CFTC Issues No-Action Letter (CFTC Letter 13-12) Regarding Obligation to Provide Pre-Trade Marks on Certain FX Transactions (with Lofchie Comments)

The CFTC's Division of Swap Dealer and Intermediary Oversight ("DSIO") issued a no-action letter that provides swap dealers ("SDs") with relief from the requirement that they provide a pre-trade mid-market mark ("PTM") as otherwise prescribed under CFTC Rule 23.431 ("Disclosures of Material Information"). The letter extends relief previously granted by the CFTC in letter 12-42 (December 6, 2012), as reported in our news story of that date.

The relief is available with respect to physically settled FX swaps forwards with not more than a year, and vanilla options with a maturity of not more than six months, in one of 31 currencies (listed at fn. 16 of the letter), if real-time electronic prices are available in the market, and the counterparty agrees in advance, in writing, that the swap dealer does not have to disclose a PTM. The exemption is also available to physically settled FX forwards traded on an electronic trading platform, where the parties are anonymous, and only eligible contract participants are permitted to trade.

Lofchie Comment 1: Even if one assumes that there were any benefit in swap dealers' providing PTMs when trading with counterparties in the most liquid market in the world (money), once the CFTC had agreed to issue a no-action letter, why should it not be sufficient that swap dealers provide notice to counterparties to which they would not provide a PTM? Instead, a written agreement is required. This likely will require tens of thousands of written agreements between all of the possible counterparties, and the organization and maintenance of those agreements, and the tracking of who has signed, and getting new agreements for each new counterparty - an unwarranted burden. (On the brighter side, some swap dealers already may have anticipated additional letters and requested agreements as to pre-trade mid-market marks for any transactions subject to CFTC relief - such an option is provided in Addendum II to the ISDA August Protocol Questionnaire - drafted by Cadwalader.)

Lofchie Comment 2: This no-action letter of May 1 provides relief with respect to a rule that went into effect on May 1. It is disappointing that the CFTC was not able to provide guidance on a more timely basis. Because the letter is subject to conditions, firms must either scramble to comply with the conditions, comply with the rule for a limited period, or ignore the rules and conditions while scrambling to comply.Yesterday, Commissioner Chilton reissued his demand for an End-User Bill of Rights, one of the terms of which was a regulatory system that would not be "chaotic" (see related news story). It certainly would be a great thing if Commissioner Chilton fired the first shots heard round the world and insisted that the CFTC publish non-action letters before the last minute, and not rules before they were ready.

See: CFTC Letter 13-12 (links externally to CFTC website).Questions on this letter may be directed to Nihal Patel or your regular Dodd-Frank contact.