relief, which

applies to SEFs and designated contract markets (“DCMs”),4 shall commence on the date of

issuance of this letter and shall expire at 11:59 p.m. (Eastern Time) June 15, 2016.

Background

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

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

comprehensive new regulatory framework for swaps. Among other things, CEA section 2(h)(8)

requires that transactions involving swaps subject to the CEA section 2(h)(1) clearing

requirement be executed on or pursuant to the rules of a DCM or SEF, unless no DCM or SEF

1 WMBAA is an independent industry body that represents BGC Derivatives Markets, L.P., GFI

Swaps Exchange LLC, ICAP SEF (US) LLC, ICAP Global Derivatives LTD, tpSEF, Inc., and

Tradition SEF, Inc. Each of the WMBAA member firms is temporarily registered with the

Commission as a swap execution facility.

2 See 17 C.F.R. §§ 37.9(a)(2) and 37.203(a).

3 Staff construes operational or clerical errors to mean any type of error. Transactions that are

rejected from clearing for credit reasons are not covered by this relief.

4 Consistent with the Divisions’ previous action in No-Action Letter 14-50 (April 18, 2014), this

no-action letter also extends the relief provided herein to DCMs from the requirements under

Commission Regulations 38.152 and 38.500. See 17 C.F.R. §§ 38.152 and 38.500.

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

hat are

rejected from clearing for credit reasons are not covered by this relief.

4 Consistent with the Divisions’ previous action in No-Action Letter 14-50 (April 18, 2014), this

no-action letter also extends the relief provided herein to DCMs from the requirements under

Commission Regulations 38.152 and 38.500. See 17 C.F.R. §§ 38.152 and 38.500.

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

No Action Relief for Swap Operational or Clerical Errors

Page 2

makes such swaps available to trade or such swaps qualify for the clearing exception under CEA

section 2(h)(7) (the “trade execution requirement”).6

On June 4, 2013, the Commission published regulations governing SEFs.7 Under

Commission Regulation 37.9(a)(2), a swap that is subject to the trade execution requirement

(referred to as a “Required Transaction”) and is not a block trade, as defined under Commission

Regulation 43.2,8 shall be executed on a SEF through either (1) an Order Book, as defined in

Commission Regulation 37.3(a)(3)9 or (2) a Request for Quote System, as defined in

Commission Regulation 37.9(a)(3),10 that operates in conjunction with an Order Book.

Commission Regulation 37.203(a) requires that a SEF prohibit certain abusive trading practices,

including pre-arranged trading (except for block trades or other types of transactions certified to

or approved by the Commission, pursuant to Part 40 of the Commission’s regulations).

On April 9, 2012, the Commission published regulations governing DCMs that impose

similar requirements.11 Under Commission Regulation 38.152, a DCM must prohibit abusive

trading practices on its markets by members and market participants including, among other

things, pre-arranged trading

ions certified to

or approved by the Commission, pursuant to Part 40 of the Commission’s regulations).

On April 9, 2012, the Commission published regulations governing DCMs that impose

similar requirements.11 Under Commission Regulation 38.152, a DCM must prohibit abusive

trading practices on its markets by members and market participants including, among other

things, pre-arranged trading. Commission Regulation 38.500 requires, with limited exceptions,

that trades on a DCM be competitively executed as it requires a DCM to provide a competitive,

open and efficient market and a mechanism for executing transactions that protects the price

discovery process of trading in the centralized market.

On April 9, 2012, the Commission also published regulations governing the clearing of

swaps, including the timing of acceptance for clearing.12 Commission Regulations 1.74, 23.610

and 39.12(b)(7)13 set forth time frames for futures commission merchants (“FCMs”), swap

dealers (“SDs”), major swap participants (“MSPs”) and derivatives clearing organizations

(“DCOs”), respectively, to accept or reject a trade for clearing.14 These regulations require that a

trade be submitted and accepted or rejected for clearing as quickly as would be technologically

practicable as if fully automated systems were used.

Finally, on September 26, 2013, the Divisions issued Staff Guidance on Swaps Straight-

Through Processing (“Staff Guidance”). The Staff Guidance stated, among other things, that: (a)

6 7 U.S.C. § 2(h)(8).

