CFTC Issues No-Action Relief from SEF Reinstatement Requirements Under CFTC Regulation 37.3(d) Permitting Listing of Bitcoin Swap | Practical Law

CFTC Issues No-Action Relief from SEF Reinstatement Requirements Under CFTC Regulation 37.3(d) Permitting Listing of Bitcoin Swap | Practical Law

The CFTC issued temporary no-action relief to a dormant CFTC-registered swap execution facility (SEF) from SEF reinstatement requirements under CFTC Regulation 37.3(d). The no-action relief allows Tassat Derivatives, LLC to list a physically deliverable Bitcoin swap contract for trading before a CFTC decision on reinstatement of Tassat's SEF registration is issued.

CFTC Issues No-Action Relief from SEF Reinstatement Requirements Under CFTC Regulation 37.3(d) Permitting Listing of Bitcoin Swap

by Practical Law Finance
Published on 26 Sep 2020 • USA (National/Federal)
The CFTC issued temporary no-action relief to a dormant CFTC-registered swap execution facility (SEF) from SEF reinstatement requirements under CFTC Regulation 37.3(d). The no-action relief allows Tassat Derivatives, LLC to list a physically deliverable Bitcoin swap contract for trading before a CFTC decision on reinstatement of Tassat's SEF registration is issued.
On September 15, 2020, the CFTC's Division of Market Oversight (DMO) issued No-Action Letter No. 20-29 (No-Action 20-29), which granted Tassat Derivatives, LLC, a CFTC-registered swap execution facility (SEF) which became dormant, temporary no-action relief from SEF reinstatement requirements under CFTC Regulation 37.3(d) (17 C.F.R. § 37.3(d)). The no-action relief allows Tassat to list a physically deliverable Bitcoin swap contract for trading in the fourth quarter of 2020, before a final CFTC decision on reinstatement of Tassat's SEF registration is issued, subject to certain conditions.
On November 6, 2019, the CFTC issued a transfer order that approved the transfer of the SEF registration of truEX LLC to its affiliate, Tassat. The SEF-registration transfer was part of an asset transfer in connection with a winding down of truEX's existing interest rate swap business. The asset transfer included personnel and work product related to the development of the physical Bitcoin swap contract. The transfer request was made to the CFTC in June 2019 and truEX stopped operating in July 2019.
However, as of August 1, 2020, under CFTC Regulation 40.1(f) (17 C.F.R. § 40.1(f)), Tassat was deemed dormant because it had not conducted trading on its platform for 12 consecutive months. This required Tassat to seek reinstatement of its SEF registration to continue to operate, including the listing of contracts for trading (see Commodity Exchange Act (CEA) § 5h (7 U.S.C. § 7b-3) and CFTC Regulation § 37.3(a) (17 C.F.R. § 37.3(a)).
On August 10, 2020, Tassat requested relief from CFTC Regulation 37.3(d) to permit Tassat to launch its physical Bitcoin swap contract for trading before reinstatement of Tassat's SEF registration. DMO granted Tassat's request for relief from CFTC Regulation 37.3(d), and will not recommend that the CFTC commence an enforcement action against:
  • Tassat for failing to reinstate its SEF registration before listing and launching the physical Bitcoin swap contract.
  • Any Tassat participant who trades the physical Bitcoin swap contract when it is listed on Tassat's platform.
In granting the requested relief, DMO noted that:
  • Tassat and truEX worked to create and certify, and cooperated with DMO and the CFTC's Division of Clearing and Risk (DCR) and Division of Swap Dealer and Intermediary Oversight (DSIO) to undertake an enhanced review of, the physical Bitcoin swap contract.
  • Since the transfer to it of truEX's SEF registration, Tassat has been active in preparing to launch the physical Bitcoin swap contract and complying with all regulatory requirements.
  • Since truEX's SEF registration was not transferred to Tassat until November 2020, Tassat had less than 12 months to launch the physical Bitcoin swap contract, and internal and external factors (including COVID-19) prevented Tassat from launching the physical Bitcoin swap contract. According to Tassat's request for relief, the 12-month period that caused the dormancy began in July 2019 (when truEX stopped trading), but Tassat could not provide services or launch products while CFTC approval of the SEF registration transfer was pending.
  • Except for the absence of trading on its platform, Tassat has maintained an active SEF in compliance with all regulatory requirements since the transfer to it of truEX's SEF registration.
However, DMO conditioned the grant of relief on the following conditions:
  • Tassat must file an application for reinstatement of its SEF registration in accordance with CFTC Regulation 37.3(d) by October 15, 2020 (one month from the date of No-Action 20-29).
  • Tassat must not list the physical Bitcoin swap contract for trading until it has:
    • filed its application for reinstatement of its SEF registration in accordance with CFTC Regulation 37.3(d); and
    • re-certified the physical Bitcoin swap contract for trading.
  • Tassat may not certify or list for trading any product other than the physical Bitcoin swap contract until the CFTC grants its application for reinstatement of its SEF registration.
The letter states that if Tassat does not meet any of these conditions or fails to comply with the CEA (7 U.S.C. § 1 to 27f) and applicable CFTC regulations while No-Action 20-29 is in effect, DMO will immediately exercise its authority to terminate the relief. No-Action 20-29 remains in effect until the earlier of:
  • September 15, 2021.
  • The date of the CFTC's approval or denial of Tassat's application for reinstatement of its SEF registration.