The CFTC approved three final rules regarding (i) core principles and other requirements for swap execution facilities; (ii) the process for a designated contract market or swap execution facility to make a swap available to trade; and (iii) procedures to establish appropriate minimum block sizes for large notional off-facility swaps and block trades.
Although the text of the Final Rules is not yet available, the summary below is based primarily on the fact sheets issued by the CFTC and the discussions at the CFTC Open Meeting.
SEF Final Rules
By a vote of 4-1, the CFTC approved final rules regarding core principles and other requirements for SEFs (“SEF Final Rules”). Commissioner O’Malia voted against the SEF Final Rules. Commissioner O’Malia also introduced an amendment to the SEF Final Rules which would require a fact-based analysis of the request-for-quote (“RFQ”) requirement. This amendment was not approved.
SEF Registration Requirement
The SEF Final Rules implement the SEF registration requirement in CEA Section 5h(a)(1) by requiring facilities that meet the SEF definition in CEA Section 1a(50) to register as SEFs.
After the rule becomes effective, prospective SEFs can file a provisional “notice” registration, but must file a complete SEF registration application before the 120-day compliance date. The rules include the SEF application form (“Form SEF”), and a comprehensive list of instructions and documents that must accompany applications for registration as a SEF.
SEF Execution Methods and the Trade Execution Requirement
According to the CFTC, registered SEFs must provide a “minimum trading functionality,” which it defines as an “Order Book,” which generally will be a system in which market participants can enter or hit multiple bids and offers.
Swaps that are subject to the trade execution requirement (i.e., subject to mandatory clearing and “made available to trade”) and that are not block trades must be executed on an SEF in accordance with a prescribed execution method.
The requirements in the SEF Final Rules implement and provide guidance regarding the 15 core principles under CEA Section 5h.
With regard to the rules regarding the mandated request for a quote, the CFTC will eventually require SEF to transmit an RFQ to at least three market participants, although only two market participants are required for the first year.
Process for Determining That a Swap Is “Made Available to Trade”
By a vote of 3-2 (Commissioners Scott O’Malia and Sommers dissenting), the CFTC approved final rules establishing a process for designated contract markets (“DCM”) and SEFs to find that a swap is “made available to trade” (the “MAT Final Rules”).
The MAT Final Rules permit DCMs and SEFs to submit to the CFTC a determination that a swap is “available to trade” (“MAT Determination”) for purposes of CEA Section 2(h)(8), provided that: (1) the DCM or SEF lists or offers the swap for trading; and (2) the swap is subject to a CFTC mandatory clearing determination. MAT Determinations may be submitted either for approval pursuant to CFTC Rule 40.5 or under self-certification procedures pursuant to CFTC Rule 40.6.
Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades
By a vote of 3-2 (Commissioners Scott O’Malia and Sommers dissenting), the CFTC approved final rules establishing minimum block sizes for large notional off-facility swaps and block trades (the “Block Trade Final Rule”).
CEA Section 2(a)(13) requires the public dissemination of certain post-trade transaction pricing data as the CFTC determines is appropriate to enhance price discovery and consistent with protecting the identities and maintaining the anonymity of business transactions and market positions of swap counterparties. CEA Section 2(a)(13) also obligates the Commission to establish criteria to determine what constitutes a “large notional swap transaction (block trade)” for the purposes of applying time delays for disseminating transaction and pricing data for such transactions to the public.
The CFTC published final rules regarding the real-time public reporting on January 9, 2012; however, these rules did not address the minimum block sizes for large notional off-facility swaps or block trades. The Block Trade Final Rule addresses the issues that were not finalized when the CFTC adopted the real-time public reporting rules.
Effective Date and Compliance Date
According to the CFTC, minimum block sizes will be implemented through a two-phase approach. The initial period would last until registered SDRs have collected at least one year of reliable data for each asset class, at which point the requirements would be revised and then reviewed annually.
Links to the CFTC’s Fact Sheets and FAQs
Fact Sheet: Final Rulemaking on Procedures to Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades; Further Measures to Protect the Identities of Parties to Swap Transactions
Questions & Answers: Procedures to Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades; Further Measures to Protect the Identities of Parties to Swap Transactions
Fact Sheet: Process for a Designated Contract Market or Swap Execution Facility to Make a Swap Available to Trade under Section 2(h)(8) of the Commodity Exchange Act
Questions and Answers: Process for a Designated Contract Market or Swap Execution Facility to Make a Swap Available to Trade and Schedule to Phase in Compliance with Section 2(h)(8) of the Commodity Exchange Act