By Margaret Scullin
On January 28, 2014, the Commodity Futures Trading Commission (“CFTC”) announced that it had deemed certified a made available to trade determination by a third swap execution facility (“SEF”), TW SEF LLC (Tradeweb). This follows the certification of two previous made available to trade determinations submitted by Javelin SEF, LLC and trueEX, LLC, respectively. Two further made available to trade determinations, submitted by Bloomberg SEF LLC and MarketAxess SEF Corporation, respectively, are pending certification during the CFTC’s 90-day review process.
The swaps listed in the certified made available to trade determinations will become subject to the trade execution requirement of section 2(h)(8) of the Commodity Exchange Act (“CEA”) 30 days after certification. Section 2(h)(8) of the CEA requires that swaps subject to the mandatory clearing requirement of the CEA must be executed on a designated contract market (“DCM”) or SEF. Therefore, from the effective date of a made available to trade determination, the swaps listed in that determination must be executed through a DCM or a SEF, in accordance with CFTC regulations, if those swaps are subject to mandatory clearing. Because the determinations are product-specific, rather than SEF-specific, listed swaps will be subject to the trade execution requirement regardless of the trading platform on which they are offered.
All three of the certified made available to trade determinations include LIBOR-based fixed-to-floating interest rate swaps denominated in US dollars having fixed notional amounts with various full-year tenors. The most recent certified made available to trade determination also includes certain credit default swaps.
Javelin SEF, LLC’s made available to trade determination will take effect on February 15, 2014, trueEX, LLC’s on February 21, 2014 and TW SEF LLC’s on February 26, 2014.
Despite the looming deadlines, some uncertainty remains about how these determinations are to be implemented. In particular, the CFTC noted that questions have been raised about the treatment of transactions involving multiple swaps (so-called “package transactions”) where not all of the swaps are subject to the trade execution requirement. To address these questions, the CFTC intends to hold a public roundtable on package transactions to consider whether and in what form limited relief might be appropriate. A public meeting of the CFTC’s Technology Advisory Meeting, originally scheduled for January 21, 2014, was to include discussion of the made available to trade determination process. That meeting has been postponed until February 10, 2014.
The CFTC has not addressed concerns raised by the International Swaps and Derivatives Association, Inc. (“ISDA”) and the Securities Industry and Financial Markets Association (“SIFMA”) about cross-border issues arising from the trade execution requirement. ISDA and SIFMA have commented that non-US persons could be subject to the trade execution requirement yet may have limited access to SEFs due to time differences. They have recommended that at least one SEF should support trading of each listed swap 24 hours a day before a made available to trade determination takes effect. ISDA and SIFMA also noted that non-US customers may be prohibited from trading on a SEF unless that SEF is registered with or licensed by that customer’s jurisdiction. Further questions remain as to whether foreign trading platforms are required to register as SEFs with the CFTC. The CFTC has been urged to address these concerns in order to avoid fragmentation of the market.
Perhaps more guidance will be issued before the trade execution requirement takes effect. In the meantime, market participants that will be subject to this requirement must ensure that they have completed the onboarding process with one or more SEFs by the deadline and that they are operationally ready to comply. This includes signing a participant agreement with each SEF and agreeing to be bound by the SEF’s rulebooks. That alone has proven challenging, as the rulebooks have been amended frequently to incorporate evolving CFTC SEF rules and guidance.