United States: Dodd-Frank Trade Execution Developments

In February 2014, certain categories of interest rate swaps and index credit default swaps became subject to the trade execution requirement under Dodd-Frank.  As a result, those product types may no longer be traded bilaterally over-the-counter but, rather, must be executed on a swap execution facility ("SEF") or designated contract market ("DCM"), unless an exemption or exception applies.  A product type becomes subject to the trade execution requirement when (i) it is required to be cleared under a CFTC clearing determination 1 and (ii) a SEF or DCM has made it "available to trade" (i.e., the SEF or DCM must demonstrate that it lists or offers that swap for trading on its trading system or platform and has considered various factors such as "whether there are ready and willing buyers and sellers"), as approved by the CFTC.2  If, however, a particular swap qualifies for an exemption or exception from the Dodd-Frank clearing requirement, it generally will be exempt or excepted from the trade execution requirement as well.

Generally, a SEF or DCM may submit its determination to the CFTC that a swap is "made available to trade" and self-certify compliance with the Commodity Exchange Act ("CEA") and rules thereunder pursuant to CFTC Regulation 40.6.3  The CFTC then has 10 business days plus between 30 and 120 calendar days to deem the submission certified and effective.4

To date, the following swaps have been submitted to the CFTC by various organizations, all of which have been certified and made effective:

Organization Effective Date Products Affected

Javelin SEF, LLC

February 15, 2014

Certain interest rate swaps:

trueEX LLC

February 21, 2014

Certain interest rate swaps:

TW SEF LLC

February 26, 2014

Certain index credit default swaps and certain interest rate swaps:

MarketAxess SEF Corporation

February 27, 2014

Certain index credit default swaps:

  • CDX.NA.IG On-The-Run 5Y
  • CDX.NA.IG Most Recent Off-The-Run 5Y
  • DX.NA.HY On-The-Run 5Y
  • CDX.NA.HY Most Recent Off-The-Run 5Y
  • iTRAXX Europe On-The-Run 5Y
  • iTRAXX Europe Most Recent Off 5Y
  • iTRAXX Europe Crossover On-The-Run 5Y
  • iTRAXX Europe Crossover

Bloomberg SEF LLC

March 9, 2014

Certain index credit default swaps:

  • CDX.NA.IG 5Y: The then current On-The-Run series
  • iTraxx Europe 5Y: The then current On-The-Run series

Certain interest rate swaps:

  • USD LIBOR IRS with 2, 3, 5, 7, 10, 15, 20 and 30-year tenors: Fixed Notional, Spot Starting and Par only
  • EUR EURIBOR IRS with 2, 3, 5, 7, 10, 15, 20 and 30-year tenors: Fixed Notional, Spot Starting and Par only

(The foregoing Bloomberg SEF LLC products were made available to trade via earlier determinations, specifically those effective February 15, 2014, February 21, 2014, and February 26, 2014, as summarized above in this table.)

However, "made available to trade" determinations have not yet been made for many of the swaps that are currently required to be cleared, including various basis swaps and forward rate agreements, and certain indices and tenors of index credit default swaps.

In addition, on February 10, 2014, in connection with the commencement of the trade execution requirement, the Division of Market Oversight of the CFTC announced the following measures intended "to promote trading on swap execution facilities and support an orderly transition to mandatory trading":

  • "Swap Data Repositories – Access to SDR Data by Market Participants," interim final rule.  Market participants are generally prohibited access to swap data maintained by a swap data repository.5  However, the swap data and other information maintained by a swap data repository related to a particular swap may be accessed by either counterparty to that swap.6 This interim final rule clarifies that such swap data available to a counterparty to a swap does not include the identity of the other counterparty (or its clearing member) if the swap is: (i) executed anonymously on a SEF or DCM; and (ii) cleared in accordance with the CFTC's "straight-through processing" requirements.7
  • CFTC Letter No. 14-12, "No-Action Relief from the Commodity Exchange Act Sections 2(h)(8) and 5(d)(9) and from Commission Regulation § 37.9 for Swaps Executed as Part of a Package Transaction"  This no-action letter provides that, until May 15, 2014, a swap executed as part of a "package transaction" will be not subject to the trade execution requirement.  A "package transaction" is a transaction involving two or more instruments: (i) that is executed between two counterparties; (ii) that is priced or quoted as one economic transaction with simultaneous execution of all components; (iii) that has at least one component that is a swap that is made available to trade and, therefore, is subject to the trade execution requirement; and (iv) where the execution of each component is contingent upon the execution of all other components.8
  • "Division of Market Oversight Guidance on Swap Execution Facility Jurisdiction".  Under the CEA, a SEF must establish and enforce rules such as terms and conditions of swaps traded or processed through the SEF.9  CFTC Regulation 37.202(b) further requires a SEF to obtain the consent of any market participant before that market participant may access the SEF's facilities.  Guidance clarifies that a SEF may obtain such consent simply by providing in its rulebook that any person initiating or executing a transaction on or subject to the rules of the SEF directly or through an intermediary, and any person for whose benefit such a transaction has been initiated or executed, consents to the jurisdiction of the SEF.10

The range of product types to which the trade execution requirement applies is expected to expand as SEFs and DCMs make further submissions and "made available to trade" determinations are made.

Footnotes

1. CEA § 2(h)(8).

2. CFTC Rules 37.10 and 38.12.

3. Id.

4. See CFTC Regulation 40.6.

5. CFTC 49.17(f).

6. Id.

7. Swap Data Repositories – Access to SDR Data by Market Participants (February 10, 2014) (available at: www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister021014.pdf).

8. Some common types of interest rate swap package transactions include swap curves (package of two swaps of differing tenors), swap butterflies (package of three swaps of differing tenors), swap spreads (government securities vs. swaps typically within similar tenors), invoice spreads (Treasury-note or Treasury-bond futures vs. swaps), cash/futures basis (Eurodollar futures bundles vs. swaps), offsets/unwinds, delta neutral option packages (caps, floors, or swaptions vs. swaps), and mortgage-backed security basis (to-be-announced swaps (agency mortgage-backed securities) vs. swap spreads). Common credit default swap package transactions include transactions commonly known as index options vs. index, tranches vs. index, and index vs. single name credit default swaps.

9. 7 U.S.C. § 5h(f)(2)(A).

10. Division of Market Oversight Guidance on Swap Execution Facility Jurisdiction (February 10, 2014) (available at: www.cftc.gov/ucm/groups/public/@newsroom/documents/file/dmostaffguidance021014.pdf).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Nikiforos Mathews
Jonas Robison
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