"Mandatory SEF/DCM Trading Begins for Certain Interest Rate Swaps"

by Skadden, Arps, Slate, Meagher & Flom LLP
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As of February 15, 2014, certain types of fixed-for-floating interest rate swaps must be executed on a swap execution facility (SEF) or a designated contract market (DCM), unless an exception applies (e.g., the commercial end-user exception).1 This SEF/DCM-trading requirement is a result of the Commodity Futures Trading Commission’s (CFTC) first “made-available-to-trade” determination (MAT Determination) announced on January 16, 2014.2 Since this initial requirement, CFTC staff has announced MAT Determinations for additional interest rate swaps and certain credit default swaps.3 Below is a comprehensive chart showing when mandatory SEF/DCM trading begins for each type of interest rate swap and credit default swap currently subject to a MAT Determination.

CFTC Issues Additional SEF-Related Guidance

Package Trades. In the initial MAT Determination, the CFTC indicated that a swap subject to a MAT Determination was required to be executed on a SEF or DCM, even if part of a “package trade.”4 However, CFTC staff recently issued time-limited no-action relief from mandatory SEF/DCM trading for package trades.5 For purposes of the relief, a “package trade” means “a transaction involving two or more instruments: (1) that is executed between two counterparties; (2) that is priced or quoted as one economic transaction with simultaneous execution of all components; (3) that has at least one component that is a swap [subject to a MAT Determination]; and (4) where the execution of each component is contingent upon the execution of all other components.”6 The no-action relief expires May 15, 2014. Unless the relief is extended, it is uncertain whether market participants will be able to continue entering into package trades if the CFTC’s MAT Determination requires one component of the “package trade” to be executed on a SEF or DCM while another component is not.7

EU Multilateral Trading Facilities. On February 12, 2014, the CFTC and European Commission announced “significant progress” towards harmonizing the regulatory frameworks for SEFs and EU-regulated multilateral trading facilities (MTFs), as contemplated in their “Path Forward” statement issued in July 2013.8 In furtherance of these efforts, on the same day as this announcement, CFTC staff issued no-action relief from certain rules related to SEF trading for certain MTFs and MTF market participants.9 Relief is provided for (1) certain qualifying MTFs from SEF registration, (2) MTF market participants from mandatory SEF/DCM trading, and (3) swap dealers and major swap participants from certain external business conduct rules and documentation requirements for swaps executed on qualifying MTFs. The relief is subject to numerous conditions and, with respect to items (1) and (2), will expire no later than the effective date of any final rule adopted by the CFTC regarding exempt foreign trading facilities that are subject to comparable and comprehensive regulation.10

Other Guidance. The CFTC has clarified anonymity requirements for transactions executed on a SEF and reported to a swap data repository (SDR).11 Staff also issued an advisory that all market participants that indirectly effect transactions on a SEF are subject to the SEF’s jurisdiction.12

Mandatory SEF/DCM Trading Effective Dates

The following charts set forth the various swaps currently subject to a MAT Determination and identify the mandatory SEF/DCM trading effective dates as follows:

Plain type = February 15, 2014
Italics = February 21, 2014
Bold = February 26, 2014

Fixed-to-Floating Interest Rate Swaps (USD)

Floating Rate Indexes

USD Libor

USD Libor

USD Libor

Trade Start

Spot Starting (T+2)

IMM Start Date

IMM Start Date

Fixed Leg Payment Frequency

Semi-Annual, Annual

Semi-Annual, Annual

Semi-Annual

Optionality

No

No

No

Fixed Leg Day Count Convention

30/360, Actual/360

30/360, Actual/360

30/360

Floating Leg Reset Frequency

Quarterly, Semi-Annual

Quarterly, Semi-Annual

Quarterly

Floating Leg Day Count Convention

Actual/360

Actual/360

Actual/360

Dual Currencies

No

No

No

Notional

Fixed

Fixed

Fixed

Fixed Rate

Par

Par

Standard Coupon13

Tenors14

2 yrs.
3 yrs.
4 yrs.
5 yrs.
6 yrs.
7 yrs.
10 yrs.
12 yrs.
15 yrs.
20 yrs.
30 yrs.

2 yrs.
3 yrs.
4 yrs.
5 yrs.
6 yrs.
7 yrs.
10 yrs.
12 yrs.
15 yrs.
20 yrs.
30 yrs.

1 yr.
2 yrs.
3 yrs.

4 yrs.
5 yrs.
7 yrs.
10 yrs.
---
15 yrs.
20 yrs.
30 yrs.

