MFA Comment Letter to CFTC on SEF Trading Rules and Onboarding Documentation

The Managed Funds Association (“MFA”) has submitted a letter requesting that the CFTC conduct targeted compliance reviews of the rulebooks and user agreements of temporarily registered swap execution facilities (“SEFs”), and enforce the CFTC’s SEF rules and related staff guidance before the effective date of the first “made available-to-trade” (“MAT”) determination. 

In requesting such action, the MFA outlined the material issues that MFA members have encountered related to SEF rulebooks, SEF user agreements, and operational and documentation readiness for the SEF trading of bunched orders in credit default swaps that represent significant barriers to impartial access for buy-side firms to SEFs. The MFA’s letter also raised certain documentation and commercial challenges that buy-side firms have faced in negotiating access to SEFs that represent a principal impediment to funds completing the SEF onboarding process.

Lofchie Comment:  Beyond the specific comments made in it, the MFA letter also implicitly raises material procedural problems with the CFTC’s rulemaking process.  First, in its emphasis of the speed of adopting and implementing rules, the CFTC would force a tremendous volume of swaps trading onto SEFs without having conducted any review of SEFs beyond determining that SEFs had filed a complete application (without regard to the contents of that application).  The MFA’s letter specifically complains about the failure of the CFTC to review the various SEFs’ rulebooks; however, it is arguably even more troubling that the CFTC has not tested the various SEFs’ technological capabilities.  The MFA also asserts that the various SEFs have inconsistently and incompletely adhered to relevant CFTC requirements and, in doing so, point to an inconsistency in the manner in which the SEFs have implemented the CFTC’s requirement that neither party charge a breakage fee for a trade that does not clear.  However, this also implicitly raises yet another issue: whether the CFTC properly adopted its prohibition on breakage fees.

Addressing the various complaints made in the MFA letter would not be a trivial matter and would likely require a meaningful delay before the CFTC could force swap trading to take place on SEFs.

See: MFA Letter to CFTC