No-action letter stating that the Division will not recommend that the Commission commence an enforcement action against a swap execution facility (“SEF”) that does not satisfy the minimum trading functionality requir...

Summary: No-action letter stating that the Division will not recommend that the Commission commence an enforcement action against a swap execution facility (“SEF”) that does not satisfy the minimum trading functionality requirement set forth in Commission regulation 37.3(a)(2) by offering an order book as defined in Commission regulation 37.3(a)(3) (an “Order Book”), in connection with swap transactions executed on the SEF that are not subject to the trade execution requirement in Commodity Exchange Act (“CEA” or “Act”) section 2(h)(8) (“Permitted Transactions”).

CFTC LETTER NO. 25-24 NO-ACTION JULY 30, 2025

Rahul Varma

Acting Director

Re:

No-Action Position with Respect to the Swap Execution Facility Minimum Trading

Functionality under Commission Regulation 37.3(a)(2)

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

(“Commission”) is issuing this letter in response to a request dated June 30, 2025 from LSEG

FX SEF, operated by Refinitiv US SEF LLC (“LSEG SEF”),1 pursuant to Commission

Regulation 140.99.2

LSEG SEF requested that the Division issue a no-action letter stating that the Division will not

recommend that the Commission commence an enforcement action against a swap execution

facility (“SEF”) that does not satisfy the minimum trading functionality requirement set forth in

Commission regulation 37.3(a)(2) by offering an order book as defined in Commission

regulation 37.3(a)(3) (an “Order Book”), in connection with swap transactions executed on the

SEF that are not subject to the trade execution requirement in Commodity Exchange Act

(“CEA” or “Act”) section 2(h)(8) (“Permitted Transactions”).3

I

satisfy the minimum trading functionality requirement set forth in

Commission regulation 37.3(a)(2) by offering an order book as defined in Commission

regulation 37.3(a)(3) (an “Order Book”), in connection with swap transactions executed on the

SEF that are not subject to the trade execution requirement in Commodity Exchange Act

(“CEA” or “Act”) section 2(h)(8) (“Permitted Transactions”).3

I.

Background

In 2013, the Commission issued final rules pursuant to section 5h of the CEA requiring entities

that satisfy the definition of a SEF to register with the Commission,4 and prescribing certain

requirements for registered SEFs, including the minimum trading functionality requirement set

forth in Commission regulation 37.3(a)(2) (“Minimum Trading Functionality

Requirement”).5 Commission regulation 37.3(a)(2) states that “A swap execution facility shall,

1 LSEG SEF, Request for Relief from Minimum Trading Functionality for Swap Execution Facilities (June 30,

2025) (“LSEG SEF Request Letter”).

2 17 C.F.R. § 140.99.

3 “Permitted transaction” is defined in Commission regulation 37.9(c)(1) as “any transaction not involving a swap

that is subject to the trade execution requirement in section 2(h)(8) of the Act.” 17 C.F.R. § 37.9(c)(1). “Required

transaction” is defined in Commission regulation 37.9(a)(1) as “any transaction involving a swap that is subject to

the trade execution requirement in section 2(h)(8) of the Act.” 17 C.F.R. § 37.9(a)(1).

4 A “swap execution facility” is defined in CEA section 1a(50) as a trading system or platform in which multiple

participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in

the facility or system, through any means of interstate commerce, including any trading facility, that (A) facilitates

the execution of swaps between persons, and (B) is not a designated contract market. 7 U.S.C. § 1a(50)

1a(50) as a trading system or platform in which multiple

participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in

the facility or system, through any means of interstate commerce, including any trading facility, that (A) facilitates

the execution of swaps between persons, and (B) is not a designated contract market. 7 U.S.C. § 1a(50).

5 Core Principles and Other Requirements for Swap Execution Facilities; Final Rule, 78 FR 33476 (June 4, 2013)

(the “SEF Final Rules”).

