CFTC No-Action Relief for SEFs Regarding Broken Trades (CFTC Letter 13-66) (with Lofchie Comment and YouTube Video)

The CFTC's Division of Clearing and Risk ("DCR") and Division of Market Oversight ("DMO") (together, "the Divisions") provided time-limited relief for SEFs from compliance with certain requirements of CFTC Rules 37.9(a)(2) ("Methods of execution for required and permitted transactions – Execution methods") and 37.203(a) ("Rule enforcement program – Abusive trading practices prohibited") in connection with broken trades. The Divisions announced that they will not recommend action against a SEF for failure to comply with Rule 37.9(a)(2) regarding methods of execution for required or permitted transactions or Rule 37.203(a)'s prohibition of pre-arranged trading.This relief, however, is conditional upon the following circumstance: "if, after a trade has been rejected for clearing for clerical or operational errors or omissions, the SEF permits a new trade, with terms and conditions that match the terms and conditions of the original trade, other than any such error and the time of execution, to be submitted for clearing without having been executed pursuant to the methods set forth in Rule 37.9(a)(2)."

Additionally, in order for a SEF to avail itself of the no-action relief, the SEF must submit to following conditions:

• The procedure must only be available for trades that are rejected because of a clerical or operational error or omission resulting in a mismatch of the terms of the trade. The procedure must not be available for trades that are rejected because a customer breached its credit limit at a clearing member or a clearing member breached its credit limit at a DCO.
• The SEF must have rules stating that any trade executed on or subject to the rules of the SEF that is not accepted for clearing shall be void ab initio. The rules may not permit trades to be held in a suspended state and then re-submitted.
• Both clearing members must agree to submit the new trade.
• Each clearing member must obtain the consent of its customer, if any, to submit the new trade.
• Neither a clearing member nor a SEF may require a customer to agree in advance to consent to the submission of the new trade. The consent must be sought on a case-by-case basis, after the trade has been rejected.
• The new trade must be submitted as quickly as technologically practicable after receipt by the clearing members of notice of the rejection from clearing, but in any case no later than 30 minutes from the issuance of a notice of rejection by the DCO to the clearing members.
• Both the original trade and the new trade must be subject to pre-execution credit checks that comply with CFTC Rule 1.73and/or Rule 23.609and the Staff Guidance.
• Both the original trade and the new trade must be processed in accordance with the time frames set forth in CFTC Rule 1.74, 23.610, 39.12(b)(7) and the Staff Guidance.
• The SEF reports the swap transaction data to the relevant swap data repository ("SDR") as soon as technologically practicable after the original trade is rejected by the DCO, including:
  • A part 43 cancellation for the original trade;
  • A part 45 termination indicating that the original trade is void ab initio;
  • Swap transaction data pursuant to Parts 43 and 45 for the newly executed trade. This data must reference the original cancelled trade and indicate that it has been reported pursuant to the procedures described in this letter. This data must also link the original trade to the new trade for both Parts 43 and 45 reporting to the relevant SDR.
• The SEF must enable the relevant SDR to publicly disseminate the new trade – which may be at a price that is away from the current market – pursuant to Part 43 and in a manner that references the original cancelled trade that was previously publicly disseminated.
• The procedure established by the SEF does not operate in any way to impair impartial access to the SEF as required by Commission Regulation 37.202 and the Staff Guidance. In particular, SEF rules must not require breakage agreements among participants as a condition of access and must prohibit a participant from requiring breakage agreements with other participants as a condition of trading with them.
• The SEF must have rules stating that if the new trade is also rejected, it is void ab initio and the parties will not be provided a second opportunity to submit a new trade.

This no-action relief commences on October 25, 2013, and expires on June 30, 2014.

Lofchie Comment: The CFTC imposes more conditions on attempts to fix a clerical error in a single trade than it does in allowing a newly formed SEF to declare that the entire interest rate swaps market is required to trade on an exchange.

See: CFTC Letter 13-66.See also: Triple International Financial Law Review Articles on SEFsSee also: YouTubeVideo