The CFTC adopted  new rules and amendments codifying previous no-action relief concerning the execution of "package transactions" and the correction of "error trades" on swap execution facilities ("SEFs").

The final rulemaking amends CFTC Rules Part 36 ("Trade Execution Requirement") and Part 37 ("Swap Execution Facilities" or "SEFs") to, among other things:

  • codify CFTC Letter 20-31 to permit the swap components of certain types of "package transactions" to be carried on SEFs through "flexible means of execution" instead of through the execution methods required pursuant to CFTC Rule 37.9 ("Methods of Execution for Required and Permitted Transactions");
  • exempt from the trade execution requirements those swap transactions executed as part of a package transaction that includes a new issuance bond; and
  • codify the "intent" of CFTC Letters 17-27 and 20-01 to establish a "principles-based" approach for SEF error trade policies to allow for methods of execution other than those currently permitted under the CFTC Rules.

The rule changes will go into effect 60 days after publication in the Federal Register.

Commissioner Statements

CFTC Chair Heath P. Tarbert expressed  support for allowing swap components of package transactions to trade through any execution method. Mr. Tarbert stated that this approach "recognizes the progress made toward centralized exchange-type trading for swaps without forcing the market too far ahead of its natural evolutionary process." Mr. Tarbert noted that the final rules were related to his recent directive to limit the use of staff no-action letters solely to "supplement rulemakings" rather than to "function as rules." Mr. Tarbert stated that he would support finalizing additional rules with respect to SEFs and other CFTC priorities where there was a "broad-based consensus of market participants and stakeholders."

CFTC Commissioner Brian Quintenz noted that the amendments "will facilitate the prompt identification and correction of error trades" and help to "minimiz[e] market participants' exposure to market credit, and operational risks." He also wants the CFTC to "promptly" finalize additional rules with respect to SEFs, including on (i) the SEF financial resources requirement and (ii) the codification of an exemption for swaps between affiliated counterparties.

CFTC Commissioner Dan Berkovitz said the final rules were "cost-effective" and responded to the "Congressional goal of promoting the trading of swaps on SEFs." He highlighted the "tailored nature," appropriate safeguards and regulatory flexibility of the rules.

Commentary

The final rules follow the previously proposed language. The CFTC largely declined to take on commenters' suggestions to expand the scope of what would be codified. For example, the CFTC declined to address made-available-to-trade swaps + futures packages, noting that those types of packages were not part of the proposal and that staff relief related to those packages in Letter 20-31 remains in effect.

Primary Sources

  1. CFTC Final Rule: Swap Execution Facility Requirements
  2. CFTC Press Release: CFTC Unanimously Approves Final Rule Amending Swap Execution Facility Requirements
  3. CFTC Statement, Heath P. Tarbert: Statement in Support of Final Rule on Swap Execution Facilities
  4. CFTC Statement, Brian D. Quintenz: Statement regarding Swap Execution Facility Requirements
  5. CFTC Statement, Dan M. Berkovitz: Statement on Codification of Certain Swap Execution Facility Requirements; Final Rule

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