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In response to changes in business practices, regulations and
laws eventually change, too. During the past few years derivatives
markets are witnessing this change as it applies to trading
facilities as well as to entities that provide services that may be
ancillary to intermediated swap execution. Indeed, the lines are
becoming blurred between a traditional derivatives exchange and a
facility or an entity that only a few years ago no one would
recognize as an organized exchange.
U.S. financial regulators, such as the Commodity Futures Trading
Commission (“CFTC“) and the
Securities and Exchange Commission
(“SEC“) struggle with
conceptualizing whether, how and to what extent they can regulate
intermediaries and the decentralized finance
(“DeFi“) facilities that offer
swap execution services. On the one hand, an increasing number of
intermediaries such as commodity trading advisors
(“CTAs“), introducing brokers
(“IBs“), swap dealers
(“SDs“) or unregistered and
unregulated entities offer services that may facilitate execution
of swaps on a multiple-to-multiple participant basis. On the other
hand, decentralized autonomous organizations
(“DAOs“) that consist only of
computer code and are controlled by tokenholders, that are not
incorporated because incorporation is not available in most
jurisdictions, or various other unincorporated technology
providers, both can offer negotiation or execution services that
are very similar to those of registered designated contracts
markets (“DCMs“) and swap
execution facilities
(“SEFs“).
The CFTC and the SEC, together with the E.U.’s European
Securities and Markets Authority
(“ESMA“) and the UK Financial
Conduct Authority (“FCA“),
collectively recognize that post-Dodd-Frank regulations need to be
updated, but struggle with either reaching too far beyond the scope
of a traditional exchange, or not reaching far enough to regulate a
service, in whatever form it comes: execution of swaps on a
multiple-to-multiple participant basis. This paper explores
regulators’ recent efforts at capturing these markets by
regulation or enforcement, and also provides some takeaways from
these developments as well as speculates on the likely impact on
the markets in the U.S.
1. CFTC Enforcement and the Staff Advisory
a. SEF Definition and the 2013 CFTC SEF
Rule
In response to the financial crisis of 2008, Title VII of the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(the “Dodd-Frank Act” or
“Dodd-Frank“)1
substantially amended the Commodity Exchange Act of 1936
(“CEA“)2 to abolish
several forms of commodity derivatives and
“swap”3 trading, negotiation and execution
facilities4 and, in addition to the already existing
DCMs, create a single form of a swap execution facility – as
a SEF. The CEA defines a SEF as:
The term “swap execution facility” means a trading
system or platform in which multiple participants have the ability
to execute or trade swaps by accepting bids and offers made by
multiple participants in the facility or system, through any means
of interstate commerce, including any trading facility, that
– (A) facilitates the execution of swaps between
participants; and (B) is not a designated contract
market.5
At first glance, this definition appears to provide sufficient
certainty as to what a SEF is; however, upon further reflection
many ambiguities become evident. First, from the definitional
perspective, there are many terms that are simply not defined but
nevertheless are critical to the construction of the concept of a
SEF – what is a “trading system,” or a
“platform” or a “facility” or a
“system”? Second, is the inclusion of the term
“trading facility”6 only an example in a list
of other possibilities, or is it a qualifier for the entire
definition? In other words, must a SEF necessarily be a
“trading facility,” or is the scope of SEF broader and
only includes (but need not necessarily be) an entity that would
qualify as a “trading facility”? Third, will an entity
that only “facilitates” the execution of swaps and that
provides the “ability” without the actual execution of
swaps – qualify as a SEF? Fourth, it is clear what a SEF is
not – it is not a DCM, but given that a DCM is defined as a
“board of trade” or “other trading
facility,”7 how can a SEF both be a “trading
facility” but not “other trading facility” at the
same time? Fifth, since the definition only refers to “ability
to execute” instead of simply saying “execute,” does
it mean that swap negotiation facilities or facilities where bids
and offers are not binding are within the scope of a SEF, while
they are expressly excluded from the definition of a “trading
facility”? Sixth, is there a difference between the
“execute” or “trade” of a swap? Can one
“trade” a swap without execution or vice versa? Seventh,
would “any means of interstate commerce” include the
telephone, or “pit trading,” or a DAO running on a
distributed ledger technology
(“DLT“) platform? Or does the
reference to “multiple participants” mean
“members”8 in such trading system, or do these
“participants” need not be formal “members”?
The list of questions can go on. . . .
