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CFTC MTF no action- a long and complex answer to a question no-one is asking anymore

On the 9th April the CFTC “clarified” the confusion regarding substituted SEF compliance for MTFs. No-action Letter 14-46 supersedes and extends the 11th February 2014 relief from SEF-registration rules  that were due to take effect on 15 May 2014, affecting EU MTFs and SDs who wish to transact through them. In order to benefit, MTFs must submit a request to the CFTC by 11:59pm 14th May 2014 (see below for details). However, to date, there have been no applications by MTFs to the CFTC for qualifying status. This lack of impetus is largely at the behest of the CFTC itself, having advised EU platforms to wait for the new guidance, advice they failed to pass on to the FCA who have been working hard to make sense of the now superseded 11th February guidance. Meantime, market reality has rolled on and may well have made the whole saga irrelevant, except perhaps as a lesson in how not to do it. Lacking a clear alternative, US dealers have largely transferred their non-$ portfolios into non-guaranteed affiliates, bypassing the SEF rules altogether. This has had the foreseen and feared effect of liquidity fragmentation[1]– US persons trading on SEFs and non-US  trading bilaterally or via non-qualifying MTFs. Even in the event of a last-minute rush for MTF qualifying status, this elective apartheid is likely to continue until approximate equivalency is achieved in both clearing and execution, a distant prospect at best; even then, perhaps excepting the USD IRS market, there is no compelling need to apply for QMTF status. However, if only theoretically, it is an important letter and in the interests of completeness, a summary of its provisions follows:

  • Relieves an MTF (subject to request and acceptance) from the requirement to register as an SEF under Section 5 h(a)(1) CEA
  • Relieves an MTF’s clients from the trade execution mandate under Section 2 h(8) CEA and certain swap data reporting obligations under Parts 43 and 45 of the CFTC Regulations
  • Relieves SDs and MSPs that execute swaps on a QMTF from:
    • Certain external business conduct (EBC) standards under Part 23 (h) CFTC regulations
    • Confirmation requirements under CFTC Regulation 23.501
    • Relationship documentation requirements  under CFTC Regulation 23.504

The relief has no formal expiry date and will last until supersession by final rulings on substituted compliance in each jurisdiction. The various reliefs are triggered by the DMO’s acknowledgement of the time-limited request and are subject to variation if the CFTC finds inaccuracy in the self-certification. The written request must include certifications that the MTF:

  • Is subject to and in compliance with domestic regulations that are in accordance with SEF rules on trading methodology and non-discriminatory access
  • Meets specified requirements in respect of swap clearing and data reporting
  • Is only open to eligible contract participants

Assuming an MTF has been accepted as qualified, its counterparties are subject to specific continuing obligations:

  • Pre-execution credit requirements for FCMs (17CFR 1.73), SDs and MSPs (17 CFR 23.609)
  • Straight-through processing requirements for FCMs (17 CFR 1.74), SDs and MSPs (17 CFR 23.610)
  • Data reporting responsibilities equivalent to those for transactions on an SEF
  • Consent to the QMTFs (supra)national jurisdiction

Assuming compliance with the above by both the MTF and its participants, SDs and MSPs obtain the following specific relief for certain trades:

SDs/MSPs that transact a swap before knowing counterparty identity:

  • Exemption from final CFTC Title VII EBC regulations:
    • Verification of counterparty eligibility (17 CFR 23.430)
    • Material risks, characteristics, incentives, mid-market mark (17 CFR 23.431(a))
    • Scenario analysis (17 CFR 23.431(b))
    • Notice of right to receive daily mark from a DCO for cleared swaps (17 CFR 23.431(d)(1)
    • Requirements for counterparties to special entities ((17 CFR 23.450)
    • Political contributions by certain SDs (17 CFR 23.451)

SDs/MSPs that transact intended to be cleared (ITBC) swaps where the swap was accepted for clearing by a DCO as of 15th November 2013 or is required to be cleared under Section 2(h)(1) CEA and Part 50 CFTC Regulation:

  • Exemption from requirements relating to:
    • Verification of counterparty eligibility (17 CFR 23.430)
    • KYC, true name and owner, reasonable reliance on representations, manner of disclosure, and disclosures in a standard format (17 CFR 23.402(b)-(f)
    • Material risks, characteristics, incentives, mid-market mark (17 CFR 23.431(a))
    • Scenario analysis (17 CFR 23.431(b))
    • Notice of right to receive daily mark from a DCO for cleared swaps (17 CFR 23.431(d)(1))
    • Notice of right to clearing (17 CFR 23.432(b))
    • Recommendations to counterparties re. institutional suitability (17 CFR 23.434)
    • Requirements for SDs acting as advisors to special entities (17 CFR 23.440))
    • Requirements for counterparties to special entities ((17 CFR 23.450)
    • Political contributions by certain SDs (17 CFR 23.451)

SDs/MSPs that transact intended to be cleared (ITBC) swaps where the swap was not accepted for clearing by a DCO as of 15th November 2013 and is not required to be cleared under Section 2(h)(1) CEA and Part 50 CFTC Regulation:

  • Exemption from requirements relating to:
      • Verification of counterparty eligibility (17 CFR 23.430)
      • KYC, true name and  owner, reasonable reliance on representations, manner of disclosure, and        disclosures in a standard format (17 CFR 23.402(b)-(f)
      • Material risks, characteristics, incentives, mid-market mark (17 CFR 23.431(a))
      • Scenario analysis (17 CFR 23.431(b))
      • Notice of right to receive daily mark from a DCO for cleared swaps (17 CFR 23.431(d)(1))
      • Notice of right to select DCO (17 CFR 23.432(a))
      • Notice of right to clearing (17 CFR 23.432(b))
      • Political contributions by certain SDs (17 CFR 23.451)

 

 

 

 

 

 

 

 



[1] The January 2014 ISDA paper- Cross-border fragmentation of global OTC derivatives: an empirical analysis, found the volume of cleared EUR IRS traded in Europe between European and US dealers dropped 77% between the start of SEF trading in October 2013 and the end of the year

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