December 23, 2013

CFTC’s Division of Market Oversight Provides Conditional No-Action Relief from Limitations on Execution Methods for Required Transactions that Involve Basis Risk Mitigation Services Provided by a SEF

Washington, DC — The U.S. Commodity Futures Trading Commission’s (CFTC or Commission) Division of Market Oversight (DMO) today announced the issuance of a no-action letter providing swap execution facilities (SEFs) relief, under certain conditions, in connection with a SEF’s provision of certain “basis risk mitigation services,” i.e., a service that manages the basis risk from reference price quarterly re-pricing timing mismatches on swaps. DMO notes that the Commission previously determined that entities providing “risk mitigation services” must register as SEFs because they meet the definition of a SEF in Section 1a(50) of the Commodity Exchange Act (CEA).

DMO’s no-action letter provides relief, under certain conditions, to registered SEFs providing a basis risk mitigation service for Required Transaction swaps from the requirement in Commission Regulation 37.9(a)(2) that any transaction involving a Required Transaction be executed through an order book or a request for quote system operating in conjunction with an order book, provided that the basis risk mitigation service operates in accordance with a SEF rule that meets the conditions contained in DMO’s no-action letter. Commission Regulation 37.9(a) defines trades of swaps subject to the trade execution requirement in section 2(h)(8) of the Commodity Exchange Act as “Required Transactions.” At this point in time, the trade execution requirement does not yet apply to any swap. It is expected, however, that the requirement may be triggered for the first time in early 2014. DMO’s no-action letter provides relief from Regulation 37.9(a)(2) through 11:59 p.m. on December 31, 2014.

DMO notes that although the relief was requested by a particular entity, the relief provided is available to all registered SEFs providing basis risk mitigation services meeting the conditions specified in the letter.

Last Updated: December 23, 2013