April 22, 2015

CFTC Staff Issue No Action Letters Providing Relief in Connection with Erroneous Swap Trades and Swap Trade Confirmations

Washington, DC — Today, the U.S. Commodity Futures Trading Commission's (Commission) Division of Market Oversight (DMO) and the Division of Clearing and Risk (together, the Divisions) issued a no-action letter providing time-limited relief to swap execution facilities (SEFs) and designated contract markets (DCMs) from Commission regulations to allow trades voided as a result of clerical or operational errors or errors discovered after a trade has been cleared to be corrected (Error-Trade No-Action Letter). Separately, DMO issued a no-action letter providing relief to SEFs from certain requirements concerning trade confirmations required from SEFs for non-cleared swaps (Confirmation No-Action Letter). The no-action letters, described in more detail below, are intended to support the development of SEFs and the trading of swaps on SEFs and DCMs.

Erroneous Swap Trades:  The Divisions are providing relief from certain Commission regulations to permit SEFs and DCMs to correct clerical or operational errors that cause a swap to be rejected for clearing and thus become void ab initio; and the relief allows counterparties to resubmit the trade with the correct terms.  The Error Trade No-Action Letter also permits SEFs and DCMs to correct clerical or operational errors discovered after a swap has been cleared.  It allows counterparties to execute a trade to offset the cleared trade and also submit a new trade with the correct terms.

Specifically, the Divisions will not recommend that the Commission take any enforcement action against a SEF for failure to comply with Commission Regulation 37.9(a)(2) or against a DCM for failure to comply with Commission Regulation 38.500, regarding methods of execution or to comply with Commission Regulations’ 37.203 and 38.152 prohibition against pre-arranged trading if, within one hour after a trade has been rejected for clearing, the SEF or DCM permits a new trade, with terms and conditions that match the terms and conditions of the original trade, other than any such error and time of execution, to be submitted for clearing without having been executed pursuant to methods set forth in Commission Regulations 37.9(a)(2) or 38.500 and violating the prohibition against pre-arranged trades under 37.203 and 38.152.

The relief further provides that if an error is discovered after a trade has been cleared, the Divisions will not recommend that the Commission take any enforcement action against a SEF for failure to comply with Commission Regulation 37.9(a)(2) or against a DCM for failure to comply with Commission Regulation 38.500, regarding methods of execution or to comply with Commission Regulations’ 37.203 and 38.152 prohibition against pre-arranged trading if, within three days after a trade has been accepted for clearing, the SEF or DCM permits a trade between the original parties that offsets the resulting swaps of the erroneous trade after clearing and a trade with the correct terms without the trades having to be executed pursuant to the methods required in Commission Regulations 37.9(a)(2) and 38.500 and violating the prohibition against pre-arranged trades under 37.203 and 38.152.

The relief provided in the Error-Trade No-Action Letter is subject to terms and conditions in the no-action letter.  The relief provided will expire at 11:59 p.m. (Eastern Daylight Time) on June 15, 2016.

Swap Trade Confirmations:  Separately, DMO issued a no-action letter extending the time period for relief previously provided in No-Action Letter 14-108, from September 30, 2015 to March 31, 2016, with certain modifications.  This Confirm No-Action Letter provides relief to SEFs from the requirement to obtain documents that are incorporated by reference in a trade confirmation issued by a SEF, as required under Commission Regulation 37.6(b), prior to issuing the confirmation and from the requirement that a SEF maintain such documents as records, as required in Commission Regulations 37.1000, 37.1001 and 45.2(a).  This letter also provides new relief from the requirement in Commission Regulation 45.3(a) that a SEF report confirmation data contained in the documents that the SEF incorporates by reference in a confirmation.

The Confirm No-Action Letter provides that DMO will not recommend that the Commission take enforcement action if, in a confirmation provided pursuant to Commission Regulation 37.6(b), a SEF incorporates by reference terms from previously-negotiated agreements between the counterparties, without first having obtained copies of such agreements.  DMO also will not recommend that the Commission take enforcement action against a SEF for failure to maintain a copy of the agreements incorporated by reference in the SEF’s confirmation, as required under Commission Regulations 37.1000, 37.1001 and 45.2(a).

Further, DMO will not recommend that the Commission take enforcement action against a SEF for failure to report confirmation data contained in the documents that a SEF incorporates by reference in a confirmation, as is required under Commission Regulation 45.3(a).  The no-action letter states, however, that a SEF must continue to report all swap data that the SEF is reporting as of the time of the issuance of this letter, pursuant to part 45 of the Commission’s regulations, even if such data are contained in the documents that the SEF incorporates by reference in a confirmation.

The relief provided in the Confirm No-Action Letter is subject to terms and conditions in the no-action letter.  The letter will expire at 11:59 p.m. (Eastern Daylight Time) on March 31, 2016.

Last Updated: April 22, 2015