CFTC Provides Relief to SEFs from Swap Trade Confirmation Requirements
Commentary by Bob Zwirb
The CFTC extended the expiration date for the relief from swap trade confirmation requirements that was provided previously in CFTC No-Action Letter 15-25. The date was extended from March 31, 2016 to March 31, 2017.
According to the letter, relief is provided to swap execution facilities ("SEFs") from CFTC Rule 37.6, which requires an SEF to obtain documents that are incorporated by reference in a trade confirmation issued by the SEF prior to issuing the confirmation. SEFs also are provided with relief from the requirement in CFTC Rules 37.1000, 37.1001 and 45.2(a) that an SEF maintain such documents as records. Finally, the letter states that SEFs are granted relief from the requirement in CFTC Regulation 45.3(a) that an SEF must report confirmation data contained in the documents that the SEF incorporates by reference in a confirmation.
The letter also notes that the CFTC Division of Market Oversight will not recommend taking enforcement action if any one of the following events occur:
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in a confirmation provided pursuant to CFTC Regulation 37.6(b), an SEF incorporates terms by reference from previously negotiated agreements between the counterparties without first having obtained copies of such agreements;
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an SEF fails to maintain a copy of the agreements incorporated by reference in the SEF's confirmation, as required under CFTC Regulations 37.1000, 37.1001 and 45.2(a); or
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an SEF does not report confirmation data contained in the documents that an SEF incorporates by reference in a confirmation, as required under CFTC Regulation 45.3(a).
The association seeking the relief also requested that the CFTC undertake a rulemaking to establish an SEF confirmation solution that is consistent with the terms of the no-action relief.
Commentary
The need for relief – indeed, the need for frequent relief from many Dodd-Frank requirements – is illustrated by the following passage in the no-action letter:
According to the [association requesting relief], the relief granted in No-Action Letter 15-25 has not eased the operational concerns that prompted the original request for relief. Due to the complexity of the issue . . . SEFs have been unable to develop a method to request, accept and maintain a library of every underlying previously-negotiated freestanding agreement between counterparties that is not cumbersome and cost prohibitive. According to the [requester], many of these agreements are maintained in paper form, or scanned PDF files, making them impossible to quickly digitize in a cost-effective manner. The [requester] states that the resource cost is considerable when considering the number of different agreements that exist to accommodate the different parties and different asset classes. The [requester] believes that SEFs will not be able to develop a cost-effective method to collect and maintain underlying, previously-negotiated free standing agreements between counterparties [in the time allotted by previous CFTC No-Action Letter 15-25].