CFTC Staff Issues No-Action Letter on Disclosing Pre-Trade Mid-Market Mark of a Swap
Commentary by Steven Lofchie
In a no-action letter, the CFTC’s Market Participants Division ("MPD") said it will not recommend an enforcement action against a swap entity for its failure to disclose to certain counterparties the Pre-Trade Mid-Market Mark ("PTMMM") of certain swaps on the Secured Overnight Financing Rate ("SOFR") under certain conditions. Disclosure of the PTMMM is otherwise required under CFTC Rule 23.431 ("Disclosures of material information").
The MPD said that for the no-action position to be available, (i) the terms of the transaction must be within the scope of the certain requirements of the letter; e.g., as to length of the trade; (ii) real-time tradeable bid and offer prices for the swap must be published electronically in the market in a manner that is visible to the counterparty; and (iii) the counterparty must agree in writing to forego the disclosure.
The MPD stated that its no-action position "is applicable only with respect to Covered SOFR OIS and does not apply to any obligations of a Swap Entity to disclose PTMMMs for contracts other than the Covered SOFR OIS..."
In a statement, Commissioner Christy Goldsmith Romero criticized the issuance of the no-action letter that "rolls back" crucial Dodd-Frank Act reforms. The Commissioner argued that (i) the no-action letter inappropriately shifts the burden of understanding swap dealer’s conflicts and incentives back onto counterparties, upending the Dodd-Frank Act’s intent, (ii) the no-action letter undermines the CFTC’s enforcement program and (iii) the policy decision should be made by the CFTC commissioners, not the CFTC staff.
Commentary
It is hard to imagine a disclosure of less value to a swap counterparty than the mid-market mark of a widely published rate where the counterparty agrees that it prefers the speed and certainty of immediate execution to a delay for receiving price information that the counterparty does not need.
That said, the debate over what decisions should be made by the Commissioners, not by staff, continues. On the one hand, there is a logic that it is the Commissioners who have been entrusted by Congress with such decision-making authority. On the other hand, if every decision is required to be made by the Commissioners, whether at the CFTC or the SEC, there is a tremendous bottleneck and very little gets done. Generally, it is hard to imagine a business, of anywhere near the scale of these agencies, operating in a fashion where so little can be decided by staff.