CFTC Exempts Swap "Optimization" Services from Clearing and Reporting Rules

The CFTC will not require firms that run swap "optimization" services or their users to trade through SEFs, centrally clear or trade report so long as the trades do not change market exposure and satisfy certain conditions.

In a joint no-action letter issued by the CFTC Divisions of Market Oversight, Clearing and Risk and Market Participants ("staff") the CFTC said the relief covers two services that insert offsetting swaps into existing portfolios while leaving each party's market risk unchanged. The two services are: portfolio rebalancing (which lowers counterparty credit risk) and basis risk mitigation (which neutralizes timing mismatches in hedged positions). The staff said the providers need not register as a Swap Execution Facility ("SEF"). Further, staff said the resulting trades need not be executed on a regulated venue under the trade-execution requirement or cleared. They said the resulting trades would not be publicly reportable, because the transactions are priced in advance and do not contribute to price discovery.

The Divisions imposed the following conditions on the relief: (i) the exercises must be market-risk-neutral and risk-reducing, (ii) must not move swaps from cleared to uncleared status or evade clearing, (iii) must be all-or-nothing with no partial selection, and (iv) the providers must stay disinterested and register as introducing brokers and join the National Futures Association. The positions extend treatment the CFTC had long given to portfolio compression.

The Divisions said the relief would last until the CFTC issued rules on the services or the end of 2028, whichever came first, and noted that regulators in the United Kingdom, European Union, and Australia had taken similar steps.