The CFTC Division of Market Oversight ("DMO") extended time-limited relief to swap execution facilities ("SEFs") from the "occurs away" requirement in the CFTC Rule 43.2 definition of "block trade."

Under Rule 43.2, a block trade is defined as a swap transaction that "occurs away" from the registered SEF's or designated contract market's rules and procedures. The recently granted relief extends the relief provided through CFTC Letter No. 16-74 (which extended relief granted in CFTC Letters 14-118 and 15-60).

The relief was extended in response to a request from the Wholesale Market Brokers' Association, Americas ("WMBAA"). WMBAA asserted that under the block trade definition in CFTC Rule 43.2, SEFs are not able to comply with a strong>CFTC Rule 37.702(b) requirement to "facilitate pre-execution credit checks for block trades that 'occur away' from a SEF." WMBAA argued that a futures commission merchant ("FCM") uses an SEF's credit check functionality to perform credit checks. As such, credit checks are able to occur only (i) after a swap has been executed away from the SEF or (ii) before a swap has been executed on the SEF. WMBAA requested a permanent solution to the compliance issues presented by the "occurs away" requirement, but in the meantime asked for an extension of the aforementioned exemptive relief.

In response to the request from WMBAA, the DMO agreed to extend the relief if the following conditions are met:

  • the block trade is not executed on the SEF's Order Book functionality;
  • the SEF adopts rules for cleared block trades indicating that the SEF relies on the relief provided in the letter;
  • the block trade must (i) involve a swap listed on a registered SEF, (ii) be executed pursuant to the SEF's rules, (iii) meet the notional or principal amount at or above the appropriate minimum block size applicable to the swap, and (iv) be reported to a swap data repository pursuant to SEF and CFTC rules;
  • the FCM completes the pre-execution credit check pursuant to CFTC Rule 1.73 at the time at which the order for a block trade enters the SEF's non-Order Book trading system or platform; and
  • the block trade is subject to void ab initio requirements where the swap is rejected on the basis of credit.

The relief is now set to expire on November 15, 2020. The DMO stated that the extended relief will allow additional time to explore more permanent solutions relevant to screening block trade orders.

Commentary / Steven Lofchie

The extension is consistent with Chair Giancarlo's criticisms of the CFTC's existing rules regarding trading on SEFs. Presumably, by the time this no-action letter expires, the relevant rules will be fixed.

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.