CFTC Issues Staff "Guidance" on Impartial Access to SEFs (with Lofchie Comment)

The CFTC Divisions of Clearing and Risk, Market Oversight, and Swap Dealer and Intermediary Oversight issued guidance to swap execution facilities ("SEFs") cautioning that the rules of various SEFs may be in conflict with the CFTC's requirement of "impartial access."

Among the SEF rules or requirements that were mentioned by the CFTC as being problematic were (i) requiring that market participants have a pre-execution agreement, such as a breakage agreement, (ii) requiring that firms be either a swap dealer or a clearing member in order to see Requests for Quotes, (iii) limiting access to firms depending on whether they are takers or providers of liquidity or both, and (iv) limiting a firm's ability to access the SEF directly, as opposed to forcing a market participant to trade through a clearing member.

Lofchie Comment: Whether the CFTC staff's latest "guidance" is good or bad public policy is unclear. The guidance raises many substantive questions. Here are a few: why does the CFTC staff believe that a "breakage agreement" should be prohibited? Why is the requirement of such an agreement inconsistent with impartial access? (Presumably, so long as a requirement applies to everyone and it is the type of requirement that can at least be achieved by some, then the requirement is "impartial.") Why should it be a prohibited model of doing business to require an unregulated firm to access an SEF through a registered FCM? (Or simply put, why shouldn't competing business models be permissable.) Separate from the substance of the requirements in this CFTC (staff) "guidance," the process issues are also troubling. For example, here is a sentence from the last paragraph of the "guidance":"This Guidance, and the positions taken herein, represent the views of the Divisions [of the CFTC] only, and do not necessarily represent the views of the Commission [CFTC]. . . . "What does that mean? Is the guidance meant to be a rule and not merely a suggestion? If so, does that violate the Administrative Procedures Act? Will SEFs be subject to disciplinary action if they do not follow the Division's guidance?

See: Staff Guidance on Application of CFTC Rules to SEFs.Related news: Triple International Financial Law Review Articles on SEFs (October 24, 2013); CFTC Issues Time-Limited No-Action Letter for FCMs and SEFs (13-62) (with Lofchie Comment) (October 1, 2013); CFTC Issues Time-Limited No-Action Letter Relief for Temporarily Registered SEFs and Designated Contract Markets from the One-Business-Day Product Review Period Requirement (13-60) (October 1, 2013); CFTC's DMO Issues Time-Limited No-Action Relief for Temporarily Registered SEFs (with Lofchie Comment) (September 30, 2013); Two CFTC No-Action Letters (13-55 and 13-56) on Swap Data Reporting (with Lofchie Comment) (September 30, 2013); CFTC's DMO Provides Time-Limited No-Action Relief to SEFs and Market Participants (with Lofchie Comment) (September 27, 2013); CFTC Issues Staff Guidance on Swaps Straight-Through Processing (with Delta Strategy Group Summary) (September 27, 2013).