The CFTC filed the notice linked below in a position limits litigation, advising the court that if the CFTC votes at the November 5 meeting to issue a new proposed position limits rule that is supported by a cost-benefit analysis, then the Commission will voluntarily dismiss its appeal of a decision that it could not impose position limits without performing such an analysis.

Lofchie Comment:  A significant amount of academic literature argues against the imposition of position limits. This viewpoint should receive a fair hearing from all of the Commissioners.

See:  CFTC Notice to Court Regarding Position Limits Meeting.
Related News:  “Blog Post Quotes Commissioner Wetjen on Position Limits” (October 24, 2013); “CFTC Commissioner O’Malia Blasts Cross-Border Guidance and Potential Position Limits Rule ” (September 27, 2013); “ISDA and SIFMA v. CFTC Court Date Set for Oral Arguments on Position Limits” (August 26, 2013).

The Asset Management Group of SIFMA (SIFMA AMG) submitted the attached comment letter to the CFTC in which it expressed significant concerns regarding straight-through processing, swap execution facility (SEF) implementation and relief relating to the aggregation provision in the final block trade rule. In addition, SIFMA AMG requested an extension of certain no-action letters issued by CFTC staff relating to the implementation of the CFTC SEF final rules until at least February 1, 2014.

SIFMA further requested further no-action relief (through March 31, 2014) relating to the aggregation prohibition in the final trade block rule.

Lofchie Comment:  We have raised the issue several times (and intend to again) that the CFTC has played roughshod with the Administrative Procedures Act in connection with its “guidance” on cross-border regulations.  In the case of its various no-action letters and guidance on SEFs (many of which impose additional conditions on market participants), the argument that the CFTC is not complying with the obligations incumbent upon it as a regulatory agency seem at least as strong.  What we are likely to find as the CFTC eventually attempts to bring enforcement actions based on its “rules” that were never properly adopted is that these “rules” issued in the form of “guidance” are subject to challenge as improperly imposed.  Certainly, any market participant charged with a violation by the CFTC on the basis of its guidance and no-action letters should consider whether the CFTC’s charge has a proper foundation.

See: SIFMA AMG comment letter.
Related News: “CFTC Issues Staff Guidance on Swaps Straight-Through Processing” (September 30, 2013).
See also:  CFTC Staff Guidance on Swaps Straight-Through Processing.   

The CFTC’s Division of Clearing and Risk (“DCR”) and Division of Market Oversight (“DMO”) (together, “the Divisions”) provided time-limited relief for SEFs from compliance with certain requirements of CFTC Rules 37.9(a)(2) (“Methods of execution for required and permitted transactions – Execution methods”) and 37.203(a) (“Rule enforcement program – Abusive trading practices prohibited”) in connection with broken trades. The Divisions announced that they will not recommend action against a SEF for failure to comply with Rule 37.9(a)(2) regarding methods of execution for required or permitted transactions or Rule 37.203(a)’s prohibition of pre-arranged trading. This relief, however, is conditional upon the following circumstance: “if, after a trade has been rejected for clearing for clerical or operational errors or omissions, the SEF permits a new trade, with terms and conditions that match the terms and conditions of the original trade, other than any such error and the time of execution, to be submitted for clearing without having been executed pursuant to the methods set forth in Rule 37.9(a)(2).”

Additionally, in order for a SEF to avail itself of the no-action relief, the SEF must submit to following conditions:

• The procedure must only be available for trades that are rejected because of a clerical or operational error or omission resulting in a mismatch of the terms of the trade. The procedure must not be available for trades that are rejected because a customer breached its credit limit at a clearing member or a clearing member breached its credit limit at a DCO.
• The SEF must have rules stating that any trade executed on or subject to the rules of the SEF that is not accepted for clearing shall be void ab initio. The rules may not permit trades to be held in a suspended state and then re-submitted.
• Both clearing members must agree to submit the new trade.
• Each clearing member must obtain the consent of its customer, if any, to submit the new trade.
• Neither a clearing member nor a SEF may require a customer to agree in advance to consent to the submission of the new trade. The consent must be sought on a case-by-case basis, after the trade has been rejected.
• The new trade must be submitted as quickly as technologically practicable after receipt by the clearing members of notice of the rejection from clearing, but in any case no later than 30 minutes from the issuance of a notice of rejection by the DCO to the clearing members.
• Both the original trade and the new trade must be subject to pre-execution credit checks that comply with CFTC Rule 1.73 and/or Rule 23.609 and the Staff Guidance.
• Both the original trade and the new trade must be processed in accordance with the time frames set forth in CFTC Rule 1.74, 23.610, 39.12(b)(7) and the Staff Guidance.
• The SEF reports the swap transaction data to the relevant swap data repository (“SDR”) as soon as technologically practicable after the original trade is rejected by the DCO, including:
  • A part 43 cancellation for the original trade;
  • A part 45 termination indicating that the original trade is void ab initio;
  • Swap transaction data pursuant to Parts 43 and 45 for the newly executed trade. This data must reference the original cancelled trade and indicate that it has been reported pursuant to the procedures described in this letter. This data must also link the original trade to the new trade for both Parts 43 and 45 reporting to the relevant SDR.
• The SEF must enable the relevant SDR to publicly disseminate the new trade – which may be at a price that is away from the current market – pursuant to Part 43 and in a manner that references the original cancelled trade that was previously publicly disseminated.
• The procedure established by the SEF does not operate in any way to impair impartial access to the SEF as required by Commission Regulation 37.202 and the Staff Guidance. In particular, SEF rules must not require breakage agreements among participants as a condition of access and must prohibit a participant from requiring breakage agreements with other participants as a condition of trading with them.
• The SEF must have rules stating that if the new trade is also rejected, it is void ab initio and the parties will not be provided a second opportunity to submit a new trade.

