SEFs Chafe at Footnote 195

Terry Flanagan

Some market participants are concerned that professionals in the embryonic swaps execution industry may get buried in paperwork related to the agreements that swap counterparties must adhere to.

A footnote (Footnote 195) of the Commodity Futures Trading Commission’s swap execution facility rules requires that SEFs become a central source of paper ISDA master agreements for non-cleared products executed on their platforms.

“Footnote 195 imposes an obligation on SEFs to obtain the privately negotiated master agreements and related annexes in place between counterparties to a trade in uncleared swaps,” said Shawn Bernardo, CEO of interdealer broker Tullett Prebon’s tpSEF. “This is issue is something that the industry as well as the CFTC are aware of and we working toward a solution.”

Footnote 195 observes that there is “no reason, under certain specified circumstances, why a SEF’s written confirmation agreement cannot incorporate by reference the privately negotiated terms from a freestanding master agreement.

The CFTC has granted no-action relief to the Footnote 195 requirement until September 30, 2015. In granting the relief, the CFTC noted that that not all SEFs are prepared to issue confirmations that include all terms of a swap transaction.

Some participants stated that SEFs do not have access to the relevant non-economic terms of the transaction, and it is not clear how SEFs will be able to access the ISDA Master Agreements that contain terms that need to be included in the Confirmation, such as ISDA templates, definitions, and the terms negotiated by the counterparties with respect to the templates and definitions.

Requestors also sought clarification as to which individual terms must be included in the Confirmation and requested time to standardize terms to be included in a Confirmation. Requesting parties were particularly concerned that the lack of certainty over what terms must be included in a Confirmation would lead to legal uncertainty over the terms of executed transactions, because the terms in the Confirmation legally supersede any contradictory terms.

Under footnote 88 of the final SEF rules adopted by the Commodity Futures Trading Commission, permitted transactions (transactions that are not subject to mandatory clearing) must be traded on a SEF along with required transactions (those that are subject to mandatory clearing), as long as the platform on which they’re traded is multi-dealer.

That vastly increased the number of swap transactions, and therefore the complexity, associated with reporting to SDRs and CCPs.

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