Overview
On July 26, 2023, the CFTC issued a notice of proposed rulemaking (NPRM) revising swap confirmation requirements for transactions executed on, or pursuant to the rules of, swap execution facilities (SEFs). The changes largely codify existing no-action letter 17-17 (NAL 17-17) and should not require significant changes to existing compliance programs of SEFs, their members, or participants. The comment deadline for the NPRM is 60 days following publication in the Federal Register.1
Over the last several years, the CFTC has worked to codify no-action letters related to Title VII of the Dodd-Frank Act.2 This proposal continues that trend.
Background
CFTC Rule 37.6(b) requires a SEF to provide counterparties with written confirmation of all terms upon a trade's execution, whether occurring on-SEF or pursuant to its rulebook. The SEF-issued confirmation is deemed, by regulation, to legally supersede any previous agreement between the executing counterparties. A minor exception for block trades (i.e., certain positions executed off-SEF) excludes customer identifiers from SEF confirmation requirements. Swap Dealers (SDs) rely on SEF-issued confirmations to satisfy their own trade confirmation obligations, provided that the SEF's rules "establish that confirmation of all terms of the transaction shall take place at the same time as execution."
Compliance under the current regime
The Part 37 Adopting Release permitted a SEF to incorporate pre-existing counterparty agreements by reference, but required the SEF to obtain and maintain these agreements in accordance with SEF recordkeeping requirements. Not surprisingly, the process of obtaining (and identifying) all agreements, and digitizing and retaining them in a compliant manner, proved problematic and resulted in a succession of no-action letters, the most recent being NAL 17-17. Since 2014 the no-action letters have permitted SEFs to satisfy the requirement to provide all terms in writing via incorporation by reference and without obtaining the prior written agreements of their participants.
Overview of Proposed Changes
If adopted, the rule proposal would codify most of NAL 17-17, allowing SEFs to satisfy trade confirmation and related recordkeeping requirements without first obtaining swap documentation previously agreed between its participants.3 The CFTC declined to codify relief provided in NAL 17-17 relating to a SEF’s failure to report confirmation data contained in underlying counterparty agreements, noting its belief that data elements required to be reported under the trade reporting re-write are "readily available" for a SEF to satisfy its Part 45 obligations.
Further proposed revisions to SEF confirmation requirements include:
- Requiring that all terms be confirmed in writing "as soon as technologically practicable" – and not "at execution".
- Specifying that a SEF-issued confirmation legally supersedes the “conflicting terms” of a previous agreement, and not the entirety of any such agreement (as currently required).
- Conforming the SD confirmation safe harbor for SEF-executed trades by permitting SDs to rely on SEF-issued confirmations (see bullet point 1, above) where a SEF’s rulebook establishes that all terms are confirmed "as soon as technologically practicable".
Takeaways
- Recordkeeping requirements may still apply. If, notwithstanding the relaxed rule, the SEF-participant swap agreements are voluntarily obtained or if the Commission requests them, such agreements will constitute business records that would need to be retained pursuant to CFTC Rules 37.1000, 37.1001 and 45.2.
- Keeping swap agreements private. Swap market participants trading on, or considering executing trades on, a SEF will not be required to provide swap trading relationship documentation and related agreements to a third-party, unless otherwise requested by the Commission pursuant to Core Principle 5.
- Information upon request. A SEF must retain the ability to obtain SEF-participant swap agreements under Core Principle 5, including where requested by the CFTC.
- Inconsistent Timing. Even with the added flexibility of requiring SEF-issued confirmations to be made "as soon as technologically practicable," off-SEF trade confirmation requirements will continue to provide comparatively more time (i.e., 1-2 business days for SD-executed trades) for counterparties to confirm trade terms.
About Steptoe
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Endnotes
1 At the time of this writing the NPRM was not published in the Federal Register.
2 See, for example, Margin Requirements for Uncleared Swaps and Major Swap Participants, 86 Fed. Reg. 229 (Jan. 5, 2021), codifying and expanding CFTC Letter No. 19-29 by allowing non-bank swap dealers to use the risk-based IM model calculation of its SD or MSP counterparty to determine the amount of IM to be collected.
3 The NPRM provides that a SEF's collection of pre-negotiated trading agreements is not required "except as otherwise necessary to fully perform its operational, risk management, governance, or regulatory functions, or any requirements under this part."
