CFTC Staff Considers Whether SEF "Prime Brokerage" Arrangements Require DCO Registration

Commentary by Nihal Patel

The CFTC Division of Clearing and Risk ("DCR") issued a staff advisory to encourage persons using certain swap execution facilities ("SEF")-related "prime brokerage arrangements" for swaps to consider whether the arrangements require derivatives clearing organization ("DCO") registration.

The advisory indicates that DCR staff have found potential DCO registration issues in SEF structures (or firms seeking to register as SEFs) that "require the use of a single prime broker to provide centralized credit substitution to all SEF participants." The advisory adds that while DCR does not believe that all prime brokerage arrangements will meet the DCO definition in CEA Section 1a(15), it has recently informed several SEFs and SEF applicants that their structures would require registration.

Commentary

The scope of the CFTC concern is uncertain, but it is notable that the fact pattern indicated to have inspired the notice is somewhat limited: a SEF (or to-be-SEF) providing services in which a single entity acts as a centralized "credit substitution" for all SEF participants. In other words, this fact pattern does not seem consistent with traditional notions of "prime brokerage" but suggests an exchange-like platform in which the same universal counterparty must be used by all.

Email me about this

Premium Content

Available only to Premium subscribers.

 

Tags