7 Core Principles and Other Requirements for Swap Execution Facilities, 78 Fed. Reg. 33,476

(June 4, 2013).

8 See 17 C.F.R. § 43.2.

9 See 17 C.F.R. § 37.3(a)(3).

10 See 17 C.F.R. § 37.9(a)(3).

11 Core Principles and Other Requirements for Designated Contract Markets, 77 Fed. Reg.

33,612 (June 19, 2012).

12 See Customer Clearing Documentation, Timing of Acceptance for Clearing, and Clearing

Member Risk Management, 77 Fed. Reg

ts for Swap Execution Facilities, 78 Fed. Reg. 33,476

(June 4, 2013).

8 See 17 C.F.R. § 43.2.

9 See 17 C.F.R. § 37.3(a)(3).

10 See 17 C.F.R. § 37.9(a)(3).

11 Core Principles and Other Requirements for Designated Contract Markets, 77 Fed. Reg.

33,612 (June 19, 2012).

12 See Customer Clearing Documentation, Timing of Acceptance for Clearing, and Clearing

Member Risk Management, 77 Fed. Reg. 21,278 (Apr. 9, 2012).

13 See 17 C.F.R. §§ 1.74, 23.610, and 39.12(b)(7), respectively.

14 See id. at 21,285.

No Action Relief for Swap Operational or Clerical Errors

Page 3

FCMs must screen orders for execution on a SEF pursuant to either Commission Regulations

1.73(a)(2)(i) or (ii), regardless of the method of execution;15 (b) pursuant to Commission

Regulation 37.702(b), each SEF must make it possible for clearing FCMs to screen as required

by Regulation 1.73 on an order-by-order basis;16 (c) SEFs must have rules stating that trades that

are rejected from clearing are void ab initio;17 and (d) SEFs, FCMs, SDs and MSPs may not

require breakage agreements as a condition for trading swaps intended for clearing on a SEF.18

After issuing the Staff Guidance, the Divisions were informed by market participants that

some swap trades are rejected by a DCO because of operational or clerical errors that are readily

correctable. For example, some clearing submissions fail to match on a material economic term

due to an operational error; the trades are then rejected from clearing and deemed void ab initio

n a SEF.18

After issuing the Staff Guidance, the Divisions were informed by market participants that

some swap trades are rejected by a DCO because of operational or clerical errors that are readily

correctable. For example, some clearing submissions fail to match on a material economic term

due to an operational error; the trades are then rejected from clearing and deemed void ab initio.

In response, on October 25, 2013, the Divisions issued No-Action Letter 13-66 providing time

limited relief from Commission Regulation 37.9(a)(2), regarding methods of execution for

required transactions, and Regulation 37.203(a), prohibiting pre-arranged trading, if, after a trade

has been rejected for clearing, a SEF permits a new trade between the original parties, with terms

and conditions that match the terms and conditions of the original trade, other than any such

error and the time of execution, to be submitted for clearing without having been executed

pursuant to the methods set forth in Regulation 37.9(a)(2).19 On April 18, 2014, the Commission

provided similar relief to DCMs until June 30, 2014.20 Both letters expired on June 30, 2014.

Market participants also informed the Divisions that issues could arise because DCOs

clear package transactions on a leg-by-leg basis rather than clearing all legs simultaneously.21

As a result, there may be an operational error in which an individual leg of a package transaction

may be rejected by a DCO because the risk of the leg, measured in isolation, could cause a trader

to exceed its credit limit; however, if the legs had been submitted in a different sequence or had

been cleared simultaneously, the net risk may not have exceeded the credit limit and no legs

would have been rejected

e may be an operational error in which an individual leg of a package transaction

may be rejected by a DCO because the risk of the leg, measured in isolation, could cause a trader

to exceed its credit limit; however, if the legs had been submitted in a different sequence or had

been cleared simultaneously, the net risk may not have exceeded the credit limit and no legs

would have been rejected. On May 1, 2014, the Divisions issued No-Action Letter 14-62, which

in part permitted SEFs and DCMs to establish a “new trade, old terms” procedure for legs of a

package transaction that had been rejected from clearing because of the sequencing of the

