The US Commodity Futures Trading Commission (CFTC) has provided time-limited no-action relief concerning swap execution facility (SEF) access for block trade execution.
This time-limited relief to SEFs is until 15 December 2015 at 12:00 am EST.
The relief granted will facilitate market compliance with credit screening and efficient straight-through processing requirements for block trades.
A block trade is, among other things, a publicly reportable swap transaction that “[o]ccurs away from the registered [SEF’s] or [DCM’s] trading system or platform and is executed pursuant to the registered [SEF’s] or [DCM]’s rules and procedures.” (Commission regulation 43.2)
A Futures Commission Merchant (FCM) that is a clearing member of a registered derivatives clearing organization (DCO) must establish risk-based limits and screen orders for compliance with those limits.
The credit check must be done before execution, no matter the means of execution. Separately, Commission regulation § 37.702(b) requires a SEF to coordinate with each DCO to which it submits transactions for clearing and have rules and procedures to facilitate prompt and efficient straight-through processing by DCOs in accordance with Commission regulation 39.12(b)(7).
Due to the current state of technology, there are concerns about the ability to perform pre-execution credit checks for block trades away from the facility. The SEF market participants and FCMs may face difficulties in satisfying their credit and straight-through processing obligations under regulations §§ 1.73 and 37.702(b) for block trades executed away from the facility. DMO is therefore providing time-limited relief to SEFs from the “occurs away” requirement under § 43.2 until 15 December 2015 at 12:00 am EST. The relief will allow SEFs to facilitate the execution of block trades on their non-order book trading systems or platforms.
The relief is subject to the following conditions:
· The block trade is not executed on the SEF’s order book functionality, as defined in § 37.3(a)(3);
· The SEF adopts rules pertaining to cleared blocks that indicate that the SEF is relying on the relief provided in the no-action letter and that require each cleared block trade executed on a non-order book trading system or platform to comply with the other requirements set forth in the block trade definition in § 43.2;
· The FCM completes the pre-execution credit check pursuant to § 1.73 at the time the order for a block trade enters the SEF’s non-Order Book trading system or platform; and
· The block trade is subject to void ab initio requirements where the swap is rejected on the basis of credit.
Parties to a swap who do not use the SEF functionalities provided by this letter must ensure the required credit check occurs before execution. During this period of relief, DMO will continue to review and evaluate SEF trading practices and functionalities for pre-execution credit checks as well as its other rules in these areas.
