The Division of Market Oversight is issuing a no-action letter that extends No-Action Letter 14-108 and continues to provide relief from (1) the requirement that a SEF obtain documents that are incorporated by referen...

Summary: The Division of Market Oversight is issuing a no-action letter that extends No-Action Letter 14-108 and continues to provide relief from (1) the requirement that a SEF obtain documents that are incorporated by reference in confirmations issued under Commission Regulation 37.6(b) prior to issuing the confirmation, and (2) the requirement that a SEF maintain such documents as records. In addition, the division is providing relief from the requirement set forth in Commission Regulation 45.3(a) that SEFs report terms contained in the agreements that are confirmation data.

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 15-25

No-Action

April 22, 2015

Division of Market Oversight

Re: Extension of No-Action Relief for SEF Confirmation and Recordkeeping

Requirements under Commission Regulations 37.6(b), 37.1000, 37.1001, and 45.2, and

Additional Relief for Confirmation Data Reporting Requirements under Commission

Regulation 45.3(a)

Ladies and Gentlemen:

On August 14, 2014, the Division of Market Oversight (“Division”) issued CFTC No-

Action Letter 14-108 to provide relief for swap execution facilities (“SEFs”) from confirmation

and recordkeeping requirements set forth in Commission Regulations 37.6(b), 37.1000, 37.1001,

and 45.2. The no-action letter provided that the Division would not recommend enforcement

action against a SEF that, without first obtaining copies of the underlying previously-negotiated

agreements between the counterparties to a non-cleared transaction, incorporates such

agreements by reference in the trade confirmation required under Commission Regulation

37.6(b). The letter also provided that the Division would not recommend enforcement action if a

SEF failed to maintain a copy of the incorporated underlying agreements as required under

Commission Regulations 37.1000, 37.1001, and 45.2(a)

en the counterparties to a non-cleared transaction, incorporates such

agreements by reference in the trade confirmation required under Commission Regulation

37.6(b). The letter also provided that the Division would not recommend enforcement action if a

SEF failed to maintain a copy of the incorporated underlying agreements as required under

Commission Regulations 37.1000, 37.1001, and 45.2(a).

Relief Requested

Absent further action from the Division, No-Action Letter 14-108 will expire on

September 30, 2015. In its letter dated April 15, 2015,1 the Wholesale Markets Brokers’

Association, Americas (“WMBAA”)2 has requested that the relief granted in No-Action Letter

14-108 be extended until March 31, 2016 with the addition of relief from certain swap data

reporting requirements under Commission Regulation 45.3(a)(1). According to WMBAA, the

relief granted in No-Action Letter 14-108 has not eased the operational concerns that prompted

the original request for relief. Due to the complexity of the issue, WMBAA states that SEFs

have been unable to develop a method to request, accept and maintain a library of every

underlying previously-negotiated freestanding agreement between counterparties that is not

cumbersome and cost prohibitive. According to WMBAA, many of these agreements are

maintained in paper form, or scanned PDF files, making them impossible to quickly digitize in a

1 Letter from Wholesale Markets Brokers’ Association Americas, Request for Relief from Certain Requirements

under Parts 37 and 45 Related to Confirmations and Recordkeeping for Swaps Not Required or Intended to be

Cleared (April 15, 2015).

2 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 SEF.

Related to Confirmations and Recordkeeping for Swaps Not Required or Intended to be

Cleared (April 15, 2015).

2 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 SEF.

No-Action Relief for SEF Confirmation and Recordkeeping Requirements

Page 2

cost-effective manner. WMBAA states that the resource cost is considerable when considering

the number of different agreements that exist to accommodate the different parties and different

asset classes. WMBAA believes that SEFs will be unable to comply with Commission

regulations by September 30, 2015, and requests additional time until March 31, 2016, to

develop a solution.

In addition, WMBAA also requests relief from the requirement set forth in Commission

Regulation 45.3(a)(1) that SEFs report terms contained in the underlying previously-negotiated

freestanding agreements that are confirmation data.3 According to WMBAA, because SEFs do

not possess the agreements, SEFs are unable to report terms incorporated by reference from these

agreements. WMBAA requests relief from the reporting obligations until March 31, 2016 to

allow more time to devise a solution to the reporting issues.