15 Staff Guidance at 2.

16 Id. at 3

17 Id. at 6.

18 Id.

19 No-Action Letter 13-66 (Oct. 25, 2013).

20 No-Action Letter 14-50 (Apr. 18, 2014).

21 For purposes of this letter, a “package transaction” is a transaction involving two or more

instruments: (1) that is executed between two or more counterparties; (2) that is priced or quoted

as one economic transaction with simultaneous or near simultaneous execution of all

components; (3) that has at least one component that is a swap that is made available to trade and

therefore is subject to the CEA section 2(h)(8) trade execution requirement; and (4) where the

execution of each component is contingent upon the execution of all other components.

No Action Relief for Swap Operational or Clerical Errors

Page 4

submission of the legs.22 On September 30, 2014, the Divisions issued No-Action Letter 14-121,

which extended that relief granted in No-Action Letter 14-62 until February 16, 2015.23

Requested Relief

In its no-action request, WMBAA indicates that the industry continues to work on

solutions to reduce operational and clerical errors but that, at this time, trades continue to be

rejected as void ab initio because of readily correctable operational or clerical errors

ion Letter 14-121,

which extended that relief granted in No-Action Letter 14-62 until February 16, 2015.23

Requested Relief

In its no-action request, WMBAA indicates that the industry continues to work on

solutions to reduce operational and clerical errors but that, at this time, trades continue to be

rejected as void ab initio because of readily correctable operational or clerical errors. WMBAA

requests that the relief provided in No-Action Letter 13-66 be reinstated to provide additional

time for SEFs to develop solutions for such errors.

WMBAA also indicates that because trades are required to be submitted for clearing

immediately after execution, counterparties to a transaction may not have an opportunity to

identify an error until after the transaction has cleared.

If an error is identified after a swap has cleared, any correction or cancellation necessarily

would have to be undertaken by the DCO because only the DCO is able to make corrections or

cancellations to swaps carried on its books. According to WMBAA, some DCOs decline or are

unable to correct or cancel the swaps carried on their books. As a result, to undo a cleared

erroneous swap, counterparties must arrange and execute a transaction that offsets the swaps

carried on the DCO’s books and, if the parties desire, execute a new transaction that reflects the

correct terms agreed to by the counterparties. Similar to the no-action relief provided in No-

Action Letter 13-66, WMBAA seeks time limited no-action relief from Commission Regulation

37.9(a)(2) regarding methods of execution for required transactions and Regulation 37.203(a)’s

prohibition of pre-arranged trading, so that a SEF may permit counterparties to undo an

erroneous cleared swap by executing a pre-arranged trade that offsets the swaps carried on the

DCO’s books, without requiring that trade to be executed pursuant to the methods set forth in

Regulation 37.9(a)(2)

n

37.9(a)(2) regarding methods of execution for required transactions and Regulation 37.203(a)’s

prohibition of pre-arranged trading, so that a SEF may permit counterparties to undo an

erroneous cleared swap by executing a pre-arranged trade that offsets the swaps carried on the

DCO’s books, without requiring that trade to be executed pursuant to the methods set forth in

Regulation 37.9(a)(2).

No-Action Relief

The Divisions are issuing this no-action letter to provide relief similar to that provided in

No-Action Letters 13-66 and 14-50 and to permit a similar procedure to be followed in situations

where an error is not discovered until after a swap has been cleared. Specifically, subject to the

conditions listed below, the Divisions will not recommend that the Commission take any

enforcement action against a SEF for failure to comply with Commission Regulation 37.9(a)(2)

or against a DCM for failure to comply with Commission Regulation 38.500, regarding methods

of execution or to comply with Commission Regulations’ 37.203 and 38.152 prohibition against

pre-arranged trading if, after a trade has been rejected for clearing, the SEF or DCM permits a

new trade, with terms and conditions that match the terms and conditions of the original trade,

22 No-Action Letter 14-62 (May 1, 2014).

23 No-Action Letter 14-121 (Sep. 30, 2014).

No Action Relief for Swap Operational or Clerical Errors

Page 5

other than any such error and time of execution, to be submitted for clearing without having been

executed pursuant to methods set forth in Commission Regulations 37.9(a)(2) or 38.500.