This no-action relief commences on October 25, 2013, and expires on June 30, 2014.

Lofchie Comment:  The CFTC imposes more complicated and burdensome conditions on attempts to fix a clerical error in a single trade than it does in allowing a newly formed SEF to declare that the entire interest rate swaps market is required to trade on an exchange. Something is wrong with this picture.

See: CFTC Letter 13-66.
See also:  YouTube Video

The CFTC has announced that it will hold a public meeting on Tuesday, November 5, 2013, at 9:30 a.m. to consider position limits for derivatives as well as other matters.  For details, see below.

In his October 23 blog post, economist Craig Pirrong discusses the lack of clarity in CFTC rulemaking relating to SEFs (and other issues), in particular criticizing the CFTC’s practice of adopting requirements that are contained in difficult to interpret footnotes.

Lofchie Comment:  In another news story about CFTC footnotes, Chairman Gensler was quoted as saying, “swap dealers must be careful how they interpret regulations.”  This is an interesting comment in two respects:  (i) first, the whole point of the controversy over footnotes in CFTC regulations is that the market does not know what those regulations mean; therefore the regulators should not chastise the market for failing to be careful about interpreting regulations – rather, it is incumbent on the regulators to issue rules that are readily understood (which is likely not to be the case where, as Professor Pirrong points out, important provisions are dropped into footnotes 88 and 513); (ii) second, in the interpretative guidance relating to cross-border activities (which is at least indirectly at issue here), the CFTC failed to issue regulations at all.  As we previously noted, such guidance cannot legally form the basis of an enforcement action, and it will be likewise problematic for the CFTC to enforce rules which the entire market agrees are unclear and which relate to guidance that is not enforceable at all.

See:  “I See Your Footnote 88, and Raise You Footnote 513, or Kafka Squared,” Streetwise Professor.

The CFTC is requesting public comment on a certification from trueEX, LLC (“trueEX”) to implement available-to-trade determinations for certain interest rate swap contracts.

trueEX submitted its available-to-trade determinations to the CFTC on a self-certified basis pursuant to CFTC Rules 37.10 (“Process for a swap execution facility to make a swap available to trade”) and 40.6 (“Self-certification of rules”).  According to the CFTC, if trueEX’s submission is deemed certified by operation of Rule 40.6, such swap contracts, whether listed or offered by trueEX or any other designated contract market (“DCM”) or swap execution facility (“SEF”), will be subject to the trade execution requirement under CEA Section 2(h)(8) (“Mandatory Clearing Requirement for Swaps – Exceptions”).

All transactions involving swaps that are subject to the trade execution requirement generally must be executed on either a DCM or an SEF, and – when executed on an SEF – must be executed in accordance with the execution methods prescribed by CFTC Rule 37.9(a)(2) (“Methods of execution for required and permitted transactions”).

The Division of Market Oversight has stayed trueEX’s submission to provide the CFTC with additional time to analyze the submission.  The CFTC has 90 days to review the submission, ending on January 20, 2014.  trueEX’s submission will be subject to a 30-day comment period within the stay period, which will close on November 21, 2013. Comments may be submitted electronically here.

Lofchie Comment:  trueEx is the second SEF to certify that swaps should be “made available to trade”; i.e., required to trade on an SEF or futures exchange. 

Any such determination seems premature, given that the markets are still trying to figure out how the term “SEF” is defined, rules governing SEFs are in flux, and market participants seem confused as to the various requirements.

See: CFTC Press Release.
See also: SEF Seeks Determination of Mandatory Exchange Trading of Swaps (certification of Javelin).