The CFTC Division of Market Oversight (“DMO”) has issued further staff “guidance” as to swap execution facilities (“SEFs”). The Guidance addresses six areas, including:
- SEF/DCM registration requirements, which apply to multilateral swaps trading platforms located both in and outside the U.S. under CFTC Rule 37.3 (“Requirements and Procedures for Registration”) if the SEF is used for executions by either (i) non-U.S. persons located within the United States or (ii) U.S. persons through agents;
- consent by clearing members to the jurisdiction of a SEF pursuant to CFTC Rule 37.700 (“Core Principle 7-Financial Integrity of Transactions”), which requires that SEFs “establish and enforce rules and procedures for ensuring the financial integrity of swaps entered on or through the facilities of the SEF, including the clearance and settlement of the swaps pursuant to Section 2(h)(1)” of the CEA;
- a SEF’s use of proprietary data or personal information collected by the SEF from its market participants. The Guidance states that it is inconsistent with CFTC Rule 37.7 (“Prohibited Use of Data Collected for Regulatory Purposes”) for a SEF participation agreement or rulebook to contain a requirement that, in order to access the SEF, an eligible contract participant must consent to the SEF’s using data it collects from the ECP, including market data, propriety data, and personal data for business or marketing purposes;
- clarification that a trade guarantee from a clearing member is required to satisfy CFTC Rule 37.700, but that an additional guarantee from a SEF member is not required;
- a SEF’s definition of “emergency” situations must be consistent with the definition in CFTC Rule 40.1(h) (“Definitions”) and not broader than such definition; and
- SEF reporting obligations, particularly the obligation that, when a SEF reports swap data, it must also report the legal entity identifier of the SEF.
Lofchie Comment: This “guidance” appears to represent a fairly remarkable extension of the CFTC’s jurisdiction, albeit subject to the usual questions as to whether the CFTC is acting in violation of the Administrative Procedures Act.
In the first instance, the “guidance” states that the “[Market Oversight] Division [of the CFTC] expects that a multilateral swaps trading platform located outside the United States that provides U.S. persons or persons located in the U.S. (including personnel and agents of non-U.S. persons located in the United States) . . . with the ability to trade or execute swaps on or pursuant to the rules of the platform, either directly or indirectly through an intermediary, will register as a SEF or DCM.” A footnote to this language indicates that the CFTC would consider various factors in determining whether a non-U.S. SEF would have to register, although the conditions in the footnote are entirely ambiguous and include phrases such as “a significant [but undefined] portion” and “generally include, but not be limited to.” In short, a SEF that does not exclude all trading by U.S. persons, or by non-U.S. persons who are present in the United States, is subject to CFTC registration. Further, according to the guidance, once a SEF registers, every clearing member of the SEF must be subject to the jurisdiction of the SEF, which has the effect of giving the CFTC indirect jurisdiction over the clearing member. In summary, the CFTC assert that it may have jurisdiction over SEFs everywhere in the world (even where no U.S. person can trade directly on the SEF) and over every clearing member of every such SEF. And it does so in the form of “guidance,” issued without warning or consultation, and not a rule.
This guidance is likely to have significant market consequences and draw international resistance from the CFTC’s global regulatory colleagues.
See: CFTC DMO Staff Guidance.
Related news: CFTC Issues Staff ”Guidance” on Impartial Access to SEFs (November 15, 2013); 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); 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 (September 30, 2013).