The Divisions also will provide this relief to the situation where an error is not discovered

until after a swap has been cleared

, 2014).

No Action Relief for Swap Operational or Clerical Errors

Page 5

other than any such error and time of execution, to be submitted for clearing without having been

executed pursuant to methods set forth in Commission Regulations 37.9(a)(2) or 38.500.

The Divisions also will provide this relief to the situation where an error is not discovered

until after a swap has been cleared. Thus, relief is provided to a SEF or a DCM if, after a trade

has been cleared and an error is discovered, the SEF or DCM permits a prearranged trade

between the original parties that offsets the swaps carried on the DCO’s books, without that trade

having been executed pursuant to the methods required in Commission Regulations 37.9(a)(2)

and 38.500. The SEF or DCM may also permit the original or intended24 counterparties to enter

into a pre-arranged transaction that reflects the terms to which the parties mutually assented

without that trade having been executed pursuant to the methods set forth in Commission

Regulations 37.9(a)(2) and 38.500.

This relief is subject to the following conditions:

1. The pre-arranged transactions subject to this relief must be only (1) for the correction

of an operational or clerical error or omission made by the SEF, DCM, one of the

counterparties, or an agent of one of the counterparties that causes a trade to be

rejected from clearing and void ab initio, or (2) for the purpose of offsetting swaps

carried on a DCO’s books where a clerical or operational error or omission made by

the SEF, DCM, counterparty, or an agent of the counterparty is not identified until

after the trade has been cleared. In the latter situation, a new transaction that corrects

the errors in the original transaction also is subject to this relief.25

2

void ab initio, or (2) for the purpose of offsetting swaps

carried on a DCO’s books where a clerical or operational error or omission made by

the SEF, DCM, counterparty, or an agent of the counterparty is not identified until

after the trade has been cleared. In the latter situation, a new transaction that corrects

the errors in the original transaction also is subject to this relief.25

2. The SEF or DCM must have error trade rules that are consistent with Commission

regulations and provide for trade price adjustments or trade cancellations and rules

that are transparent to the market and subject to standards that are clear, fair and

publicly available. Further, consistent with the obligations of SEFs and DCMs to

prevent market abuses, such standards should account for whether a transaction

cancellation or price adjustment will adversely impact market integrity, facilitate

market manipulation or other illegitimate activity, or otherwise violate the CEA,

Commission regulations, or the SEF’s or DCM’s rules.

24 In certain instances, the wrong legal entity may be assigned as a counterparty to a trade. The

relief will allow the swap with the wrong counterparties to be undone and the execution of a new

swap with the correct counterparties.

25 Staff notes that the relief will apply to the leg of a package transaction that is rejected from

clearing or for which an error is discovered after the leg has been cleared. Accordingly, this

letter provides relief similar to that provided in No-Action Letter 14-121 and a SEF or DCM may

establish a “new trade, old terms” procedure for legs of a package transaction that had been

rejected from clearing because of the sequencing of the submission of the legs. This relief does

not apply to the legs of a package that have been accepted for clearing.

as been cleared. Accordingly, this

letter provides relief similar to that provided in No-Action Letter 14-121 and a SEF or DCM may

establish a “new trade, old terms” procedure for legs of a package transaction that had been

rejected from clearing because of the sequencing of the submission of the legs. This relief does

not apply to the legs of a package that have been accepted for clearing.

No Action Relief for Swap Operational or Clerical Errors

Page 6

3. For swaps rejected for non-credit reasons, the new trade must be executed on the SEF

or DCM and submitted for clearing as quickly as technologically practicable after

receipt of notice of the rejection by the DCO to the clearing members, but, in any

event, no later than one hour from the issuance of the notice.26 For erroneous cleared

swaps, the trade to offset the swaps carried on the DCO’s books and the new

transaction that corrects the errors in the original transaction must be executed and

submitted for clearing no later than three days after the erroneous cleared swap was

executed.

