CFTC Final Rule: Core Principles and Other Requirements for Swap Execution Facilities
|FINAL RULE: Core principles for swap execution facilities approved on May 16, 2013. The rule entered the Federal Register on June 4, 2013, and will become effective on October 2, 2013. However, the three-participant minimum for requests-for-quote (RFQs) will be phased in over one year. In the first year, the minimum will be set at two participants.|
|Final Rule Issue||Effective Date||Compliance Date|
|June 4, 2013||August 5, 2013||October 2, 2013 (one-year phase-in of RFQ minimum); Also see No-action relief note|
Note: The commission has subsequently issued numerous no-action letters and staff guidance on certain elements of the final rules. For a current update, visit the Swap Execution Facilities Regulation page.
Among the provisions of the Dodd-Frank Act is the creation of a new entity, the swap execution facility, defined as "a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce" that is not a designated contract market.
The Act left it to the CFTC and SEC to develop the framework for SEFs, which includes the setting of core principles for SEFs, which the CFTC proposed at its December 10, 2010 open meeting. The proposed rule appeared in the Federal Register on January 7, 2011, and the period for public comment was open until March 8, 2011.
To view a selection of comments, click HERE.
Among the SEF core principles is a provision regarding the definition of "made available to trade (MAT)." Subsequent to the proposal, market participants have requested a clarification of the requirements of SEFs and DCMs. On December 5, 2011 open meeting, the commission proposed a rule on MAT, which was also finalized at the May 2013 meeting. Details of the MAT rule can be found HERE.
Summary of the Final Rule
Among the provisions of the final rules are 15 core principles covering areas such as:
- Trading and product requirements
- Compliance obligations;
- Surveillance obligations;
- Operational capabilities; and
- Financial information and resource requirements.
Registration as a SEF requires the submission of Form SEF, meet minimum trade functionality (as defined by having an "order book", and offer "impartial access" to its markets.
An order book is an electronic trading facility, trading system or platform in which all market participants in the trading system or platform have the ability to enter multiple bids and offers, observe or receive bids and offers entered by other market participants, and transact on such bids and offers.
Any transaction that is traded on a SEF, and does not qualify as a block transaction (as described in an accompanying final rule) must be executed either
- On an order book; or
- On a request for quote ("RFQ") system that operates in conjunction with an order book. In providing either one of these execution methods, a SEF may use “any means of interstate commerce,” provided that the chosen execution method satisfies the requirements in the rules.
Voice Broking and RFQ Systems
Of particular concern throughout the process was whether traditional voice execution would still be permitted under the new regime. In the May 16, 2013 meeting, staff and commissioners specifically stated that the RFQ system can include execution by voice, or telephone, as long as minimum RFQ standards are met.
The rule as originally proposed would have required all RFQs to be sent to at least five market participants. (A proposed rule by the SEC on security-based swaps under its jurisdiction would require only one). Under the final CFTC rule, the number will be phased in, beginning with two and, move to three market participants unless the commission proposes an alternative system in the meantime.
Related Documents: Fact Sheet, Q&A, and Rule Proposal as it Appeared in the Federal Register