Background

Commission Regulation 37.6(b) requires that a SEF “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.”4 In the adopting release for the final part 37 rules, the

Commission expressed that, with respect to non-cleared swaps, SEFs could satisfy the

regulation’s written confirmation requirement by incorporating by reference terms set forth in

agreements previously negotiated by the counterparties, provided that su

ly supersede any previous agreement and serve as

a confirmation of the transaction.”4 In the adopting release for the final part 37 rules, the

Commission expressed that, with respect to non-cleared swaps, SEFs could satisfy the

regulation’s written confirmation requirement by incorporating by reference terms set forth in

agreements previously negotiated by the counterparties, provided that such agreements had been

submitted to the SEF ahead of execution.5

Commission regulations also require that a SEF maintain all agreements that are

incorporated by reference in a confirmation. Commission Regulations 37.1000 and 37.10016

implement the requirement set forth in SEF Core Principle 10 that a SEF maintain records of all

activities relating to the business of the facility, including a complete audit trail.7 Commission

Regulation 45.2(a) also requires that a SEF “keep full, complete, and systematic records,

together with all pertinent data and memoranda, of all activities relating to the business of such

entity or person with respect to swaps, as prescribed by the Commission.”8

3 “Confirmation data” is defined as “all of the terms of a swap matched and agreed upon by the counterparties in

confirming the swap.” 17 C.F.R. §45.1.

4 17 C.F.R. §37.6(b).

5 Core Principles and Other Requirements for Swap Execution Facilities, 78 Fed. Reg. 33,491 n.195 (June 4, 2013)

(the proviso furthers counterparties’ ability “to ensure that nothing in the confirmation terms contradict” the terms

contained in the incorporated agreements).

6 17 C.F.R. §§ 1000, 1001.

7 CEA section 5h(f)(10); 7 U.S.C. 7b–3(f)(10).

8 17 C.F.R. §45.2(a).

. §37.6(b).

5 Core Principles and Other Requirements for Swap Execution Facilities, 78 Fed. Reg. 33,491 n.195 (June 4, 2013)

(the proviso furthers counterparties’ ability “to ensure that nothing in the confirmation terms contradict” the terms

contained in the incorporated agreements).

6 17 C.F.R. §§ 1000, 1001.

7 CEA section 5h(f)(10); 7 U.S.C. 7b–3(f)(10).

8 17 C.F.R. §45.2(a).

No-Action Relief for SEF Confirmation and Recordkeeping Requirements

Page 3

Section 45.3 of the Commission’s regulations requires that registered entities and swap

counterparties report swap creation data to SDRs.9 For swaps executed on or pursuant to the

rules of a SEF or Designated Contract Market (“DCM”), Commission Regulation 45.3(a)(1)

requires the SEF or DCM to report all required swap creation data to an SDR as soon as

technologically practicable after execution of the swap.10 Swap creation data is comprised of all

primary economic terms (“PET”) data for a swap and all confirmation data for a swap.11 The

primary economic terms of a swap are “all the terms of a swap matched or affirmed by the

counterparties in verifying the swap” and include, at a minimum, the terms for swaps in each

asset class found in Appendix 1 to part 45.12 Confirmation data is “all of the terms of a swap

matched and agreed upon by the counterparties in confirming the swap.”13

No-Action Relief

Based on the representations in WMBAA’s request, the Division understands the

difficulty facing SEFs to develop a cost-effective method to request, accept and maintain a

library of every underlying previously-negotiated freestanding agreement between counterparties

by September 30, 2015.14 Accordingly, the Division has determined to extend the no-action

relief provided in No-Action Letter 14-108

ed on the representations in WMBAA’s request, the Division understands the

difficulty facing SEFs to develop a cost-effective method to request, accept and maintain a

library of every underlying previously-negotiated freestanding agreement between counterparties

by September 30, 2015.14 Accordingly, the Division has determined to extend the no-action

relief provided in No-Action Letter 14-108. During the extended period of relief, the Division

will not recommend that the Commission take enforcement action if, in a confirmation provided

pursuant to Commission Regulation 37.6(b), a SEF incorporates by reference terms from

previously-negotiated agreements between the counterparties, without first having been supplied

copies of such agreements. The Division also will not recommend that the Commission take

enforcement action against a SEF for failure to maintain a copy of the agreements incorporated

by reference in the SEF’s confirmation, as required under Commission Regulations 37.1000,

37.1001 and 45.2(a).

Additionally, based on the representations in WMBAA’s request, the Division

understands that SEFs are unable to report confirmation data contained solely in the terms of the

underlying agreements that are incorporated by reference in the SEF’s 37.6(b) confirmation

because the SEFs do not possess the agreements. Accordingly, the Division will not recommend

that the Commission take enforcement action against a SEF for failure to report such terms as

confirmation data pursuant to Commission Regulation 45.3(a). However, a SEF must continue

to report all terms the SEF is currently reporting pursuant to part 45 of the Commission’s

9 17 C.F.R. §45.3.

10 17 C.F.R. § 45.3(a)(1).

11 17 C.F.R. §45.1 (“Required swap creation data means all primary economic terms data for a swap in the swap

asset class in question, and all confirmation data for the swap.”).

12 Id. (definition of “primary economic terms”).

13 Id

F is currently reporting pursuant to part 45 of the Commission’s

9 17 C.F.R. §45.3.

10 17 C.F.R. § 45.3(a)(1).