CFTC Logo, COMMODITY FUTURES TRADING COMMISSION, Three Layfette Centre, 1155 21st Street, NW, Washington, DC 20581; Telephone (202) 418-5000

Division of

Market Oversight

2

at a minimum, offer an Order Book as defined in paragraph (a)(3) of this section.”6 Commission

regulation 37.3(a)(3) defines an Order Book as:

(i) An electronic trading facility, as that term is defined in section 1a(16) of the

Act;7

(ii) A trading facility, as that term is defined in section 1a(51) of the Act;8 or

(iii) A trading system or platform in which all market participants in the trading

system or platform have the ability to enter multiple bids and offers, observe or

receive bids and offers entered by other market participants, and transact on such

bids and offers.9

In describing the purpose of the Minimum Trading Functionality Requirement, the Commission

stated in the adopting release for the SEF Final Rules that “the Commission believes that an

Order Book, as defined in final § 37.3(a)(3), is consistent with the SEF definition and promotes

the goals provided in section 733 of the Dodd-Frank Act,”10 and explained that those goals are to

“promote the trading of swaps on [SEFs] and to promote pre-trade price transparency in the

swaps market.”11 The Commission also stated that “[t]he order book requirement is designed to

ensure a base level of pre-trade transparency to all market participants by providing for live

executable bids and offers in Required Transactions.”12

In 2018, t

k Act,”10 and explained that those goals are to

“promote the trading of swaps on [SEFs] and to promote pre-trade price transparency in the

swaps market.”11 The Commission also stated that “[t]he order book requirement is designed to

ensure a base level of pre-trade transparency to all market participants by providing for live

executable bids and offers in Required Transactions.”12

In 2018, the Commission proposed amendments to the Final SEF Rules, including amendments

to eliminate the Minimum Trading Functionality Requirement.13 The Commission noted in the

proposing release that “market participants have rarely used Order Books to trade swaps on SEFs

despite their availability for all swaps listed by SEFs,” and that “other execution methods may be

better suited to maximizing participation and concentrating liquidity formation on SEFs in

episodically liquid swaps markets.”14 The Commission ultimately finalized certain aspects of the

6 17 C.F.R. § 37.3(a)(2).

7 An “electronic trading facility” is defined in CEA section 1a(16) as a trading facility that: (A) operates by means of

an electronic or telecommunications network; and (B) maintains an automated audit trail of bids, offers, and the

matching of orders or the execution of transactions on the facility. 7 U.S.C. § 1a(16).

8 Subject to specified exclusions, a “trading facility” is defined in CEA section 1a(51) as a person or group of

persons that constitutes, maintains, or provides a physical or electronic facility or system in which multiple

participants have the ability to execute or trade agreements, contracts, or transactions: (i) by accepting bids or offers

made by other participants that are open to multiple participants in the facility or system; or (ii) through the

interaction of multiple bids or multiple offers within a system with a predetermined non-discretionary automated

trade matching and execution algorithm. 7 U.S.C. § 1a(51).

9 17 C.F.R. § 37.3(a)(3).

10 SEF Final Rules at 33484.

11 Id. at 33484 fn.113.

12 Id

cepting bids or offers

made by other participants that are open to multiple participants in the facility or system; or (ii) through the

interaction of multiple bids or multiple offers within a system with a predetermined non-discretionary automated

trade matching and execution algorithm. 7 U.S.C. § 1a(51).

9 17 C.F.R. § 37.3(a)(3).

10 SEF Final Rules at 33484.

11 Id. at 33484 fn.113.

12 Id. at 33564.

13 Swap Execution Facilities and Trade Execution Requirement; Proposed Rule, 83 FR 61946 (Nov. 30, 2018)

(“2018 SEF Proposal”).

14 2018 SEF Proposal at 61964.

3

2018 SEF Proposal,15 but determined at the time not to finalize the elimination of the Minimum

Trading Functionality Requirement.16

II.

Requested No-Action Position

As noted above, the Commission has explained that the goals of the Minimum Trading

Functionality Requirement are to promote the trading of swaps on SEFs and to promote pre-trade

price transparency in the swaps market. LSEG SEF states that, while “well-intentioned,”17

requiring SEFs to maintain an Order Book for Permitted Transactions “has neither increased

trading on SEFs nor improved pre-trade price transparency, yet the requirement to offer and

maintain an Order Book for all products listed on a SEF imposes significant costs on SEFs.”18

LSEG SEF states that this, in turn, “diverts resources that could be used for developing new

technologies or methods of execution that participants will actually use, which would better

achieve the Commission’s stated goals of imposing the [Minimum Trading Functionality

Requirement].”19

LSEG SEF notes that the Commission believed in 2013 that requiring a SEF to offer an Order

