CFTC’s DMO Provides Time-Limited No-Action Relief to SEFs and Market Participants

The CFTC’s Division of Market Oversight (DMO) issued a time-limited no-action letter providing relief for temporarily registered swap execution facilities (SEFs) from any enforcement responsibilities with respect to market participants trading on those SEFs under the following CFTC Rules: 37.200(a), 37.200(b), 37.201(b)(1), 37.201(b)(3) , 37.201(b)(5), 37.202(b) and 37.203.  The no-action relief in this letter only applies to entities that have achieved temporary registration status as SEFs as of October 2, 2013.

DMO stated that market participants should be provided additional time to review SEF rulebooks and technological specifications before making any written consent to a SEF’s jurisdiction under CFTC Rule 37.202(b) and so subject themselves to the rules and requirements of such SEF.  DMO further stated that SEFs should be provided additional time to ensure compliance with its enforcement responsibilities under CFTC Rules 37.200(a)37.200(b)37.201(b)(1)37.201(b)(3)37.201(b)(5), and 37.203, due to remaining work related to customer legal documentation, processing customer information, and technological connectivity between SEFs, customers, swap data repositories, and third-party regulatory service providers.

The Division emphasized that while this letter relieves SEFs from certain enforcement responsibilities with respect to participants in their markets, this letter does not relieve SEFs from their current regulatory responsibility to establish and maintain the rules, systems and procedures necessary to carry out those enforcement responsibilities.  This no-action relief expires on November 1, 2013 at 12:01 am EST.

Lofchie Comment:   Another set of ambiguous and unworkable rules with another unworkable deadline delayed by another near-deadline no-action letter.  There is a pattern here (although perhaps the CFTC staff deserves credit for issuing the no-action letter before October 1).  The remarkable thing to me is that it just does not seem to matter.  A broken scheme of regulation seems to be the political equivalent of a tree falling in the forest with no one to hear it: unless the mainstream press finds a story here, it may as well be a non-event.

As to the no-action relief itself it is, as usual, inadequate to deal with the problem.   First off, why is the relief only available for a month?  Numerous SEFs have been provisionally registered in the past few weeks, and the CFTC Chairman has been widely quoted in the financial press saying that the CFTC has given only a “cursory” review to each of the applications.  At the same time, the user trade associations have written to the CFTC that the rules are not clear and the required compliance systems are not in place.  On what basis does the CFTC consider that a month is sufficient to deal with these issues?   Will that one-month delay provide the CFTC with sufficient time to conduct a more thorough review of SEF applications?  Notably, on the same day that the CFTC staff issued its no-action letter, it provided guidance as to trading procedures that will apply to SEFs (see related news story).  Even CFTC Commissioner Chilton said that a two-month delay in the CFTC’s SEF rules would be “reasonable” (see related news story).

In any case, given the extreme uncertainty around this rulemaking process and the related CFTC Rules, market participants who use a SEF might consider either (i) not entering into final SEF documentation until the “deadline” or (ii) executing the SEF documentation with the understanding that the agreement will not become effective until the SEF rules actually come into force.  As it is, there is no certainty as to what one is signing up for, or whether market participants will be better off or worse off for having agreed to comply with a set of rules that seems to still be a moving target.

See CFTC Letter 13-57.
See also:  Trade Associations Say “No SEFs Tonight, Please”