The CFTC issued their rules to further define a SEF and to
implement SEF registration and regulation requirements in 2013 (the
“2013 CFTC SEF
Rule“).9 The 2013 CFTC SEF Rule was
codified in Part 37 of CFTC regulations10 and
established a two-step process for compliance:
First, an entity must meet the definition of a SEF (deliberately
or inadvertently) (CEA § 5h(a)(1) and CFTC Part 37.3(a)(1));
second, it needs to make a compliance decision: if an entity
intends to become a registered SEF, it must comply with a set of
CFTC requirements to become eligible for SEF registration; or if an
entity does not want to become a SEF, it must stop acting as a SEF
(or face the CFTC’s enforcement action). This process was well
understood and over 20 entities registered with the CFTC as SEFs.
Many other entities stopped operating as SEFs and chose not to
register.11
Even though the CFTC had issued a number of no-action letters
and advisories, the market had worked out common methodologies on
how to comply with the SEF regulations, which were steadily
increasing. There nevertheless remained some aspects of the rules
that were either not practicable,12 or simply were not
fully thought through;13 and it was clear that the CFTC
would need to either continue issuing no-action letters or amend
the rules.
b. Proposed 2018 SEF Rule
In 2018 under CFTC’s then Chair Christopher Giancarlo’s
leadership, the CFTC had proposed extensive amendments to the 2013
CFTC SEF Rule (the “2018 CFTC SEF
Proposal“).14 In fact, the amendments
were so substantial that the CFTC had introduced these amendments
in the form of a proposed rulemaking and opened a public comment
period, as required under the Administrative Procedure Act
(“APA“).15 Proposed
changes included, among other things, a revision to the functional
definition of a SEF as well as the introduction of the notion that
numerous otherwise regulated entities, such as CTAs, IBs, SDs and
others would qualify as SEFs under the new rules (if adopted) and
would be required to register as SEFs. The CFTC received an
overwhelmingly negative response to these proposals and in 2021 the
2018 CFTC SEF Proposal was officially withdrawn.16
c. The 2021 CFTC SEF Advisory
On September 29, 2021, the CFTC issued an order filing (and
simultaneously settling) charges brought against a California
entity that offered finance and trading-related electronic
communication services for failing to register as a SEF. The CFTC
described the defendant as providing “a technological tool for
automated request for quote
(“RFQ“) workflow for interest
rate and cross currency swaps,” and enabling “multiple
swap market participants to select swap product parameters, such as
swap type, clearing preference, tenor, and notional size to
populate RFQs.”17
The CFTC’s Division of Market Oversight
(“DMO“) seems to have
anticipated that this order’s adoption of a novel SEF
definition would be viewed as a significant departure from the SEF
definition established in the 2013 CFTC SEF Rule. As a result, DMO
concurrently issued a Staff Advisory18
(“2021 CFTC SEF Advisory“)
clarifying that “certain trading activities may trigger
compliance with the SEF registration requirement in the Commodity
Exchange Act (CEA) and CFTC regulations.”19
The 2021 CFTC SEF Advisory is controversial from an APA
perspective, given that in 2018, as noted above, the CFTC proposed
but never finalized its 2018 CFTC SEF Proposal that would have
expanded the scope of the SEF registration requirement
(i.e., was a material change in the regulation) –
and thus, in practice, what constitutes a SEF. The 2021 CFTC SEF
Advisory arguably accomplished the result that the CFTC sought
through the 2018 proposed rulemaking by the simple expedience of
staff action and without following the procedures required by the
APA.20
The 2021 CFTC SEF Advisory indicates that entities “may
need to register as a SEF” when:
(1) facilitating trading or execution of swaps through
one-to-many or bilateral communications; (2) facilitating trading
or execution of swaps not subject to the trade execution
requirement in CEA section 2(h)(8); (3) providing non-electronic
means for the execution of swaps; or (4) currently registered with
the CFTC in some other capacity, such as a commodity trading
advisor or an introducing broker, if its facility falls within the
SEF definition.21
Of particular note for a large number of regulated or
unregulated entities, and specifically for those in the DeFi space,
is DMO’s admonition that “facilitating trading or
execution of swaps through one-to-many or bi-lateral
communications” falls within the category of activities that
could require SEF registration. This “clarification” was
likely intended to cast doubt on the notion that certain platforms,
including DAOs, are not subject to SEF registration (or any other
CFTC regulations) because their protocols do not allow multiple
participants to “simultaneously request, make, or accept bids
and offers from multiple participants” or because their
platforms act as a single liquidity provider (i.e.,
one-to-many) and thus do not satisfy the “multiple-to-multiple
prong” of CEA § 1a(50).22
On the latter point, the CFTC Staff Advisory specifically
asserts that “a facility meets the multiple-to-multiple prong
if multiple participants simply have the ‘ability to execute or
trade swaps’ with multiple participants.” The emphasis on
“ability” drastically broadens the scope of the SEF
definition. In fact, the 2013 CFTC SEF Rule specifically states
that: “The Commission continues to believe that a one-to-many
system or platform on which the sponsoring entity is the
counterparty to all swap contracts executed through the system or
platform would not meet the SEF definition in section 1a(50) of the
Act and, therefore, would not be required to register as a SEF
under section 5h(a)(1) of the Act.” Clearly, there is a
material disconnect between the 2013 CFTC SEF Rule and the 2021
CFTC SEF Advisory in that now, under the 2021 CFTC SEF advisory,
even if an entity is a one-to-many platform (i.e., not a
many-to-many), so long as it provides merely the
“ability” to execute swaps (i.e., even if no
swaps are actually executed on such platform), it will likely
qualify as a SEF.
