DMO and DCR are extending the relief provided in CFTC Letter No. 15-24 and enabling SEFs and DCMs to address clerical and operational errors.

Summary: DMO and DCR are extending the relief provided in CFTC Letter No. 15-24 and enabling SEFs and DCMs to address clerical and operational errors.

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 16-58

No-Action

June 10, 2016

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 from the Wholesale Markets Brokers’

Association, Americas ( “WMBAA”)1 that the Division of Market Oversight and the Division of

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

(“CFTC” or “Commission”) extend the relief provided under CFTC Letter No. 15-24, which will

expire on 11:59 p.m. (Eastern Time) June 15, 2016. In its request, the WMBAA contends that

despite swap execution facility (“SEF”) efforts to continue to work on solutions to reduce

operational and clerical errors,2 market participants continue to encounter circumstances in

which a trade is rejected from clearing due to a readily correctible clerical or operational error,

resulting in void ab initio treatment, or an error is discovered after a trade has been cleared. The

WMBAA does not believe it is likely that market participants will be able to entirely eliminate

operational and clerical errors. The WMBAA encourages the Commission to adopt, via a

rulemaking, a permanent, practicable process for addressing these types of errors. The WMBAA

further requests that, until such permanent solution is achieved, the existing no-action relief be

extended

eared. The

WMBAA does not believe it is likely that market participants will be able to entirely eliminate

operational and clerical errors. The WMBAA encourages the Commission to adopt, via a

rulemaking, a permanent, practicable process for addressing these types of errors. The WMBAA

further requests that, until such permanent solution is achieved, the existing no-action relief be

extended.

The Divisions continue to consider a permanent solution to clerical and operational

errors and, until such permanent solution is achieved, the Divisions will extend the no-action

relief provided under CFTC Letter No. 15-24 to SEFs and designated contract markets

(“DCMs”)3 until the earlier of (1) 11:59 pm (Eastern Time) June 15, 2017 or (2) the effective

date of revised Commission regulations that establish a permanent relief.

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

Exchange LLC; tpSEF, Inc.; and Tradition SEF, Inc. Each of these WMBAA member firms is registered with the

Commission as a SEF.

2 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.

3 Consistent with the Divisions’ previous action in CFTC Letter No. 15-24 (April 22, 2015), 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.

rs to mean any type of error. Transactions that are rejected from clearing

for credit reasons are not covered by this relief.

3 Consistent with the Divisions’ previous action in CFTC Letter No. 15-24 (April 22, 2015), 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.

No-Action Relief for Swap Operational or Clerical Errors

Page 2

Background

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act4 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 makes such swaps available to trade or such swaps

qualify for the clearing exception under CEA section 2(h)(7) (the “trade execution

requirement”).5

On June 4, 2013, the Commission published regulations governing SEFs.6 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 43.2,7 shall be executed on a SEF through either (1) an Order Book, as defined in

Commission Regulation 37.3(a)(3)8 or (2) a Request for Quote System, as defined in

Commission Regulation 37.9(a)(3),9 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)

for Quote System, as defined in

Commission Regulation 37.9(a)(3),9 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.10 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.11 Commission Regulations 1.74, 23.610

and 39.12(b)(7)12 set forth time frames for futures commission merchants (“FCMs”), swap

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

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

5 7 U.S.C. § 2(h)(8).

6 Core Principles and Other Requirements for Swap Execution Facilities, 78 Fed. Reg. 33,476 (June 4, 2013).

7 See 17 C.F.R. § 43.2.

8 See 17 C.F.R. § 37.3(a)(3).

9 See 17 C.F.R. § 37.9(a)(3).

10 Core Principles and Other Requirements for Designated Contract Markets, 77 Fed. Reg. 33,612 (June 19, 2012).

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

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

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

§ 43.2.

8 See 17 C.F.R. § 37.3(a)(3).

9 See 17 C.F.R. § 37.9(a)(3).

10 Core Principles and Other Requirements for Designated Contract Markets, 77 Fed. Reg. 33,612 (June 19, 2012).

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

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

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

No-Action Relief for Swap Operational or Clerical Errors

Page 3

(“DCOs”), respectively, to accept or reject a trade for clearing.13 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”).14 The Staff Guidance stated, among other things, that:

(a) 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.

In response, on October 25, 2013, the Divisions issued CFTC Letter No

ormed 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 CFTC Letter No. 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 Divisions

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

13 See id. at 21,285.

14 See Staff Guidance on Swaps Straight-Through Processing (Sep. 26 2013) contained at

http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/stpguidance.pdf.

15 Staff Guidance at 2.

16 Id. at 3

17 Id. at 6.

18 Id.

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

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

ence or had

13 See id. at 21,285.

14 See Staff Guidance on Swaps Straight-Through Processing (Sep. 26 2013) contained at

http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/stpguidance.pdf.