Book for all products listed on the SEF “would have the tendency to shift liquidity from the

over-the-counter bilateral markets onto SEFs,”20 and that this belief was “based in part on

experiences with the securities and futures markets, where ‘order books attract participation from

new and alternate sources of liquidity, including participants using auto

that requiring a SEF to offer an Order

Book for all products listed on the SEF “would have the tendency to shift liquidity from the

over-the-counter bilateral markets onto SEFs,”20 and that this belief was “based in part on

experiences with the securities and futures markets, where ‘order books attract participation from

new and alternate sources of liquidity, including participants using automated trading

strategies’.”21 However, LSEG SEF argues that during the several years since SEFs have been

registered with the Commission, Order Books have not attracted liquidity onto SEFs, in part due

to differences between the securities and futures markets and the swaps market.22

LSEG SEF states that “Order Books are seldom used, particularly for Permitted Transactions.”23

In this regard, LSEG SEF represents that “during the entire time that LSEG SEF’s Order Book

has been operational (i.e., prior to obtaining temporary registration status in 2013), not a single

trade has been executed on, nor any orders submitted to, LSEG SEF’s Order Book.”24

15 See Exemptions From Swap Trade Execution Requirement; Final Rule, 86 FR 8993 (Feb. 11, 2021); and Swap

Execution Facilities; Final Rule, 86 FR 9224 (Feb. 11, 2021).

16 See Swap Execution Facilities and Trade Execution Requirement; Proposed Rule; Partial Withdrawal, 86 FR 9304

(Feb. 12, 2021).

17 LSEG SEF Request Letter at 2.

18 Id. at 1.

19 Id.

20 Id at 2. See also SEF Final Rules at 33565 (“These provisions will facilitate the shifting of trading to the

centralized SEF market structure from the bilateral OTC market structure. . . .”).

21 LSEG SEF Request Letter at 2, citing the SEF Final Rules at 33561.

22 LSEG SEF Request Letter at 2, fn. 6.

23 Id. LSEG SEF points, for example, to the 2018 SEF Proposal, which cited studies finding that “[d]epending on the

product involved .

(“These provisions will facilitate the shifting of trading to the

centralized SEF market structure from the bilateral OTC market structure. . . .”).

21 LSEG SEF Request Letter at 2, citing the SEF Final Rules at 33561.

22 LSEG SEF Request Letter at 2, fn. 6.

23 Id. LSEG SEF points, for example, to the 2018 SEF Proposal, which cited studies finding that “[d]epending on the

product involved . . ., order book trading typically ranges between ‘less than [one percent] to less than [three

percent] of total [credit default swap] transactions’ on SEFs, while order book trading constitutes between ‘less than

[one percent] to approximately [twenty percent] of total [interest rate swap] transactions.’” 2018 SEF Proposal at

61964. LSEG SEF further suggests that Order Book usage in other swap asset classes is likely even less due to the

lower levels of liquidity in such asset other classes. LSEG SEF Request at 2.

24 Id. at 2-3. LSEG SEF offers foreign exchange (“FX”) non-deliverable forwards (“NDFs”) and FX options for

trading on its SEF. SEF transactions in FX NDFs and FX options are Permitted Transactions.

4

Further, LSEG SEF argues that “the past 12 years’ of experience has shown that the [Minimum

Trading Functionality Requirement] makes SEF trading less efficient, thus disincentivizing SEF

trading.”25 LSEG SEF states that, while the costs to offer and maintain an Order Book vary,

creating an Order Book typically requires a significant outlay of resources, both in terms of

financial cost and staff hours.26 LSEG SEF additionally states that it expends significant

resources each year to maintain its Order Book.27 Moreover, LSEG SEF represents that “SEFs

must periodically upgrade the systems and hardware necessary to run an Order Book,” which is

also costly.28 As such, LSEG SEF submits that “the requirement to offer and maintain a seldom

(if ever) used Order Book requires SEF participants to effectively pay for systems that they will

rarely, if ever, use and restricts SEFs’ ability to d

Order Book.27 Moreover, LSEG SEF represents that “SEFs

must periodically upgrade the systems and hardware necessary to run an Order Book,” which is

also costly.28 As such, LSEG SEF submits that “the requirement to offer and maintain a seldom

(if ever) used Order Book requires SEF participants to effectively pay for systems that they will

rarely, if ever, use and restricts SEFs’ ability to develop new offerings that would attract

additional participants and actually encourage more trading on SEFs.”29

LSEG SEF argues that “the CEA … does not require SEFs to offer or maintain an Order