As stated in the 2021 CFTC SEF Advisory, and evidenced by the
CFTC’s concurrently announced charges and settlement in
September 2021, the agency is looking closely at platforms offering
“chat” functions that enable communications in a way that
appears to give buyers and sellers the ability to execute
derivative transactions (i.e., swap trades). This broad
interpretation could pull in any number of DAO platforms or other
market participants, as well as more traditional financial services
providers and potentially even other social and business digital
communications platforms that offer capabilities related to or
involving derivatives trading.
Importantly, because the CFTC Staff Advisory, from DMO’s
perspective, is merely a clarification of what the SEF definition
has been since the 2013 CFTC SEF Rule, it will have retroactive
application, meaning that the CFTC’s Division of Enforcement
could bring enforcement actions against facilities that believed
they were in compliance with the 2013 CFTC SEF registration rule
but would now fall within the functional definition of a SEF as
outlined in the 2021 CFTC SEF Advisory.
d. The 2022 Developments
During 2022 the CFTC through enforcement as well as registration
orders further pursued implementing its 2021 CFTC SEF Advisory in
practice – essentially, engaging in regulation by
enforcement.23
On January 3, 2022, the CFTC made clear that CFTC regulations
applicable to SEFs and DCMs apply in equal measure to DeFi
platforms by filing and settling charges against an event-based
binary options exchange that was not registered as either a SEF or
a DCM.24 Given the number of unregistered platforms
similarly offering derivatives in the market, many more actions of
this nature are likely to ensue. CFTC Chair Rostin Behnam
specifically noted in his Congressional testimonies of February 9,
2022, September 15, 2022 and December 1, 2022 that the CFTC will
focus oversight on platforms where digital assets are
traded.25 CFTC’s complaint filed with the U.S.
district court in the Northern District of California, CFTC v.
Ooki DAO on September 22, 2022,26 further
illustrates Chair Behnam’s point.
On July 20, 2022, the CFTC issued an order of SEF registration
for AEGIS SEF, LLC,27 immediately sparking the
controversy. A number of market participants raised objections to
the order as a further attempt to apply the 2021 CFTC SEF advisory
in practice. Two CFTC Commissioners also raised concerns that the
CFTC is overdue for an APA-compliant revision of the SEF rules,
instead of a piecemeal approach of advisories, no-action letters,
enforcement and registration orders.28
On September 26, 2022, in its ARM enforcement
action,29 the CFTC further illustrated in practice its
understanding of what entities would qualify as SEFs by requiring
that a registered CTA also register as a SEF. This enforcement
action falls squarely within the parameters proposed in the 2018
CFTC Proposed SEF Rule. Clearly, however deficient the 2021 CFTC
SEF Advisory may have been, the CFTC has all but elevated this
advisory to the status of a Federal rule through its enforcement
actions and orders of registration.
e. Implications for Market
Participants
The combined effect of the 2021 CFTC SEF Advisory and
registration and enforcement orders establishes a body of law that
is likely to have a number of unintended (or maybe intended)
consequences.
