While all of the operative elements of the Dodd-Frank Act related to OTC transactions are in effect—clearing, execution, and reporting—there are still details to be ironed out, notably packaged transactions and extraterritoriality.

Some more complex swaps trading such as package spreads are being phased onto SEFs gradually by regulators. The Commodity Futures Trading Commission issued a no-action letter providing relief until May 15, 2014 from mandatory trading of certain swaps executed as part of a “package transaction.”

The temporary relief is intended to enable participants to continue their efforts towards compliance with the trade execution requirement and to allow Commission staff to address the issues surrounding package transactions where at least one component is not subject to the trade execution requirement.

“The CFTC granted exemptive relief for packaged transactions until May 15th under the trading mandate,” said Jon Williams, co-head of U.S. institutional markets at Tradeweb. “There’s a lot of interactive moving parts to workflows in these transactions. For more complicated transactions like packaged trades, there were concerns over the industry having enough time to sort through supporting all aspects from pre-trade credit checks to clearing.”

Added Williams, “We live in a world where clearing is a required part of the derivatives trading workflow. If a trade gets rejected for clearing because of administrative or set-up issues, it has to be voided, but it can be resubmitted within 30 minutes.”

“There are certain trading strategies you cannot execute on SEFs today,” said Supurna VedBrat, co-head of electronic trading and market structure at BlackRock, at the Futures Industry Association conference on March 12.

The CFTC has also issued guidance which says that “substituted compliance” should be available, or transaction-level requirements should not apply, with respect to swaps between a non-U.S. swap dealer and a non-U.S. person where the activities of the non-U.S. swap dealer take place outside the United States.

The key issue revolves around what is meant by “activities.” The CFTC is of the view that persons regularly arranging, negotiating, or executing swaps for or on behalf of a swap dealer are performing core, front-office activities of that dealer’s business. Thus, a non-U.S. swap dealer (whether an affiliate or not of a U.S. person) regularly using personnel or agents located in the U.S. to arrange, negotiate, or execute a swap with a non-U.S. person generally would be required to comply with the transaction-level requirements.

“We understand that the CFTC advisory will be applied to, for example, cases where personnel at the NY branch of Japan Bank A executed a swap transaction with Japan Bank B,” said the Japanese Bankers Association in a comment letter. “However, whether the swap arranged, negotiated, or executed by personnel or agents of the non-U.S. swap dealer (SD) located in the United States has a direct or indirect impact on the financial system in U.S. is unclear, and the application of transaction-level requirements is considered to have a limited impact on the enhancement of the prudentiality of the U.S. financial system.”

Packaged transactions could contain instruments that are certified as made available to trade on a SEF, coupled with non-MAT instruments, and could contain instruments that are clearable versus instruments that are not clearable. “Suppose a packaged transaction was executed, and at some stage before all the embedded legs of the transaction clear and settle, there was a problem,” said Williams. “In that case, the industry is working to determine how to unify all the activities of all the legs of the transaction and manage the issue of clearing.”