11 17 C.F.R. §45.1 (“Required swap creation data means all primary economic terms data for a swap in the swap

asset class in question, and all confirmation data for the swap.”).

12 Id. (definition of “primary economic terms”).

13 Id. (definition of “confirmation data”).

14 These agreements may include, but are not limited to, the International Swaps and Derivatives Association Master

Agreement, the Schedule to the Master Agreement, and the Credit Support Annex to the Master Agreement.

No-Action Relief for SEF Confirmation and Recordkeeping Requirements

Page 4

regulations as of the time of the issuance of this letter, even if such terms are contained in the

incorporated agreements.

This relief applies only to non-cleared swap transactions executed on or pursuant to the rules

of a SEF and is subject to the following conditions:

1. The SEF must have a rule in its rulebook that requires a SEF confirmation to

state, where applicable, that it incorporates by reference the terms of the

underlying previously-negotiated freestanding agreements between the

counterparties.

2. The SEF must have a rule in its rulebook that states that in the event of any

inconsistency between a SEF confirmation and the underlying previously-

negotiated freestanding agreements, the terms of the SEF confirmation legally

supersede any contradictory terms; and the SEF must also have a rule that

requires the SEF’s confirmations to state the same.

3. The SEF must have a rule in its rulebook that requires its participants to provide

copies of the underlying previously-negotiated freestanding agreements to the

SEF on request.

4

usly-

negotiated freestanding agreements, the terms of the SEF confirmation legally

supersede any contradictory terms; and the SEF must also have a rule that

requires the SEF’s confirmations to state the same.

3. The SEF must have a rule in its rulebook that requires its participants to provide

copies of the underlying previously-negotiated freestanding agreements to the

SEF on request.

4. The SEF must have a rule in its rulebook that requires the SEF to request from

participants the underlying previously-negotiated freestanding agreements on

request from the Commission and requires the SEF to furnish such documents to

the Commission as soon as they are available.

5. A SEF must continue to report all PET data as is required under section 45.3(a)(1)

of the Commission’s regulations. For the purposes of this relief, the data that a

SEF must still report pursuant to section 45.3(a)(1) includes, at a minimum:

a. All PET data required to be reported pursuant to Commission Regulation

45. This includes the specific terms listed in the Tables of Minimum

Primary Economic Terms Data in Appendix 1 to Part 45 of the

Commission’s regulations, as applicable to the particular swap;

b. All swap data that is readily available to the SEF and collected by the SEF

currently in the regular course of facilitating the execution of transactions

on its facility, or in the regular course of accepting transactions that

counterparties execute off of the SEF facility pursuant to the rules of the

SEF;

c. All swap data the SEF currently reports to any SDR in the regular course

of reporting swaps pursuant to Commission regulations; and

d. All swap data the SEF includes in the confirmation it sends to swap

counterparties pursuant to section 37.6(b) of the Commission’s regulations

that is not incorporated by reference from the underlying previously-

negotiated freestanding agreements.

SEF;

c. All swap data the SEF currently reports to any SDR in the regular course

of reporting swaps pursuant to Commission regulations; and

d. All swap data the SEF includes in the confirmation it sends to swap

counterparties pursuant to section 37.6(b) of the Commission’s regulations

that is not incorporated by reference from the underlying previously-

negotiated freestanding agreements.

No-Action Relief for SEF Confirmation and Recordkeeping Requirements

Page 5

6. For purposes of this relief, as of the time of issuance of this letter, a SEF may not

modify its trading systems or protocols,15 its reporting to an SDR (including

reporting via a third-party service provider), nor its confirmation process pursuant

to Commission Regulation 37.6(b) in a way that reduces the amount of PET data

it reports. The Division notes that a SEF is free to increase the amount of PET

data it reports.

The relief shall expire at 11:59pm, Eastern Daylight Time, on March 31, 2016.

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 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. As with all no-

action letters, the Division retains the authority to condition further, modify, suspend, terminate

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

ken 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. As with all no-

action letters, the Division retains 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; Dan Bucsa, Deputy Director, Division of Market Oversight, at (202) 418-

5435 or DBucsa@cftc.gov; Jonathan Lave, Associate Director, Division of Market Oversight, at

(202) 418-5983 or jlave@cftc.gov; or Ben DeMaria, Special Counsel, Division of Market

Oversight, at (202) 418-5988 or BDeMaria@cftc.gov.

Sincerely,

Vincent A. McGonagle

Director

Division of Market Oversight

15 The Division notes that changes to SEF trading protocols fall within the definition of “Rule” in section 40.1 of the

Commission’s regulations. See 17 C.F.R. § 40.1(i) (the definition of “Rule”). As a result, any changes to SEF

trading systems or protocols require a filing with the Commission pursuant to section 40.5 or 40.6 of the

Commission’s regulations. See 17 C.F.R. §§ 40.5 and 40.6.