Book.”30 LSEG SEF states that while the definition of a “SEF” references the term “trading

facility,”31 which is generally understood to be an order book,32 “the SEF definition states only

that a SEF includes a trading facility that facilitates the execution of swaps and is not a

designated contract market[,]” thus indicating “that a SEF can have an Order Book but [is] not

required to do so.”33

Overall, LSEG SEF argues that “the [Minimum Trading Functionality Requirement] does not

result in greater transparency and has not contributed to shifting swaps-market liquidity onto

SEFs.”34 Instead, LSEG SEF believes that the Minimum Trading Functionality Requirement

“imposes significant costs on SEFs that divert time and resources away from efforts that could be

much more effective at accomplishing those goals.”35

III.

No-Action Position

Based on the foregoing – including the Commission’s observation in the 2018 SEF Proposal to

eliminate the Minimum Trading Functionality Requirement that “market participants have rarely

used Order Books to trade swaps on SEFs despite their availability for all swaps listed by

SEFs,”36 and that “other execution methods may be better suited to maximizing participation and

concentrating liquidity formation on SEFs in episodically liquid swaps markets”37 – and the

representations of LSEG SEF, the Division believes that a reconsideration should be undertaken

25 Id. at 3.

26 Id

used Order Books to trade swaps on SEFs despite their availability for all swaps listed by

SEFs,”36 and that “other execution methods may be better suited to maximizing participation and

concentrating liquidity formation on SEFs in episodically liquid swaps markets”37 – and the

representations of LSEG SEF, the Division believes that a reconsideration should be undertaken

25 Id. at 3.

26 Id.

27 Id.

28 Id.

29 Id.

30 Id at 3-4.

31 See note 4, supra.

32 See note 8, supra.

33 LSEG SEF Request Letter at 4.

34 Id.

35 Id.

36 2018 SEF Proposal at 61964. See also note 23, supra.

37 Id. Further, the 2018 SEF Proposal notes that the Commission in the SEF Final Rules “acknowledged that the

Order Book functionality does not have the requisite flexibility to serve as the ideal method of execution for a

variety of swaps, in particular those that feature lower levels of liquidity.” Id. (citing to SEF Final Rules at 33564-

65).

5

of the usefulness and effectiveness of the Minimum Trading Functionality Requirement in

connection with Permitted Transactions,38 and thus believes that a no-action position is

warranted until such time that such reconsideration is completed. Accordingly, the Division will

not recommend that the Commission commence an enforcement action against a SEF for failure

to satisfy the Minimum Trading Functionality Requirement in connection with Permitted

Transactions. This no-action position will continue until the adoption of a Commission action

addressing the Minimum Trading Functionality Requirement in connection with Permitted

Transactions.

IV.

Conclusion

This letter, and the positions taken herein, represent only the views of the Division, and do not

necessarily represent the positions or views of the Commission or of any other office or division

of the Commission. This letter and the no-action positions taken herein are not binding on the

Commission or other Commission staff

ment in connection with Permitted

Transactions.

IV.

Conclusion

This letter, and the positions taken herein, represent only the views of the Division, and do not

necessarily represent the positions or views of the Commission or of any other office or division

of the Commission. This letter and the no-action positions taken herein are not binding on the

Commission or other Commission staff. The positions provided in this letter do not excuse

persons relying on it from compliance with any other applicable requirements contained in the

Act, Commission regulations, or any other applicable laws (i.e., securities laws). Further, this

letter, and the positions taken herein, are based upon the facts and circumstances presented to

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

this letter void. Finally, as with all staff letters, the Division retains the authority to condition

further, modify, suspend, terminate, or otherwise restrict the terms of the positions herein, in its

discretion.

If you have any questions concerning this correspondence, please contact Roger Smith, Division

of Market Oversight, at (202) 418-5344 or rsmith@cftc.gov, or Nora Flood, Division of Market

Oversight, at (202) 418-6059 or nflood@cftc.gov.

Sincerely,

____________________

Rahul Varma

Acting Director

Division of Market Oversight

38 Such as consideration of LSEG SEF’s argument that Minimum Trading Functionality Requirement for Permitted

Transactions should be eliminated. See LSEG Request Letter at 4 (“[e]liminating the [Minimum Trading

Functionality Requirement] for Permitted Transactions would therefore create efficiencies in SEF trading and

functionality without detriment to swap market participants or the Commission”).