First, unless a clear regulatory action is taken in compliance
with the APA, legal uncertainty around how market participants
should execute their swap transactions will persist. Market
participants may be forced to execute swaps that are not subject to
the trade execution requirement on a SEF, which would be in
competition to using the traditional services of an IB or CTA.
Second, market participants will incur unnecessary costs to trade
on a SEF with no potential of offsetting benefits. Third, the
change in the SEF’s scope could harm execution quality if
trading counterparties do not participate on the SEF or choose not
to use “any means of interstate commerce” that may even
remotely resemble a SEF functionality. Finally, this change could
cause the loss of valuable execution support provided by CTAs and
IBs, when market participants may not have the resources or
operational set-up to contact their trading counterparties to
negotiate and execute swap transactions on a strictly one-to-one
and bilateral basis.
Entities that would otherwise act as traditional CTAs or IBs
would shy away from providing these services in fear of
inadvertently qualifying as SEFs, while there is a fundamental
difference between a “registrant,” such as CTA or an IB,
and a “registered entity,” such as a SEF.
“Registrants” typically serve as fiduciaries to their
customers, while “registered entities” act as
self-regulatory organizations
(“SROs“) that do not owe any
fiduciary duties to their members and participants.
Furthermore, there is a significant concern among market
participants, such as SDs, that transacting with entities that are
CTAs or IBs, or with counterparties that are represented by or
trade through CTAs and IBs, may expose them to an aiding and
abetting liability if these CTAs and IBs may have failed to also
register as SEFs. In many instances SDs would not be able to obtain
requisite representations and warranties from these CTAs and IBs
that would state that they are not required to be registered as
SEFs, and SDs are not required to act as their counterparties’
lawyers or auditors. Given these risks, SD would simply shy away
from transacting or dealing with any CTA or IB, which would further
damage the CTA and IB industry.
2. SEC’s Regulations
a. The SEC’s Proposed
ATS Rule
On January 26, 2022, the SEC released a proposal to amend Rule
3b-16 of the Securities Exchange Act of 1934
(“Exchange Act“) with respect
to alternative trading systems
(“ATSs“) (“SEC
ATS proposed rule“).30 Although the
focus of the SEC ATS proposed rule is on the definition of
“exchange” under Section 3(a)(1) of the Exchange Act as
it relates to U.S. government and Treasury securities, that focus
should not obscure the proposal’s additional aim of expanding
the exchange concept “to include systems that offer the use of
non-firm trading interest and communication protocols to bring
together buyers and sellers of securities.” In practice, this
proposed amendment would broaden the scope of the definition of
“exchange” to capture not only actual orders placed on
securities exchanges, but also “non-firm trading
interests,” including conditional offers and exploratory
solicitations for securities trades. The amendment would also
provide the SEC with newly codified authority to oversee and
regulate communication protocol systems
(“CPSs“).31
SEC Commissioner Caroline Crenshaw described the proposed
expansion of SEC authority over platforms on which solely
“non-firm trading interests” are exchanged as the
long-needed removal of a “loophole” used to evade SEC
rules. Specifically, to capture CPSs, the SEC proposes amending the
term “exchange” to include any “organization,
association, or group of persons” that is not otherwise
subject to an exemption if it:
(1) brings together buyers and sellers of securities using
trading interest; and (2) makes available established,
non-discretionary methods (whether by providing a trading facility
or communication protocols, or by setting rules) under which buyers
and sellers can interact and agree to the terms of a trade.
The SEC ATS proposed rule provides a non-exhaustive list of CPSs
that would be subject to registration and oversight, including RFQ
systems; so-called “stream axes,” which electronically
provide a continuous flow of firm and non-firm trading offers on a
security to those on the platform, some conditional order systems;
and negotiation systems that bring together buyers and sellers via
a “bilateral negotiation protocol.”
Although SEC Chair Gary Gensler described these amendments as
necessary to adapt the agency’s regulations to a world in which
exchange platforms are “increasingly electronified,” this
action by the SEC is also a shot across the bow for DeFi platforms
offering blockchain-based, algorithmically facilitated platforms on
which securities trades are facilitated or communicated.
