Factbox: CFTC drafts SEF, end-user exemption rules

WASHINGTON (Reuters) - The U.S. Commodity Futures Trading Commission on Thursday unveiled its seventh set in a series of rules as it works to take oversight of the $600 trillion over-the-counter derivatives market.

The CFTC used the meeting to propose key rules for swap execution facilities, and end-user exceptions from mandatory clearing requirements.

Here are details of what was proposed:


Goal: to promote pre-trade price transparency for the trading of swaps on electronic trading systems or platforms.

Comment period: 60 days

Swap execution facilities, or SEFs, must offer:

* platforms that provide for a centralized limit order book available to all participants and/or;

* platforms based on transparent request for quote systems that provide requests for quotes that are visible to all participants on platform, allow liquidity providers to post bids and offers and provide time priority for market participants who originated a request for quote.

* Trading platforms are allowed to offer three tiers of transactions:

* Tier 1 transactions are not block trades and exhibit material transaction volume.

* Tier 2 transactions are not block trades and do not exhibit material transaction volume.

* Tier 3 transactions are not subject to clearing and execution requirements, are block trades or are illiquid or bespoke. These swaps could be executed through various methods including voice and limited request for quote systems.

* To operate as a swap execution facility, platforms must register with the CFTC.

* The new rules will be come into effect 90 days after the final regulations are published.

* Existing swap venues that wish to continue operating as SEFs can apply for temporary grandfather relief while the commission reviews their registration applications.


Goal: to provide process for end users who want to use the mandatory swaps clearing exemption.

Comment period: 60 days

* An end user is a non-financial entity that is using swaps to hedge or mitigate its commercial risks.

* Swaps defined as “hedging or mitigating risks” include those that qualify as bona fide hedging under commission rules, or recognized as hedging for accounting purposes or any swaps hedging or mitigating any of a person’s business risks.

* Swaps that are undertaken for the purpose of speculation, investing or trading do not qualify for exemption.

* End users must also notify the commission of how it generally meets its financial obligations associated with entering into non-cleared swaps.

* This notice is to be provided through a Swap Data Repository at the time a swap is executed.

* The commission is seeking comments on whether it should allow small banks, savings associations and credit unions to use the end user exemption.


Goal: to implement the Dodd-Frank Act’s external business conduct requirements for swap dealers and major swap participants in their dealings with counterparties.

Comment period: 60 days

* Rule prohibits fraudulent, deceptive, and manipulative acts or practices.

* Confidential treatment of counterparty information required.

* Rule prohibits trading ahead and front running of counterparty swap transactions.

* Duties swap dealers, major swap participants have toward their counterparties under the proposed rule include :

* Verification of a counterparty’s eligibility.

* Disclosures of material information.

* For high-risk bilateral swaps, dealers would have to provide a scenario analysis to allow the counterparty to assess its potential exposure in connection with the swap.

* A swap dealer acting as an advisor to a special entity would have to act in the “best interests” of that entity.

* The rules would allow for swap dealers to act as an advisor to a special entity and then enter into the same swap for which it provided the advice.


Goal: to implement requirements on the resolution of conflicts of interest for clearinghouses, exchanges, and platforms.

Comment period: 60 days

* Some potential conflicts of interest that a clearinghouse may confront include: determining whether a swap is capable of being cleared, the minimum criteria an entity must meet to become a swap clearing member and whether a particular entity satisfies such criteria.

* An exchange or platform may have conflicts of interest in areas such as balancing the advancement of commercial interests and the fulfillment of self-regulatory responsibilities.

* Clearinghouses would have to report to the CFTC when their boards of directors reject a recommendation from the Risk Management Committee.

* Exchanges and platforms would have to report to the CFTC when their boards of directors reject a recommendation from the regulatory oversight committee.

* Clearinghouses, exchanges and platforms would have to implement regulatory programs to identify and mitigate conflicts of interest.

* They would also have to have written policies on safeguarding non-public information.


Goal: the interim final rule clarifies the reporting obligations of market participants for swaps entered into on or after the enactment of the financial reform law, but prior to the effective date of swap reporting rules.

Comment Period: 30 days

* Counterparties should be prepared to report swap data relating to transition swaps whenever reporting becomes required under permanent rule.

* Counterparties obligated to preserve data related to terms of each transition swap so it may be reported when permanent reporting rules implemented.

* Counterparties to transition swaps are not required to create any new records and are permitted to retain data in their existing format.

Reporting by Ayesha Rascoe and Christopher Doering