The Commodity Futures Trading Commission is introducing measures to promote trading on swap execution facilities (SEFs).
The Commission wants to support an orderly transition to mandatory trading of swaps, which begins for certain interest rate swaps on 15 February, 2014.
“As a result of the trade execution mandate, next week many swaps for the first time will trade on regulated platforms and benefit from market-wide, pre-trade transparency,” says acting chairman Mark Wetjen. “These measures, in conjunction with the Commission’s implementation of the trade execution mandate, will maximise the level of trading on these regulated platforms and support the transition to a transparent, risk-reducing swap-market structure under CFTC oversight.”
Wetjen says the platforms improve pricing for the buy-side, commercial end-users, and other participants and add to liquidity by streamlining participation in the swap markets.
In connection with the commencement of the trading mandate, the Commission and the Division of Market Oversight (DMO), respectively, have taken the following measures:
1) In order to protect the identities of counterparties trading on SEFs and incentivize anonymous trading on regulated platforms, on 10 February 2014 the Commission issued an interim final rule clarifying that consistent with the requirements of section 21(c)(6) of the Commodity Exchange Act, a party to an anonymous trade executed on a SEF or designated contract market (DCM) cannot access information in swap data repositories in order to obtain the identity of its counterparty.
2) On 10 February 2014, DMO issued a no-action letter providing relief until 15 May 2014 from mandatory trading of certain swaps executed as part of a “package transaction.” Accordingly, DMO reminds swap execution facilities (SEFs) that they may facilitate the trading of swaps subject to the trade mandate, if executed as part of such a “package transaction,” only if (i) the methods for executing such swaps comply with the trading protocols applicable to Required Transactions in § 37.9 of the Commission’s regulations or (ii) such SEFs have rules in effect that permit the trading of package transactions under the terms of the relief. DMO staff will hold a public meeting on 12 February to discuss potential challenges surrounding the execution of package transactions through SEFs or DCMs.
3) DMO published guidance on 10 February clarifying that while Rule 37.202(b) requires that market participants trading on a SEF consent to its jurisdiction, it is a reasonable interpretation that such consent need not be obtained through an affirmative writing. DMO stated that at this time a SEF may comply with Rule 37.202(b) by providing in its rulebook that any person initiating or executing a transaction on or subject to the rules of the SEF directly or through an intermediary, and any person for whose benefit such a transaction has been initiated or executed, consents to the jurisdiction of the SEF.
4) DMO has published on the Commission’s website a centralised list of swaps subject to the mandate. This dedicated webpage is intended to provide notice to market participants of the swaps subject to the mandate and includes specific terms defining each such swap.