Some would argue that the DeFi platforms currently operating
autonomous or semi-autonomous protocols that provide communications
functions or other related services to potential buyers and sellers
of securities are not covered by the Exchange Act’s current
definition of “exchange.” These amendments would, at
least in some instances, bring those platforms more clearly under
the SEC’s jurisdiction, first and foremost by requiring them to
register with the agency as an exchange or as a broker-dealer or an
ATS.
b. SEC’s SEF Rule
On April 6, 2022, the SEC finally re-proposed its SEF rules for
security-based swaps (“2022 SEC SEF
Proposal“).32 The SEC’s proposal
states that: “the [SEC] preliminarily believes that it should
harmonize as closely as possible with the CFTC on foundational
terms such as ‘trading facility,’ ‘electronic trading
facility,’ and ‘order book’ because the CFTC’s
reliance on these terms over several years has created
understanding of what type of functionality a SEF must offer.”
This means that the body of law and CFTC’s interpretations of
what constitutes a SEF could largely transfer over to the SEC as
well and participants in security-based swap markets will have to
face the same issues discussed in this paper.
3. ESMA’s Consultation Paper
Two days after the release of the SEC ATS proposed rule in
January of 2022, the ESMA published a consultation paper
(“CP“) setting forth
“ESMA’s Opinion on the trading venue perimeter.”
ESMA’s paper seeks to further “clarify . . . the
definition of multilateral systems and provid[e] guidance on when
systems should be considered as multilateral systems and, as
consequence, seek for authorization as trading venues.”
Very similarly to the 2021 CFTC SEF Advisory and SEC ATS
proposed rule, ESMA’s CP aimed to clarify when a trading venue
becomes subject to the authorization requirement as either an
organized trading facility
(“OTF“) or a multilateral
trading facility (“MTF“).
“In particular, the CP looks at [RFQ] systems and new
technology providers that may, in some instances, operate de facto
a multilateral system without proper authorization.”
ESMA’s CP reminds entities that under MiFID II a
multilateral system is one in which: there is a system or a
facility; there are multiple third parties buying and selling
interests; those trading interests need to be able to interact; and
those trading interests need to be in financial instruments. The CP
also looks at recent technology and market developments, including
bilateral negotiation and communication protocols, as well as RFQ
and order management and execution systems.
Following this consultation, on February 9, 2023, ESMA had
published its final report containing the final opinion on
ESMA’s Opinion on the trading venue perimeter where it followed
the outline in CP and finalized its interpretation to include
communication protocols as one of the indicia of a trading venue
(“2023 ESMA Trading Venue
Report“). It considered in detail the following
concepts: “definition of a multilateral system” (a system
or facility), “multiple third-party buying and selling
interests,” “interaction between trading interests,”
scope of technology providers and communication tools,
request-for-quote systems, systems that pre-arrange transactions.
The 2023 ESMA Trading Venue Report is a product of a mutual
regulatory and market participants’ collaborative effort and is
a thorough document that provides greater clarity than the 2021
CFTC SEF Advisory.
4. FCA Consultation Paper
In September 2022 as part of its Wholesale Markets Review
conducted with HM Treasury, the UK’s Financial Conduct
Authority (“FCA“) published
Consultation Paper CP22/18 on new guidance on the regulatory
perimeter for trading venues. The FCA paper examines the same
concepts and constructs as the ESMA 2023 Trading Venue Report and
proposes guidance to be included in the FCA Handbook’s
Perimeter Guidance Manual to clarify the definition of a
multilateral system, as well as on specific arrangements in
financial markets in the form of Q&As.
Like ESMA, the FCA is looking to adapt a regulatory framework to
deal with ambiguities in the application of the MiFID definition of
multilateral system when distinguishing between unregulated
communication arrangements, firms that are authorized to arrange
deals in investment and regulated trading venues (the MiFID II term
that encompasses regulated markets, multilateral trading facilities
and organized trading facilities). It proposes doing so by giving
guidance on each of the four elements of the definition of a
multilateral system, being:
- Having the characteristics of a trading system or
facility; - Comprising multiple third-party buying and selling trading
interests; - Allowing trading interests to interact in the system; and
- Those trading interests are in financial instruments (as
defined in the Regulated Activities Order).
The guidance will also cover specific arrangements and how they
work under the definition, including voice broking, portfolio
managers operating internal matching systems, bulletin boards,
investment-based crowdfunding firms operating primary market
platforms and the systems operated to block trades onto trading
venues.
The consultation closed on November 25, 2022 and a policy
statement is expected in Q2 2023.
