The CFTC issued an Order that will exempt certain European Union ("EU")-authorized trading facilities from the requirement to register as a swap execution facility ("SEF"). The Order will become effective on January 3, 2018. The Order follows a recent European Commission decision recognizing certain CFTC-regulated SEFs and designated contract markets ("DCMs") as compliant with EU trading obligations.

The CFTC determined that the EU legal framework satisfies the CEA standard for granting an SEF registration exemption. This includes requirements under MiFID II, which becomes applicable on January 3, 2018. The Order also lists 16 specific trading facilities that will be exempted from the registration requirement. On the listed facilities, participants will be able to execute swap trades that are subject to the CFTC trade execution requirement. For swaps that are not subject to the trade execution requirement, the listed facilities will be able to offer trading to U.S. counterparties.

CFTC Chair J. Christopher Giancarlo praised the recent cooperative efforts between the CFTC and the EC: "These decisions, including all of their relevant conditions, should be enduring achievements, as they are essential to ensuring a strong and stable trans-Atlantic derivatives market that supports economic growth both in the European Union and the United States."

The CFTC also announced that it will now review possible action regarding the real-time public reporting requirements under CFTC Rules Part 43 for certain publicly reportable swaps executed on exempted EU facilities.

Commentary /Nihal Patel

The CFTC exemptive Order does not contain any material conditions on the exemption from SEF registration, but does "emphasize" certain CEA requirements that will continue to apply, notwithstanding the exemptive Order. In particular, the CFTC reminds market participants that: (i) CFTC swap reporting requirements under Parts 43 and 45 of the CFTC rules continue to apply; (ii) "U.S. persons" must be "eligible contract participants" to enter into non-DCM swaps; and (iii) transactions for U.S. persons that are "customers" under CEA Section 4d must clear through a CFTC-registered futures commission merchant and a registered derivatives clearing organization.

"Reminder" (ii) is notable in that it seems to contain a subtle (perhaps inadvertent?) interpretation of CEA Section 2(e). The CFTC states that Section 2(e) makes it unlawful for any "U.S. person" to enter into a swap unless it is an ECP. Longtime practitioners are aware that Section 2(e) does not mention U.S. persons or the extra-territorial reach of the provision whatsoever. The wording used by the CFTC seems to suggest a more limited view of its extra-territorial reach. The CFTC has historically taken a much broader view of what types of activities could be found to have a "direct and significant" connection to U.S. commerce under CEA Section 2(i).

Reminder (iii) is worth noting for policy reasons. Permitting trading on overseas markets is not a carte blanche license for U.S. firms to participate on those markets as an overseas market participant might. U.S. participants are, essentially, still required to go to European markets through their U.S. intermediaries.

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