CFTC Takes Regulatory Action on SEFs, DCOs, Swap Dealers, and More | Practical Law

CFTC Takes Regulatory Action on SEFs, DCOs, Swap Dealers, and More | Practical Law

The CFTC has recently issued certain final rules, proposed rules, and proposed rule amendments, as well as no-action relief, relating to derivative clearing organizations (DCOs), swap execution facilities (SEFs), swap dealers, and other registered entities.

CFTC Takes Regulatory Action on SEFs, DCOs, Swap Dealers, and More

Practical Law Legal Update w-040-3688 (Approx. 7 pages)

CFTC Takes Regulatory Action on SEFs, DCOs, Swap Dealers, and More

by Practical Law Finance
Published on 02 Aug 2023USA (National/Federal)
The CFTC has recently issued certain final rules, proposed rules, and proposed rule amendments, as well as no-action relief, relating to derivative clearing organizations (DCOs), swap execution facilities (SEFs), swap dealers, and other registered entities.
The Commodity Futures Trading Commission (CFTC) recently announced a variety of regulatory action under the Commodity Exchange Act (CEA) (7 U.S.C. §1 et seq.) and related CFTC regulations, including actions related to:

Derivatives Clearing Organizations (DCOs)

  • Proposed rule: amendments to SIDCO risk-management, wind-down, and other provisions. On July 28, 2023, the CFTC published a notice of proposed rulemaking (NPR) on amendments to CFTC regulations on certain risk-management obligations applicable to systemically important derivatives clearing organizations (SIDCOs) and DCOs that elect to be subject to CFTC regulations on SIDCOs, known as Subpart C DCOs (17 CFR 39). The NPR also includes proposed amendments to certain related definitions, such as "recovery" and "non-default losses," as well as codification of existing staff guidance on DCO recovery and wind-down plans as set out in CFTC Staff Letter 16–61. The NPR also includes a proposed amendment addressing DCOs that are not designated as systemically important, and which have not elected to be covered by CFTC regulations, requiring them to submit orderly wind down plans. Public comment on the proposed amendments are due by September 26, 2023.
  • Final rule: DCO reporting and information requirements. On July 26, 2023, the CFTC approved a final rule updating information requirements for DCOs to:
    • Update information requirements for rule submissions associated with DCOs seeking to commingle customer funds and customer positions (and the associated funds) in futures and swaps in the same account.
    • Revise certain daily and event-specific reporting requirements under Section 39.18(c) to, among other things, require the reporting of any change in the ownership or corporate or organizational structure of the DCO or its parent(s) that would result in a change to the entity or person holding a controlling interest in the DCO, whether through an increase in direct ownership or voting interest in the DCO or in a direct or indirect corporate parent entity of the DCO, increasing the reporting requirement.
    • Include in an appendix to Part 39 of the CFTC's regulations the data fields that a DCO is required to provide on a daily basis under existing Section 39.19(c)(1), including those the CFTC believes would be relevant and necessary to capture the DCO back-testing results that, if adopted, would be reported under Part 39.
    Based on the concerns raised in the comments received, the CFTC declined to adopt proposed changes to DCO systems-related reporting obligations under Section 39.18(g) regarding exception events. The notice was published in the Federal Register on August 8, 2023 (see 88 Fed. Reg. 53664 (August 8, 2023)). The effective date of the final rule and the compliance date is September 7, 2023, except that DCOs must comply with the amendments to Section 39.19 and the appendix by February 10, 2025. For more information, see Legal Update, CFTC Proposes Revised Derivatives Clearing Organization (DCO) Reporting Rules and Extends DCO No-Action Relief.
  • Rule amendments: DCO governance requirements. On July 13, 2023, CFTC final rule amendments related to DCOs and their use and governance of risk-management committees (RMCs) became effective upon their publication in the Federal Register (see 88 Fed. Reg. 133 (July 13, 2023)). The compliance deadline for DCOs is July 12, 2024. For details on these amendments, see Legal Update, CFTC Proposes Enhancements to DCO Risk-Management Requirements.

