CFTC Issues Guidance, Exemptions In Advance of SEF Rule Compliance Date

Staff responds to industry concerns and confusion surrounding SEF operations and onboarding.

One of the key aspects of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) is the trade execution requirement, under which the execution of certain swaps transactions will be required to take place on open, transparent platforms. The trade execution requirement states that if a swap is subject to the clearing mandate (meaning it must be centrally cleared unless an exception from clearing, such as the end-user exception, is available), and any swap execution facility (SEF) or designated contract market (DCM) makes it “available to trade,” then it must be traded on a SEF or DCM. Although no swaps have yet been designated as “made available to trade” and the effectiveness of the trade execution requirement is thus likely several months away, the establishment of SEFs as new marketplaces for swap trading, along with revisions to DCM regulations to accommodate the new rules for swaps and other statutory changes, is creating fundamental changes in the trading market for swaps.

Although DCMs, which are the major commodity and futures exchanges, already existed when Congress adopted the Dodd-Frank Act, SEFs per se did not exist. The Dodd-Frank Act defined a “swap execution facility” as any facility or platform “in which more than one market participant has the ability to execute or trade swaps with more than one other market participant.”1 Because of this definition, SEFs are sometimes referred to as “multiple-to-multiple” platforms, meaning that they can be used by multiple buy-side participants and by multiple sell-side participants. This is in contrast to “single-dealer platforms,” on which a single dealer provides market liquidity. Although “multiple-to-multiple” trading platforms that facilitated swap transactions did exist when the Dodd-Frank Act was adopted, none of them had been established to conform to the core principles set out in the Dodd-Frank Act or the rules (the SEF Rules)2 that were later adopted by the Commodity Futures Trading Commission (CFTC). Multiple-to-multiple platforms meeting the requirements of the SEF Rules are required to register as SEFs with the CFTC, and those that do not register are required to cease operations, effective as of October 2, 2013. The registration requirement applies to any multiple-to-multiple electronic or voice-execution venues where participants can execute swaps.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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