For Every Action, there is an Equal and Opposite No-Action…
The CFTC’s Third Law of Motion was in evidence again yesterday as CFTC Acting Chairman Mark Wetjen and EU Commissioner Michel Barnier announced continued “progress” regarding the treatment of multilateral trading facilities (MTFs), as contemplated under the “Path Forward” statement published in July 2013.
Under the Dodd-Frank Act, swap provisions (including the requirement to register as a DCM or SEF) do not apply to activities outside the United States unless 
those activities “have a direct and significant connection with activities in, or effect on, commerce of the United States”. Once this nexus is established, swaps that are subject to a clearing requirement and are “made available to trade” must generally be traded on DCMs or SEFs, unless an exception applies.
In a guidance document published on 15 November 2013, the CFTC’s Division of Market Oversight (DMO) confirmed that a multilateral swaps trading platform (such as an MTF) located outside the United States which provides US persons or persons located in the US (including personnel and agents of non-US persons located in the United States) with the ability to trade or execute swaps on or pursuant to the rules of the platform, either directly or indirectly through an intermediary, would have the necessary ‘direct and significant’ connection to trigger the DCM/SEF registration requirements of the Dodd-Frank Act. Furthermore, the CFTC’s final SEF rules published on 16 May 2013, confirmed that a facility “for the trading or processing of swaps” would be required to register as a DCM or SEF even if it only executes or trades swaps that are not subject to the trade execution mandate[1]. The net result is that, unless able to take advantage of an exemption, many MTFs would be required to register as either a DCM or a SEF.
Under the Path Forward Statement the CFTC agreed to extend time-limited transitional relief to MTFs in the event that the CFTC’s trade execution requirement was triggered before 15 March 2014, provided that such MTFs were subject to:
- sufficient levels of pre- and post-trade price transparency;
- non-discriminatory access by market participants; and
- an appropriate level of oversight.
As this is the case, on 12 February 2014, the CFTC issued two no-action letters, CFTC Letter No 14-15: and CFTC Letter No. 14-16. Both letters provide no action relief with respect to:
- MTFs overseen by competent authorities designated by EU Member States from the SEF registration requirements; and
- parties executing swap transactions on MTFs from trade execution requirements.
Relief under CFTC Letter No 14-15 expires on the earlier of:
- relief being granted pursuant to CFTC Letter No. 14-16; or
- 11:59 pm on 24 March 2014.
CFTC Letter No. 14-16 provides the potential for longer-term relief but requires an MTF to certify that it:
- is subject to and compliant with regulatory requirements established by its home state regulator that are in accordance the SEF regulatory requirements concerning trading methodology;
- is subject to and compliant with regulatory requirements established by its home state regulator that are comparable to, and as comprehensive as, SEF regulatory requirements concerning non-discriminatory access by market participants and an appropriate level of oversight;
- meets certain reporting and clearing-related requirements; and
- does not allow trading by US persons who are not eligible contract participants on its platform.
The no action relief under CFTC Letter No. 14-16 will expire upon the effective date of any final rules implementing the CFTC’s authority to exempt facilities that are “subject to comparable, comprehensive supervision and regulation” by home state authorities from the SEF registration requirement.
[1] See footnote 88