On May 17, 2023, the CFTC's Division of Clearing and Risk ("DCR") issued an advisory warning that certain prime brokerage arrangements require derivatives clearing organization ("DCO") registration. DCR noted therein that it recently encountered potential DCO registration issues involving prime brokerage arrangements used by swap execution facilities ("SEFs") or SEF applicants. DCR stated a particular concern with market structures requiring all SEF participants to use a single prime broker to provide centralized credit substitution. DCR then recited part of the DCO definition, implying that the prime brokerage arrangements it mentioned fall within that aspect of the DCO definition. DCR concluded by advising that, although it does not believe that all prime brokers are DCOs, it "recently informed several SEFs and SEF applicants that proposed market structures requiring use of a single prime broker that is a centralized credit intermediary [must] … register as a DCO[]" and strongly encouraged those operating or considering similar market structures to contact DCR.

In 2021, the CFTC's Division of Market Oversight issued an advisory ("SEF Advisory") stating that certain commodity trading advisor and introducing broker activity may require SEF registration. The CFTC followed the SEF Advisory with a number of investigations, one of which led to a settlement and the sale of the settling party's business. Many disagree with the expansive SEF definition espoused in the SEF Advisory.

As previously noted, the CFTC also has taken action in the crypto space in connection with activity it believes requires registration, stating in "the bZeroX Order … that '[i]t [i]s … Respondents' responsibility to avoid unlawfully engaging in activities that could only be performed by registered entities and … to structure their business … consistent with Commission registration requirements[]'."

We plan to follow up with a more in-depth analysis.