Fixed-to-Floating Interest Rate Swaps (Non-USD)

Currency

Euro (EUR)

Sterling (GBP)

Floating Rate Indexes

EURIBOR

GBP LIBOR

Trade Start Date

Spot Starting (T+2)

Spot Starting (T+0)

Optionality

No

No

Fixed Leg Payment Frequency

Semi-Annual, Annual

Quarterly, Semi-Annual

Fixed Leg Day Count Convention

30/360, Actual/360

Actual/365F

Floating Leg Reset Frequency

Quarterly, Semi-Annual

Quarterly, Semi-Annual

Floating Leg Day Count Convention

Actual/360

Actual/365F

Dual Currencies

No

No

Notional

Fixed

Fixed

Fixed Rate

Par

Par

Tenors15

2 yrs.
3 yrs.
4 yrs.
5 yrs.
6 yrs.
7 yrs.
10 yrs.
15 yrs.
20 yrs.
30 yrs.

2 yrs.
3 yrs.
4 yrs.
5 yrs.
6 yrs.
7 yrs.
10 yrs.
15 yrs.
20 yrs.
30 yrs.

Untranched Credit Default Swap Indices

Reference Entities

Corporate

Corporate

Region

North America

Europe

Indices

CDX.NA.IG
CDX.NA.HY

iTraxx Europe
iTraxx Europe Crossover

Tenor

CDX.NA.IG 5Y
CDX.NA.HY 5Y

iTraxx Europe 5Y
iTraxx Europe Crossover 5Y

Applicable Series

At any time, the then-current on-the-run series and the preceding series that was replaced by the current one

1 February 15, 2014, falls on a Saturday. February 18, 2014, is the first business day in the U.S. after the effective date of the MAT Determination.

2 See “The Commodity Futures Trading Commission Staff Announces Trade Execution Mandate for Certain Interest Rate Swaps,” available at: http://www.cftc.gov/PressRoom/PressReleases/pr6831-14.

3 See “The Commodity Futures Trading Commission’s Division of Market Oversight Announces Trade Execution Mandate for Additional Interest Rate Swaps,” available at: http://www.cftc.gov/PressRoom/PressReleases/pr6838-14 (additional interest rate swaps); “The Commodity Futures Trading Commission’s Division of Market Oversight Announces Trade Execution Mandate for Certain Credit Default Swaps and Additional Interest Rate Swaps,” available at: http://www.cftc.gov/PressRoom/PressReleases/pr6841-14. (additional interest rate swaps and certain credit default swaps).

4 See supra note 2 (“the inclusion of a swap subject to the trade execution requirement in a multi-legged transaction would not per se relieve market participants of the obligation to trade such swap through a DCM or SEF”).

5 See CFTC Letter No. 14-12 (February 10, 2014), available at: http://www.cftc.gov/ucm/groups/public/@newsroom/documents/letter/14-12.pdf.

6 See id. Examples of interest rate package trades include swap curves (two swaps of differing tenors), swap butterflies (three swaps of differing tenors), swap spreads (government securities versus swaps typically within similar tenors), invoice spreads (Treasury-note or Treasury-bond futures versus swaps), cash/futures basis (Eurodollar futures bundles versus swaps), offsets/unwinds, delta neutral option packages (caps, floors, or swaptions versus swaps), and mortgage-backed security basis trades (to-be-announced swaps (agency MBS) versus swap spreads). Examples of credit default swap package trades include index options versus index, tranches versus index, and index versus single name CDS.

7 The CFTC held a public roundtable on February 12, 2014, to discuss policy for package trades going forward. See “CFTC’s Division of Market Oversight to Host Public Roundtable Regarding the Trade Execution Requirement and Package Transactions,” available at: http://www.cftc.gov/PressRoom/Events/opaevent_cftcstaff021214.

8 See “Statement by the CFTC and the European Commission on progress relating to the implementation of the 2013 Path Forward Statement,” available at: http://www.cftc.gov/PressRoom/PressReleases/pr6857-14.

9 See CFTC Letter No. 14-15 (February 12, 2014), available at: http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-15.pdf (relief through March 24, 2014); CFTC Letter No. 14-16 (February 12, 2014), available at: http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-16.pdf (longer-term conditional relief).

10 See id. (citing Section 5h(g) of the Commodity Exchange Act). The relief with respect to item (3) for swap dealers and major swap participants is not time-limited.

11 The CFTC issued an interim final rule to clarify that data shall remain anonymous within an SDR that is submitted to the SDR for swaps executed anonymously on a SEF or DCM and cleared in accordance with the CFTC’s straight-through-processing requirements. See “Swap Data Repositories – Access to SDR Data by Market Participants” (February 10, 2014), available at: http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-16.pdf.

12 See “Division of Market Oversight Guidance on Swap Execution Facility Jurisdiction” (February 10, 2014), available at: http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/dmostaffguidance021014.pdf.

13 Standard Coupon refers to the then-current fixed coupon rates for Market Agreed Coupon (MAC) contracts.

14 Par coupon swaps with a tenor of four or six years are limited to the 3M USD LIBOR floating rate index; Quarterly Reset Frequency; and the following fixed leg conventions: (1) Semi-Annual and 30/360; or (2) Annual and Actual/360.

15 Euro (EUR) denominated, par coupon swaps with a tenor of four or six years are limited to the following fixed leg conventions: Annual and 30/360.

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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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