CFTC extends No-Action letter for FX Swaps


Last Friday the CFTC issued a ‘no action letter’ extending until 29th November the ‘time-limited’ relief from certain Swap Data Reporting Requirements for FX Swaps, the products in focus being NDFs and FX Options.

The extension comes on the back of representations, including a very compelling letter from James Kemp, MD of The Global Foreign Exchange Division, setting out the reasons for requesting the extension. Reading the arguments, you can see how ill prepared the majority of SEFs are to assume their obligations, and why market participants are reluctant to migrate trading onto SEFs.

According to the letter:

Key risks which have materialized for the NDF and Options markets since October 2nd including:

  • Reduced Legal Certainty for FX Trades Executed on SEFs.

In contrast to the practices developed and implemented by market participants over the past fifteen years to provide legal certainty and reduce legal and credit risk associated with trading NDFs and Options by establishing and incorporating into their confirmations pre-agreed standard trade terms, nearly all SEFs have not yet incorporated these essential terms into their confirmation processes.This has created a situation in which transactions in these products on SEFs are without the same robust legal underpinnings as an NDF or Option traded off-SEF.

  • Elevating the status of a trade recap of a voice broker, to a confirmation

The manual input trade recap with voice brokers will now be deemed a confirmation superseding all previous agreements under the transaction confirmation requirement (“TCR”) within Commission regulation 37.6(b), subjects participants to greater operational risk of errors.

  • Many SEFs are still unable to fulfill some or all of their newly assumed reporting obligations (Parts 43 and 45), including the reporting of price-forming terms of transactions such as “indication of collateralization” and “intended for clearing”.
  • Inability of SEFs to Accommodate Prime Brokerage Transactions. SEF workflows and functionality do not recognize the key distinction between direct execution and prime brokerage.
  • SEF Rulebooks Not Ready to “Go-Live”. For the FX asset class alone, there are at least twelve SEFs offering FX products. These SEF rulebooks remain in a state of flux as SEFs continue to revise them to address regulatory requirements which continue to evolve
  • Reduced Liquidity and Price Transparency. Clients which are US persons can no longer access non-US multilateral platforms that have not registered as SEFs and so have reduced liquidity and less price transparency.

Full text of the GFMA Global FX Division letter here

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