5. Proposed Regulations Applicable to Digital Assets
The first of the clarifications in the 2021 CFTC SEF Advisory as
to what activities could trigger SEF registration –
“facilitating trading or execution of swaps through
one-to-many or bi-lateral communications” – is also a cause
for concern not only for IBs and CTAs, but also for the burgeoning
DeFi industry. Looser conception of the
“multiple-to-multiple” requirement could snag DeFi
protocols that facilitate one-to-many communications.33
The Digital Commodities Consumer Protection Act
(“DCCPA“) introduced by
Senators Stabenow and Boozman on August 3, 2022 already attempts to
cover this functionality in the recent markup:
“(24) DIGITAL COMMODITY TRADING FACILITY.— 27
“(A) IN GENERAL.—The term ‘digital commodity trading
facility’ means a trading facility that facilitates the
execution or trading of on or through which
digital commodity trades between persons. are
executed. “(B) Exclusion.—The”(B)
EXCLUSIONS.—The term ‘digital commodity trading
facility’ does not include a person solely because that
person— “(i) validates digital commodity transactions;
or “(ii) develops or publishes
software.”;34
As follows from the redline, the SEF-like language of
“facilitates the execution or trading” is removed in
favor of a more clear and direct – “are
executed”.
Conclusion
CTAs, IBs, DAOs and businesses collaborating with them,
including companies providing digital communications services in
the financial services sector or entities that trade with or
through these entities,35 should closely analyze the
CFTC’s, SEC’s, and ESMA’s recent actions. Even if these
regulators did not formally coordinate their approach, the
substance of the CFTC, the purpose of the SEC ATS proposed rule, as
well as the scope of ESMA’s consultation paper and FCA’s
approach, all indicate that the regulators are attempting to do the
same thing: scope the outside boundaries of what constitutes a
regulated trading facility.
These developments not only foreshadow increased regulatory
scrutiny and compliance costs for the derivatives, commodity and
digital asset industry but also send the signal that the CFTC, the
SEC, the ESMA and other regulators, at times in either an actual or
seemingly coordinated manner, will be looking for ways to extend
and apply their authorities to the rapid technological changes that
are fundamentally altering the structure of the financial
markets.
The practical effects of the 2021 CFTC SEF Advisory are likely
to be:
- any platform or facility (registered or unregistered) offering
a chat function (even one-on-one) that provides an ability to
execute swaps would be under enhanced CFTC’s scrutiny; - CTAs could be reluctant to transact in OTC markets and
introduce customers to bilateral transactions; - new SEFs may have to essentially operate as trade confirmation
and reporting facilities; - forcing CTAs to become SEFs could interfere with their roles as
fiduciaries to customers; - other entities, such as swap dealers, would be reluctant to use
CTA services fearing potential aiding and abetting liability for
transacting with a potentially unregistered SEF; and - calling into question other intermediary models, such as
riskless principals acting as SDs or entities acting as give-up
brokers.
The previous version of this paper was first published by
the FIA Law & Compliance Division in connection with the FIA
webinar on February 23, 2023.
Footnotes
1. Public Law 111-203, H.R. 4173 et seq.
2. 7 U.S.C., 1a et seq.
3. A “swap” is defined in Sec. 1a(47) of the
CEA generally to only include non-security swaps.
4. Before the Dodd-Frank amendments in 2010, there
existed exempt commercial markets (ECMs), derivatives transaction
execution facilities (DTEFs), exempt boards of trade, excluded
electronic trading facilities, and a few others in addition to the
DCMs. Each of these trading venues afforded great flexibility for
market participants who could choose the most suitable form for
their business association – ranging from a virtually
unregulated and unregistered entity to a fully regulated DCM. After
Dodd-Frank, DCMs remained largely unchanged, while all the other
forms of trading facilities were rolled into the category of
SEF.
5. § 1a(50) of the CEA.
6. § 1a(51). This definition of “trading
facility” is critical to the understanding the scope of a SEF
because it also provides an exclusion in (B) of the definition that
carves out of the scope communication facilities where bilateral
swaps are negotiated between participants but are not executed, or
where bids and offers are not binding.
7. § 1a(6) of the CEA.
8. As defined in § 1.3 of CFTC
Regulations.
9. See CFTC, Core Principles and Other
Requirements for Swap Execution Facilities, 78 FR 33476, June 4,
2013.
10. See 17 C.F.R., Part 37.
11. The now notorious Footnote 88 in the 2013 CFTC SEF
Rule adopting release states that not only facilities that offer
the trading in swaps that are intended to be cleared and must trade
on a SEF (made available to trade, or –
“MAT“) must register, but any
facility that meets the definition of a SEF, regardless of whether
it does or does not offer swaps intended to be cleared and MAT,
must register as a SEF.