Proposed Recordkeeping Relief for Swap Execution Facilities (SEFs)

General Requirements for Registered Entities

  • Proposed amendments to requirements for registered entities. On July 26, 2023, the CFTC issued a proposed rule that would amend Part 40 of the CFTC’s regulations, which implements Section 5c(c) of the CEA governing how entities registered with the CFTC – including registered designated contract markets (DCMs), DCOs, SEFs, and swap data repositories (SDRs) – submit self-certifications and requests for approval of their rules, rule amendments, and new products for trading and clearing. The proposed rule would also address the CFTC’s review and processing of such submissions. Public comment on the proposed rule must be received on or before November 6, 2023, identified by "Provisions Common to Registered Entities'' and RIN number [3038–AF28] by any of the methods specified here.
  • Request for comment on affiliation between certain registered entities and market participants. On June 28, 2023, the CFTC issued a request for comment to inform them of potential issues that may arise because of affiliations of CFTC-registered entities with market participants. The request specifically seeks information on affiliations between DCOs, DCMs, and SEFs with intermediaries, such as futures commission merchants (FCMs) and other market participants. Under the CEA and CFTC regulations, DCOs, DCMs, and SEFs have responsibilities for supervising their participants. An affiliation with an intermediary or other market participant raises questions as to how these supervisory responsibilities will be carried out. The request seeks to inform the CFTC's understanding of these issues and possible mitigating measures.

Swap Dealers

  • Proposed amendments to CFTC margin requirements for uncleared swaps of SD and MSPs. On July 26, 2023, the CFTC issued a proposed rule that would amend CFTC margin requirements for uncleared swaps applicable to SDs and major swap participants (MSPs) for which there is no prudential regulator (CFTC margin rules) to:
    • revise the definition of "margin affiliate" to provide that certain collective investment vehicles (CIVs) that receive all of their start-up capital, or a portion thereof, from a sponsor entity are deemed not to have any margin affiliates for the purposes of calculating certain thresholds that trigger the requirement to exchange initial margin (IM) for uncleared swaps under the CFTC margin rules; and
    • permit a broader range of assets, including money market funds (MMFs) and similar fund securities to qualify as eligible IM collateral under the CFTC margin rules by eliminating the restriction in CFTC Regulation 23.156(a)(1)(ix) that disqualifies securities issued by certain pooled investment funds that transfer their assets through securities lending, securities borrowing, repurchase agreements, reverse repurchase agreements, and similar arrangements.
    The notice was published in the Federal Register on August 8, 2023 (see 88 Fed. Reg. 53409 (August 8, 2023)). Public comment on the proposed rule must be received on or before October 10, 2023. For information on these IM requirements, see Practice Note, US Derivatives Regulation: Margin Collection and Exchange Requirements for Uncleared Swaps: Initial Margin (IM) Under CFTC Margin Rules.
  • Extension of no-action relief from certain financial reporting requirements for bank swap dealers. On July 11, 2023, the CFTC Market Participants Division (MPD) issued CFTC No-Action Letter 23-11 (No-Action 23-11) extending the relief provided under CFTC No-Action Letter 21-18 from certain financial reporting obligations under the CFTC’s financial reporting rules for SDs subject to the capital requirements of a prudential regulator. The relief granted by No-Action 23-11 will expire on the earlier of October 6, 2025, or the adoption by the CFTC of any revised financial reporting and notification requirements applicable to Bank SDs. For more information on the relief granted, see Legal Update, CFTC Grants Time-Limited No-Action Relief to Bank Swap Dealers from Certain Financial Reporting Requirements.
  • Request for comparability determination for rules of French Republic and Federal Republic of Germany. On June 27, 2023, the CFTC issued a notice of proposed order and request for comment on an application submitted by the Institute of International Bankers, International Swaps and Derivatives Association (ISDA®), and Securities Industry and Financial Markets Association requesting a CFTC determination that the capital and financial reporting laws and regulations of the European Union (EU) applicable to CFTC-registered SDs organized and domiciled in the French Republic and Federal Republic of Germany are comparable to the CFTC capital and financial reporting requirements for SDs under the CEA. The notice was published in the Federal Register on June 2, 2023 (see 88 Fed. Reg. 122 (June 27, 2023)). Public comment on the proposed order must be received on or before August 28, 2023.