Temporary Relief from Registration for Swaps Intermediaries

by Morgan Lewis

[author: Michael A. Piracci, Zachary E. Vonnegut-Gabovitch, Michael M. Philipp, and Dana D.C. Westfall]

CFTC issues no-action letters providing temporary relief from registration, from the swap dealer associated persons statutory disqualification prohibition, and from including certain swaps in the de minimis exception threshold.

On October 12, the Commodity Futures Trading Commission's (CFTC's) Division of Swap Dealer and Intermediary Oversight (DSIO) issued no-action letters that provide (1) temporary relief from registration for swaps intermediaries; (2) relief from the statutory disqualification prohibition for associated persons of swap dealers and major swap participants;[1] and (3) temporary relief from having to include certain cleared energy, metal, and agriculture swaps in the calculation for the swap dealer de minimis exception threshold.[2] As a result, intermediaries involved in swaps activities will have additional time to determine whether and when they must register with the CFTC.

Temporary Relief from Registration for Swaps Intermediaries

The CFTC's definition of "swap" became effective on October 12.[3] As a result, persons and entities involved with soliciting for, transacting in, and/or advising on swaps now fall within the definition of an "introducing broker" (IB), "commodity pool operator" (CPO), or "commodity trading advisor" (CTA)[4] or an "associated person" (AP) of the foregoing, as appropriate under the Commodity Exchange Act (CEA). Accordingly, absent the relief granted by DSIO in its October 11 no-action letter, such persons would have been required to either be registered with the CFTC by October 12 or cease their swaps activities. The temporary relief granted by DSIO provides persons until December 31, 2012, to register as (1) an IB, CPO, or CTA; (2) an AP[5] of an IB, CPO, CTA, or futures commission merchant (FCM); or (3) a floor broker (FB) or floor trader (FT), where the requirement to register arises solely because of activities involving swaps, including an exchange of futures for swaps transaction (EFS). The relief also covers energy swaps that are in the process of being transitioned from the IntercontinentalExchange (ICE) over-the-counter (OTC) platform to futures on the ICE Futures U.S., Inc. and ICE Futures Europe markets, as well as energy transactions that are being transitioned from CME Group's ClearPort to off-exchange futures transactions subject to the rules of the New York Mercantile Exchange (NYMEX).

The relief provides that DSIO will not recommend enforcement action against a person for failing to be registered in one of the foregoing categories, where registration is required solely from swaps activities, provided the person files a complete registration application with the National Futures Association (NFA) before December 31, 2012. As of December 31, 2012, persons availing themselves of relief under the no-action letter must make a good-faith effort to comply with the CEA and the CFTC's rules and regulations applicable to its activities in the same manner as if the person was registered.

Additionally, an applicant for IB registration must submit proof of meeting the adjusted net capital requirements under CFTC rules before March 31, 2013, and an applicant for registration as an FB or FT must submit proof of having been granted trading privileges on a designated contract market or swaps execution facility prior to March 31, 2013.

Relief from Statutory Disqualification Prohibition for APs of Swap Dealers and Major Swap Participants

Although APs of a swap dealer (SD) or a major swap participant (MSP) are not required to be registered with the CFTC, the CEA provides that an SD or MSP may not permit a person subject to a "statutory disqualification," as defined under the CEA, to effect or be involved in effecting swaps on behalf of the SD or MSP.[6] Although APs of other CFTC registrants are subject to similar limitations, the CFTC and NFA historically have used their discretion to permit AP registration for persons otherwise statutorily disqualified from registration under the CEA, due to, for example, the age and seriousness of the disqualifying matter. In order to treat APs of SDs and MSPs similarly to APs of other CFTC registrants, DSIO will not recommend that the CFTC commence an enforcement action against an SD or MSP for having an AP that is subject to a statutory disqualification under the CEA. To be eligible for this relief, the SD or MSP must notify NFA that the AP is subject to a statutory disqualification and must submit the information related to the disqualification to NFA, and NFA must have notified the SD or MSP that NFA would have granted registration had the person applied for registration as an AP, despite the statutory disqualification. If the AP is involved in effecting swaps on behalf of the SD or MSP at the time the SD or MSP files an application to be registered with the CFTC, the SD or MSP must provide the information related to a statutory disqualification no later than 90 days following the date it files the Form 7-R as part of its registration application. The AP may continue to be involved in effecting swaps on behalf of the SD or MSP unless and until NFA notifies the SD or MSP that it would not have registered the person as an AP, at which point the person must cease to be involved in effecting swaps on behalf of the SD or MSP. If the AP is not involved in effecting swaps on behalf of the SD or MSP at the time the SD or MSP files an application to be registered with the CFTC, the AP may not be involved in effecting swaps unless and until it receives notice from NFA that NFA would have granted the person registration as an AP.

Temporary Relief from Including Certain Swaps in the Swap Dealer De Minimis Exception Threshold

In response to recent announcements by ICE and NYMEX to transition cleared swaps in certain energy, metal, and agricultural commodities to cleared futures contracts, DSIO provided relief from having to include such swaps in calculations to determine if a person is an SD.[7] Specifically, DSIO provided that a person may forgo including a swap if the swap meets the following three requirements: (1) the swap references an "exempt commodity"[8] or an agricultural commodity; (2) the swap is executed prior to December 31, 2012; and (3) the swap is either (a) cleared on a CFTC-registered derivatives clearing organization or (b) is entered into contingent upon it subsequently being cleared as a futures position as part of an exchange-for-related-position transaction, such as an EFS transaction, conducted pursuant to a designated contract market's rules.


Persons that are involved in swaps transactions for themselves or on behalf of others, should review their activities and the numerous no-action letters and interpretations that have been issued by the CFTC in the past week to determine the next steps they must take and, if required to register, when they must complete the process.

[1]. CFTC Letter No. 12-15 (Oct. 11, 2012), available here.

[2]. CFTC Letter No. 12-16 (Oct. 12, 2012), available here.

[3]. See Further Definition of "Swap," "Security-Based Swap," and "Security-Based Swap Agreement," 77 Fed. Reg. 48,208 (Aug. 13, 2012), available here.

[4]. As to swaps, an individual or an entity would be (1) an IB if it solicits or accepts orders to buy or sell swaps but does not accept funds from customers for such orders; (2) a CPO if it operated a collective investment vehicle, such as being the general partner of a hedge fund, that trades swaps; and (3) a CTA if it provided investment advice as to transactions in swaps, whether by exercising trading authority over a client's account or giving advice tailored to each client's particular circumstances.

[5]. As to swaps, an AP would be a natural person that solicits orders, customers, or customer funds for swaps or supervises such persons on behalf of a CFTC registrant.

[6].Commodity Exchange Act, 7 U.S.C. § 6s(b)(6).

[7]. CFTC Rule 1.3(ggg)(4) provides a de minimis exception from the definition of "swap dealer" for persons entering into swap positions over the previous 12 months that have an aggregate gross notional amount of no more than $8 billion and of no more than $25 million with counterparties that are "special entities" (e.g., ERISA plans and other pension plans).

[8]. An "exempt commodity" is a commodity that is not an excluded commodity or an agricultural commodity. Commodity Exchange Act, 7 U.S.C. § 1a(20).


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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