CFTC Issues No-Action Relief Regarding Documentation of Confirmations of Uncleared Swap Transactions (CFTC Letter 14-108)
Commentary by Bob Zwirb
The CFTC Division of Market Oversight ("DMO") granted time-limited conditional no-action relief to swap execution facilities ("SEFs") from certain data reporting and recordkeeping requirements in relation to confirmations required for uncleared swap transactions executed on or pursuant to the rules of an SEF under CFTC Rule 37.6(b).
CFTC Rule 37.6(b) ("Enforceability") requires an SEF to provide each counterparty to a transaction entered into, on, or pursuant to the rules of the SEF with a written record of all terms of the transaction. This written record supersedes any previous agreement and serves as the confirmation of the transaction. The no-action relief provides that, for uncleared swap transactions executed on or pursuant to the rules of an SEF, DMO will not recommend that enforcement action to the CFTC against an SEF in two instances:
- if an SEF incorporates the terms of underlying previously negotiated agreements in the confirmation without copies of the underlying agreements first being submitted to the SEF, as indicated in footnote 195 to Part 37 of the CFTC Rules; and
- if an SEF fails to obtain by the time of execution copies of the incorporated underlying agreements as required under the recordkeeping provisions of Part 37 and Part 45 ("Swap Data Recordkeeping and Reporting Requirements") of the CFTC Rules.
The provided no-action relief will expire at midnight on September 30, 2015, and is conditioned on the availability of copies of all incorporated underlying previously negotiated agreements to CFTC staff upon request.
See: CFTC Letter 14-108.
Commentary
This request for no-action relief appears to have arisen from the ambiguities related to the highly complicated nature of the CFTC's SEF confirmation and reporting requirements. The following two paragraphs from the no-action letter might give the reader a sense of what market players are up against in seeking to comply with these requirements:
"The requesting parties raised questions regarding compliance obligations under Commission regulation 37.6(b) generally and the interaction of this regulation with other Commission regulations, including Part 45. . . . .
"Requesting parties stated, for example, that not all SEFs are prepared to issue confirmations that include all terms of a swap transaction. Some participants stated that SEFs do not have access to the relevant non-economic terms of the transaction, and it is not clear how SEFs will be able to access the ISDA Master Agreements that contain terms that need to be included in the Confirmation, such as ISDA templates, definitions, and the terms negotiated by the counterparties with respect to the templates and definitions. Requestors also sought clarification as to which individual terms must be included in the Confirmation and requested time to standardize terms to be included in a Confirmation. Requesting parties were particularly concerned that the lack of certainty over what terms must be included in a Confirmation would lead to legal uncertainty over the terms of executed transactions, because the terms in the Confirmation legally supersede any contradictory terms."