4. The SEF or DCM must have rules setting forth the conditions, if any, under which it

will determine that an error has occurred, and the procedures it will follow to execute

a trade subject to the relief set forth in this letter. The rules must provide that if the

facility is able to determine how to correct an error, the facility will execute the new

trades without obtaining consent from the counterparties. The rules must also provide

what the facility will do if it is unable to determine how to correct an error. The

facility may either not fix the error, or it may seek guidance on how to address the

error from the counterparties. Any such guidance may not be implemented without

consent from both counterparties.

5

execute the new

trades without obtaining consent from the counterparties. The rules must also provide

what the facility will do if it is unable to determine how to correct an error. The

facility may either not fix the error, or it may seek guidance on how to address the

error from the counterparties. Any such guidance may not be implemented without

consent from both counterparties.

5. With respect to swaps rejected from clearing for non-credit reasons, if the new

transaction that corrects the errors in the original transaction is also rejected for

clearing, it is void ab initio and the parties will not be provided a second opportunity

to submit a new trade subject to the relief provided herein.27

6. In making its determination whether to permit the execution of a trade subject to this

relief, a SEF or DCM must make an affirmative finding that the trade or some term

therein resulted from an error.28

7. The SEF or DCM must report the swap transaction data to the relevant swap data

repository (“SDR”) as soon as technologically practicable after the original trade is

rejected by the DCO, including:

i. A part 43 cancellation for the original trade;

26 No-Action Letter 13-66 provided 30 minutes for the execution of a new swap. Staff has

increased the time frame to 60 minutes in response to requests from market participants for such

time.

27 As explained in the Staff Guidance, all trades executed on or subject to the rules of a SEF or

DCM that are rejected from clearing, whether for credit or non-credit reasons, are void ab initio.

This no-action letter allows for the submission of a new trade with the old terms, correcting for

the error, for non-credit rejections. However, submission of a second new trade with the original

old terms is not permissible.

28 A SEF is not required to keep any additional records with respect to conditions four and six.

learing, whether for credit or non-credit reasons, are void ab initio.

This no-action letter allows for the submission of a new trade with the old terms, correcting for

the error, for non-credit rejections. However, submission of a second new trade with the original

old terms is not permissible.

28 A SEF is not required to keep any additional records with respect to conditions four and six.

No Action Relief for Swap Operational or Clerical Errors

Page 7

ii. A part 45 termination indicating that the original trade is void ab initio; and

iii. Swap transaction data pursuant to Parts 43 and 45 for the newly executed trade(s).

Staff reminds SEFs and DCMs that both the erroneous trade and any subsequent trade

subject to the relief in this letter must be subject to pre-execution credit checks that comply with

Commission Regulation 1.73 and/or Regulation 23.609 and the Staff Guidance. In addition, both

the erroneous trade and any subsequent trade subject to relief in this letter must be processed in

accordance with the time frames set forth in Commission Regulations 1.74, 23.610, 39.12(b)(7),

43.3(e), 45.14, and the Staff Guidance.

This no-action relief shall commence on the date of issuance of this letter and shall expire

on June 15, 2016. Staff expects that SEFs, DCMs and market participants will use this time to

reduce the frequency of errors.

Market participants should be aware that the no-action positions taken herein do not

excuse affected persons from compliance with any other applicable requirements of the CEA or

the Commission’s regulations thereunder, in particular, the applicable swap data reporting

requirements and clearing requirements. This letter, and the no-action positions taken herein,

represent the views of the Divisions 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

able requirements of the CEA or

the Commission’s regulations thereunder, in particular, the applicable swap data reporting

requirements and clearing requirements. This letter, and the no-action positions taken herein,

represent the views of the Divisions 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. As with all no-

action letters, the Divisions retain the authority to condition further, 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 Nancy

Markowitz, Deputy Director, Division of Market Oversight, at (202) 418-5453 or

nmarkowitz@cftc.gov, or Jonathan Lave, Associate Director, Division of Market Oversight, at

(202) 418-5983 or jlave@cftc.gov.

Sincerely,

Vincent A. McGonagle

Phyllis P. Dietz

Director

Acting Director

Division of Market Oversight

Division of Clearing and Risk