Extension of Certain Dodd-Frank No-Action Relief

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On May 1, 2014, the Commodity Futures Trading Commission (“CFTC”) established a phased compliance timeline for the implementation of the trade execution requirement[1] currently applicable to certain interest rate swaps and credit default swaps executed as part of a “package transaction.”[2]  Earlier this year, the CFTC had provided no-action relief that would have required all swaps that are part of a package transaction to be traded either on a designated contract market or on a swap execution facility after May 15, 2014.[3]

Based on the recent no-action relief, the phased compliance timeline for the execution requirement for package transactions is, generally, as follows:

  • if (i) at least one swap component has been made available to trade and is subject to the trade execution requirement, and (ii) each of the other swap components is subject to the clearing requirement, then the deadline was June 1, 2014;
  • if (i) the swap components have each been made available to trade and are subject to the trade execution requirement, and (ii) all other components are U.S. Treasury securities, then the deadline was June 15, 2014;
  • if both (i) at least one swap component has been made available to trade and is subject to the trade execution requirement and (ii):
    • at least one swap component is under the CFTC’s exclusive jurisdiction and not subject to the clearing requirement;
    • at least one component is not a swap; or
    • at least one swap component is a swap over which the CFTC does not have exclusive jurisdiction (e.g., a “mixed swap”),

then the deadline is November 15, 2014.

Also, on June 4, 2014, the CFTC issued a no-action letter further delaying until December 31, 2014 the effectiveness of a November 14, 2013 advisory (the “Advisory”) regarding the applicability of certain Dodd-Frank requirements in connection with activities that occur in the United States.[4]  The Advisory generally provided that a non-U.S. swap dealer registered with the CFTC must comply with the “transaction-level” requirements[5] of Dodd-Frank when entering into a swap with a non-U.S. person if the swap is “arranged, negotiated, or executed by personnel or agents” of the non-U.S. swap dealer located in the United States.[6]

Two previous no-action letters, issued on November 26, 2013 and January 3, 2014, had delayed the effectiveness of the Advisory until January 14, 2014 and September 15, 2014, respectively.[7]  The CFTC noted that it made the most recent extension based on public comments as well as concerns raised by non-U.S. swap dealers.[8]

[1] A swap subject to the trade execution requirement may not be traded bilaterally over-the-counter but, rather, must be executed on a swap execution facility or designated contract market, unless an exemption or exception applies.  See “Dodd-Frank Trade Execution Developments.”

[2] CFTC Letter No. 14-62 (May 1, 2014).  A “package transaction” is a transaction involving two or more instruments: (1) that is executed between two counterparties; (2) that is priced or quoted as one economic transaction with simultaneous execution of all components; (3) that has at least one component that is a swap that is made available to trade and therefore is subject to the trade execution requirement; and (4) where the execution of each component is contingent upon the execution of all other components.  Some common types of interest rate swap package transactions include (but are not limited to) swap curves (package of two swaps of differing tenors), swap butterflies (package of three swaps of differing tenors), swap spreads (government securities vs. swaps typically within similar tenors), invoice spreads (Treasury-note or Treasury-bond futures vs. swaps), cash/futures basis (Eurodollar futures bundles vs. swaps), offsets/unwinds, delta neutral option packages (caps, floors, or swaptions vs. swaps), and mortgage-backed security basis (to-be-announced swaps (agency MBS) vs. swap spreads).  Common credit default swap package transactions include (but are not limited to) transactions commonly known as index options vs. index, tranches vs. index, and index vs. single name CDS.

[3] CFTC Letter No. 14-12, Re: No-Action Relief from the Commodity Exchange Act Sections 2(h)(8) and 5(d)(9) and from Commission Regulation § 37.9 for Swaps Executed as Part of a Package Transaction (February 10, 2014).  Ultimately, the original May 15, 2014 relief deadline applied only to package transactions in which all components were swaps that had been made “available to trade” and were subject to the trade execution requirement.  A swap is made “available to trade” if a swap execution facility or designated contract market has demonstrated, as approved by the CFTC, that it lists or offers that swap for trading on its trading system or platform and has considered various factors such as “whether there are ready and willing buyers and sellers.”

[4] CFTC Letter No. 14-74: Re: Extension of No-Action Relief: Transaction-Level Requirements for Non-U.S. Swap Dealers (June 4, 2014); CFTC Staff Advisory No. 13-69, Applicability of Transaction-Level Requirements to Activity in the United States (November 14, 2013).

[5] The “transaction-level” requirements include: (i) required clearing and swap processing; (ii) margining (and segregation) for uncleared swaps; (iii) mandatory trade execution; (iv) swap trading relationship documentation; (v) portfolio reconciliation and compression; (vi) real-time public reporting; (vii) trade confirmation; (viii) daily trading records; and (ix) external business conduct standards.  These requirements are separated into “Category A” and “Category B” requirements, the latter of which includes solely external business conduct standards.

[6] See CFTC Staff Advisory No. 13-69, Applicability of Transaction-Level Requirements to Activity in the United States (November 14, 2013).

[7] CFTC Letter No. 13-71, Re: No-Action Relief: Certain Transaction-Level Requirements for Non-U.S. Swap Dealers (November 26, 2013); CFTC Letter No. 14-01, Re: Extension of No-Action Relief: Transaction-Level Requirements for Non-U.S. Swap Dealers (January 3, 2014).

[8] See CFTC Press Release, CFTC Staff Issues Extension to Time-Limited No-Action Letter on the Applicability of Transaction-Level Requirements in Certain Cross-Border Situations, June 4, 2014 (available at: http://www.cftc.gov/PressRoom/PressReleases/pr6942-14).  Specifically, in conjunction with the issuance of the January 3, 2014 no-action letter, the CFTC had issued a notice of request for public comment on all aspects of the Advisory.  See Request for Comment on Application of Commission Regulations to Swaps Between Non-U.S. Swap Dealers and Non-U.S. Counterparties Involving Personnel or Agents of the Non-U.S. Swap Dealers Located in the United States (available at: https://www.cftc.gov/PressRoom/PressReleases/pr6817-14).