12. E.g., footnote 195 clarifies that a SEF is
required to collect swap trading relationship documentation
executed between the parties.
13. E.g., regulation of packaged transactions,
or post-trade name give-ups, or some SEF reporting
requirements.
14. See CFTC, Swap Execution Facilities and
Trade Execution Requirement – Proposed rule, 83 FR 61946
(November 30, 2018).
15. The Administrative Procedure Act, Pub. L. 79-404, 60
Stat. 27, June 11, 1946.
16. See CFTC, Swap Execution Facilities and
trade Execution Requirement – Proposed rule, partial
withdrawal, 86 FR 9304, 9304 (February 12, 2021).
17. See In the Matter of: Symphony
Communication Services, LLC. CFTC Docket No. 21-35, September
29, 2021.
18. Staff Advisory on Swap Execution Facility
Registration Requirement, CFTC Letter No. 21-19 (September 29,
2021).
19. Id.
20. For example, the APA requires that the agency conduct
the cost benefit analysis, provide notice to the public, provide an
opportunity for public comment, and not effect the retroactive
application of the rule, etc.
21. Id.
22. CEA SEF definition.
23. See CFTC Press Release No. 8613-22, CFTC
Releases Annual Enforcement Results (October 20, 2022).
24. See In the Matter of Blockratize, Inc.,
d/b/a Polymarket.com, CFTC Docket No. 22-09 (January 3,
2022).
25. Note that SEFs can give access to their trading
platforms only to eligible contract participants
(“ECPs“); while non-ECPs
(i.e., retail participants) can trade only on
DCMs.
26. See CFTC v. Ooki DAO (formerly d/b/a bZx
DAO), an incorporated association, Case 3:22-cv-5416, September
22, 2022. See also In the Matter of bZeroX, L.L.C.; Tom
Bean; and Kyle Kistner, CFTC Docket No. 22-31 (September 22,
2022).
27. The CFTC had stated in the press release: “The
CFTC issued the order under Section 5h of the Commodity Exchange
Act (CEA) and CFTC Regulation 37.3(b). After review of AEGIS
SEF’s application and associated exhibits, the CFTC determined
AEGIS SEF demonstrated its ability to comply with the CEA
provisions and CFTC regulations applicable to SEFs.” See
also CFTC Grants AEGIS SEF, LLC, Registration as a Swap
Execution Facility, July 20, 2022, CFTC Release
8560-22.
28. “It has been over 10 years since the Dodd-Frank
Act was passed. We must finally take action to fix unworkable rules
by codifying “perpetual” no-action relief through
notice-and-comment rulemaking as required by the Administrative
Procedure Act. We must be as demanding on ourselves as we are on
our registered entities and registrants—we must put in the
hard work to comply with the letter of the law.” Commissioner
Caroline Pham. Both Commissioners Pham and Summer Mersinger
demanded that the CFTC follow proper rulemaking procedures instead
of the ad hoc letters or advisories.
29. See In the Matter of Asset Risk
Management, LLC, CFTC Docket No. 22-36 (September 26,
2022).
30. Amendments Regarding the Definition of
“Exchange” and Alternative Trading Systems (ATSs) That
Trade U.S. Treasury and Agency Securities, National Market System
(NMS) Stocks, and Other Securities, Proposed Rule, 87 FR 15496
(March 18, 2022).
31. Additionally, as noted above, as part of this
amendment package, the SEC proposed to remove an exemption under
Regulation ATS for alternative trading systems (ATSs) that
facilitate trading of U.S. Treasury securities and other government
securities, in order to bring them “under the regulatory
umbrella.”
32. See Rules Relating to Security-Based Swap
Execution and Registration and Regulation of Security-Based Swap
Execution Facilities, SEC proposed rule, withdrawal of proposed
rules, 87 FR 28872 (May 11, 2022).
33. In the January 3, 2022 enforcement order In re
Polymarket, CFTC found that a DeFi blockchain operated
prediction market was unregistered as a DCM or a SEF.
34. The October 2022 unofficial markup.
35. Trading with an unregistered entity may be considered
adding and abetting in the perpetration of an illegal conduct.
Also, NFA’s Bylaw 1101 prohibits its members from transacting
with entities that should have been registered, such as a market
participant that may be found operating an unregistered
SEF.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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