By Margaret Scullin
Responding to concerns from various market participants, the Commodity Futures Trading Commission (“CFTC”) has granted time-limited no-action relief from the trade execution requirement, which will begin to take effect next week, for “package transactions”. A package transaction involves more than one swap or financial instrument between two counterparties that is priced or quoted as a single transaction and where the components are executed simultaneously and are contingent on execution of the other components. Concerns were raised that subjecting one or more swaps in a package transaction to the trade execution requirement would pose operational difficulties and that more time is needed to develop the necessary market infrastructure. Isolating components of a package transaction would pose challenges for futures commission merchants conducting required pre-trade credit checks and could cause credit limit breaches that would not occur if the transaction were considered as a whole. Derivatives clearing organizations may not be able to simultaneously process all components of a package transaction and, as a result, may reject some and accept others.
Market participants are working toward a common standard protocol to establish workflows for efficiently processing package transactions, but more time is needed to develop and implement the market infrastructure.
The CFTC granted no-action relief from the trade execution requirement for package transactions through May 15, 2014. This also allows the CFTC more time to consider the issues surrounding package transactions. The CFTC is holding a public roundtable on package transactions on February 12, 2014 to gather more information and will consider whether further relief is appropriate.
Package transactions were discussed at the CFTC’s Technology Advisory Committee meeting on February 10, 2014. The CFTC commissioners and staff were generally open to addressing market concerns and taking action to eliminate obstacles to trading on swap execution facilities. However, they expressed skepticism and resistance toward suggestions that more time than is currently allowed by CFTC rules for acceptance or rejection of trades may be needed to communicate information to all parties in the workflow.
The agenda for the Technology Advisory Committee meeting also included a discussion of clearing issues, such as the CFTC’s void ab initio rule for swaps not accepted for clearing. Those issues were briefly outlined by the final witness, who cited concerns about operational readiness and the impact of the void ab initio rule on parties’ ability to resubmit swaps not accepted for clearing. Unfortunately, the meeting had run over time and was adjourned without any response to those concerns from the CFTC.