In response to the mandatory swap execution facilities (“SEF”) registration date approaching on October 2, the CFTC Division of Market Oversight and Clearing and Risk issued an interpretive Guidance on a number of issues regarding trades on an SEF or designated contract market (“DCM”) that are cleared at derivatives clearing organizations (“DCO”) by clearing futures commission merchants (“FCM”).
Delta Strategy Group Summary of the Guidance:
1. The CFTC confirms that an FCM must screen all SEF/DCM orders, both customer and proprietary, against credit limits prior to execution regardless of how the trade is executed (automated or non-automated). Off-platform swaps can be screened post-trade.
2. For swaps intended for clearing on a SEF, the clearing member must be identified prior to execution. Also, a SEF must facilitate pre-execution credit screening by the FCM on an order-by-order basis. Lastly, the Commission confirms that once an order passes the pre-screening limit check, the FCM may not reject the trade (meaning the FCM guarantees the trade without a last look).
3. The CFTC confirms SEFs must route swaps intended for clearing to a registered DCO as soon as technologically practicable. Staff reiterates that affirmation hubs are a viable means for routing trades, but restates that the trades must be routed as quickly after execution as would be technologically practicable if automated systems were used.
4. DCMs must coordinate with DCOs and route executed swap transactions to the DCO for clearing.
5. In the previously issued Guidance by the Commission, a DCO had 60 seconds to accept or reject a trade based on the FCM’s credit limits at the DCO. Based on data collected since previous Guidance was issued that shows 99% of trades are accepted or rejected within 10 seconds, the Commission shortens the 60-second window to 10 seconds.
6. Should a trade not be accepted within the 10-second window, Staff considers the trade void ab initio. The Staff also states that breakage agreements are not necessary due to the previous statement and declares them to be an impairment to impartial access to SEFs. The Guidance explicitly states that DCMs, SEFs, FCMs, and swap dealers cannot require breakage agreements as a condition for access to trading on a SEF or DCM.
See: CFTC Staff Guidance.