CFTC Statement Of Commissioner Kristin N. Johnson Regarding Final Rulemaking On Swap Confirmation Requirements For Swap Execution Facilities

An essential component of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) is its framework for the regulation of swaps, including central clearing and trade execution requirements, registration and comprehensive regulation of swap dealers, and recordkeeping and reporting requirements.

I vote to approve today’s final rule on Swap Confirmation Requirements for Swap Execution Facilities (Final Rule), which facilitates predictability and consistency in swaps markets by codifying long-standing no-action relief into regulation, while maintaining a robust regulatory regime for swaps and swap execution facilities (SEFs).

The Dodd-Frank Act amended the Commodity Exchange Act (CEA) by adding Section 5h, which provides that a person may not operate “a facility for the trading or processing of swaps unless the facility is registered as a [SEF] or as a designated contract market.”[1] A SEF allows multiple participants to execute or trade swaps. As such, SEFs facilitate swap transactions in our markets by facilitating the execution of swaps between market participants. Additionally, SEFs play a critical role in price discovery and transparency and policing and reporting swap transactions in an effort to monitor systemic risk.

In 2013, the Commission adopted new rules and principles for SEFs. Under CFTC Regulation 37.6(b), a SEF must provide each counterparty to cleared and uncleared swaps with “a written record of all of the terms of the transaction which shall legally supersede any previous agreement and serve as a confirmation of the transaction.”[2] This confirmation is required to “take place at the same time as execution,” subject to certain exceptions related to bunched orders involving swaps.[3]

In the adopting release, the Commission noted that a SEF may comply with the swap confirmation requirement for uncleared swaps by incorporating terms set forth in master agreements previously negotiated by counterparties, if such agreements had been submitted to the SEF prior to execution and the counterparties ensure that nothing in the confirmation terms contradict the terms incorporated from the master agreement.[4] SEFs and market participants voiced concerns that it was operationally and technologically difficult and impracticable to obtain and store the underlying, bespoke, highly-negotiated swap agreements of SEF members for purposes of satisfying the swap confirmation requirement.

Pursuant to a no-action letter issued in March 2017, which was the last extension of a no-action letter originally issued in August 2014,[5] SEFs were permitted to incorporate by reference the terms of previously-negotiated agreements and were relieved of the obligation to: (1) obtain documents incorporated by reference in a swap confirmation and (2) report confirmation data contained in such agreements. SEFs were required to comply with certain additional conditions, including that their rulebooks require participants to provide copies of the underlying agreements to the SEF upon request.

On August 25, 2023, the Commission released a Notice of Proposed Rulemaking to codify this no-action relief (Proposed Rule) for uncleared swaps. The Commission did not incorporate the conditions in No-Action Letter 17-17 into new CFTC Regulation 37.6(b)(1). The Commission takes the view that, as noted below, the existing requirements for SEFs under the CEA, particularly Core Principle 5, and the Commission’s Part 37 regulations sufficiently account for and obviate the need for these conditions.[6]

As I noted at that time, the Commission “issued guidance and exemptive relief based on concerns that SEFs had been unable to develop a practicable and cost-effective method to request, accept, and maintain a library of the underlying previously negotiated freestanding agreements between counterparties.”[7]

The Final Rule approved today fully adopts the Proposed Rule. In addition to permitting SEFs to incorporate by reference terms of previously-negotiated agreements between counterparties, without having to obtain a copy of such agreements, the Final Rule will amend CFTC Regulation 37.6(b) to permit confirmation of all terms of a swap transaction to take place “as soon as technologically practicable” after the execution of the swap transaction. Additionally, the Final Rule amends CFTC Regulation 37.6(b) to make clear that the confirmation a SEF provides under CFTC Regulation 37.6(b) legally supersedes only conflicting terms in a previous agreement.

Importantly, as noted above, both SEFs and the Commission will retain the ability to obtain essential information, including copies of the underlying agreements for uncleared swaps. Under SEF Core Principle 5, a SEF must “[e]stablish and enforce rules that will allow the facility to obtain any necessary information to perform any of the functions described in section 5h of the [CEA].”[8] The SEF must also “[p]rovide [this] information to the Commission on request.”[9] A SEF must also have “the authority to examine books and records kept by [its] members and by persons under investigation.”[10] As the Final Rule notes, given these requirements, a SEF should have “the ability and authority to request copies of the underlying agreements that are incorporated by reference into a confirmation for an uncleared swap transaction and to provide such agreements to the Commission upon request.”[11]

I support this Final Rule, which provides a practical approach to implementing our regulatory requirements, while maintaining robust oversight of SEFs and our markets.

Thank you to the staff of the Division of Market Oversight and Roger Smith as well as the Office of the General Counsel, the Market Participants Division, and the Office of the Chief Economist, for their hard work on this Final Rule.

RELATED LINKS