The CFTC Divisions of Clearing and Risk, Market Oversight, and Swap Dealer and Intermediary Oversight issued guidance to swap execution facilities (“SEFs”) cautioning that the rules of various SEFs may be in conflict with the CFTC’s requirement of “impartial access.”
Among the SEF rules or requirements that were mentioned by the CFTC as being problematic were (i) requiring that market participants have a pre-execution agreement, such as a breakage agreement, (ii) requiring that firms be either a swap dealer or a clearing member in order to see Requests for Quotes, (iii) limiting access to firms depending on whether they are takers or providers of liquidity or both, and (iv) limiting a firm’s ability to access the SEF directly, as opposed to forcing a market participant to trade through a clearing member.
Lofchie Comment: It is not obvious one way or the other that the CFTC staff’s latest “guidance” is good policy or bad. By way of example, it is not clear why the CFTC staff believes that a “breakage agreement” should be prohibited or why the requirement of such an agreement is inconsistent with impartial access. That is, so long as a requirement applies to everyone (and it is the type of requirement that can at least be achieved by some), then the requirement is “impartial.” Although this is perhaps a more difficult legal or policy question, it is also not clear why it should be a prohibited model of doing business to require an unregulated firm to access an SEF through a registered FCM; i.e., why competing business models should not be allowed.
Separate from the substance of the requirements in this CFTC (staff) “guidance,” the process issues are also troubling. For example, here is a sentence from the last paragraph of the “guidance”:
“This Guidance, and the positions taken herein, represent the views of the Divisions [of the CFTC] only, and do not necessarily represent the views of the Commission [CFTC]. . . . “
What does that mean? The tone of the guidance suggests that it is meant to be a rule and not merely a suggestion. If so, is it a rule issued in violation of the Administrative Procedures Act? Will SEFs be subject to disciplinary action if they do not follow the Division’s guidance?
See: Staff Guidance on Application of CFTC Rules to SEFs.
Related news: CFTC Issues Time-Limited No-Action Letter for FCMs and SEFs (13-62) (October 2, 2013); CFTC Issues Time-Limited No-Action Letter Relief for Temporarily Registered SEFs and Designated Contract Markets from the One-Business-Day Product Review Period Requirement (13-60) (October 2, 2013); CFTC’s DMO Issues Time-Limited No-Action Relief for Temporarily Registered SEFs (October 2, 2013); Two CFTC No-Action Letters (13-55 and 13-56) on Swap Data Reporting (October 1, 2013); CFTC’s DMO Provides Time-Limited No-Action Relief to SEFs and Market Participants (September 30, 2013); CFTC Issues Staff Guidance on Swaps Straight-Through Processing (with Delta Strategy Group Summary) (September 30, 2013).