15 Staff Guidance at 2.

16 Id. at 3

17 Id. at 6.

18 Id.

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

20 CFTC Letter No. 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

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 CFTC Letter No.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 submission of the legs.22

On September 30, 2014, the Divisions issued CFTC Letter No. 14-121, which extended the relief

granted in CFTC Letter No. 14-62. The relief expired on February 16, 2015.23

In response to a request from the WMBAA, on April 22, 2015, the Divisions issued

CFTC Letter No. 15-24, which reinstated the relief provided by CFTC Letter No. 14-121

use of the sequencing of the submission of the legs.22

On September 30, 2014, the Divisions issued CFTC Letter No. 14-121, which extended the relief

granted in CFTC Letter No. 14-62. The relief expired on February 16, 2015.23

In response to a request from the WMBAA, on April 22, 2015, the Divisions issued

CFTC Letter No. 15-24, which reinstated the relief provided by CFTC Letter No. 14-121.

Subject to the conditions listed therein, the letter provided that the Divisions would not

recommend that the Commission take any enforcement action against a SEF or DCM for failure

to comply with Commission Regulations’ 37.9(a)(2) and 38.500 required methods of execution

or Commission Regulations’ 37.203 and 38.152 prohibition against pre-arranged trading if, after

a trade had been rejected for clearing, the SEF or DCM corrected an error by permitting a new,

pre-arranged trade with terms and conditions that matched the terms and conditions of the

original trade, 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 provided relief in the case of an operational or clerical error that was

not discovered until after a swap had been cleared. Thus, relief was provided to a SEF or a DCM

if, after a trade had been cleared and an error discovered, the SEF or DCM permitted a pre-

arranged trade between the original parties that offset the erroneous 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 could also permit the original or

intended24 counterparties to enter into a pre-arranged transaction that reflected the terms to which

the parties had mutually assented without that trade having been executed pursuant to the

methods set forth in Commission Regulations 37.9(a)(2) and 38.500

xecuted pursuant to the methods required in Commission

Regulations 37.9(a)(2) and 38.500. The SEF or DCM could also permit the original or

intended24 counterparties to enter into a pre-arranged transaction that reflected the terms to which

the parties had mutually assented without that trade having been executed pursuant to the

methods set forth in Commission Regulations 37.9(a)(2) and 38.500.

Requested Relief

As noted above, in its no-action request, the WMBAA states, that despite SEF’s efforts,

market participants continue to encounter circumstances in which a trade is rejected from

clearing due to a readily correctible clerical or operational error or an error is discovered after a

trade has been cleared. As the WMBAA does not believe that market participants will be able to

entirely eliminate operational and clerical errors, it encourages the Commission to adopt, via a

rulemaking, a permanent, practicable process for modifying previously-executed and cleared

22 CFTC Letter No. 14-62 (May 1, 2014). The letter expired September 30, 2014.

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

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.

No-Action Relief for Swap Operational or Clerical Errors

Page 5

swaps. Until there is a permanent solution, the WMBAA requests extending the existing no-

action relief.

No-Action Relief

The Divisions are issuing this no-action letter to extend the relief provided in CFTC

Letter 15-24

e wrong counterparties to be undone and the execution of a new swap with the correct counterparties.

No-Action Relief for Swap Operational or Clerical Errors

Page 5

swaps. Until there is a permanent solution, the WMBAA requests extending the existing no-

action relief.

No-Action Relief

The Divisions are issuing this no-action letter to extend the relief provided in CFTC

Letter 15-24. 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 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 relief in the case of an operational or clerical error that 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 pre-

arranged 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 intended

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

ng 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 intended

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. 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

25 Consistent with the prior no-action letter, relief also will be extended to 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. However, this relief

only will apply to the leg with an error and will not apply to the other legs of the package that have been accepted

for clearing and do not contain errors.

Consistent with the prior no-action letter, relief also will be extended to 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. However, this relief

only will apply to the leg with an error and will not apply to the other legs of the package that have been accepted

for clearing and do not contain errors.

No-Action Relief for Swap Operational or Clerical Errors

Page 6

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.

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. 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

M 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

c

onsent 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.26

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.27

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:

26 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.

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

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.

27 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

i. A part 43 cancellation for the original trade;

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 the earlier of (1) 11:59 pm (Eastern Time) June 15, 2017 or (2) the effective date of revised

Commission regulations that establish a permanent solution to addressing clerical or operational

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

ns that establish a permanent solution to addressing clerical or operational

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. 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

Director

Division of Market Oversight

Jeffrey M. Bandman

Acting Director

Division of Clearing and Risk