U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5000

Facsimile: (202) 418-5521

www.cftc.gov

Division of Market Oversight

CFTC Letter No. 14-119

No-Action

September 29, 2014

Division of Market Oversight

Re: Extension of Time-Limited No-Action Relief to DCOs and their Clearing Members 

from the SEF Registration Requirement and Trading Mandate under Part 37 and 

from Various Reporting Requirements under Part 45, all in Connection with CDS 

Clearing-Related Swaps

On September 12, 2014 and September 15, 2014, respectively, ICE Clear Credit LLC

(“ICE Clear Credit”) and the Chicago Mercantile Exchange, Inc. (“CME”), each a

Commission-registered derivatives clearing organization (“DCO”), submitted requests for an 

extension of the no-action relief granted by the Division of Market Oversight (the “Division”) 

of the Commodity Futures Trading Commission (“CFTC” or “Commission”) in CFTC Letter 

No. 13-86, which will expire on September 30, 2014 (the “CDS Settlement Price Process 

No-Action Relief”).

1

 In CFTC Letter No. 13-86, the Division confirmed that it would not 

recommend that the Commission take enforcement action: (1) against a DCO meeting certain 

specified conditions for failure to register as a swap execution facility (“SEF”) pursuant to 

CFTC Regulation 37.3; (2) against a DCO clearing member for entering into a swap through 

the DCO’s credit default swaps (“CDS”) Settlement Price Process for CDS Clearing-Related 

Swaps2rather than on a SEF or a designated contract market (“DCM”) in instances where the 

Commodity Exchange Act (“CEA” or “Act”) Section 2(h)(8) trade execution requirement

applies to such swap, subject to certain specified conditions; or (3) against a swap reporting 

counterparty for failure to comply with its obligations to report swap data as required by Part 

45 of the Commission’s regulations for CDS Clearing-Related Swaps, subject to certain 

specified conditions.

 

1 CFTC Letter No. 13-86 (Dec. 31, 2013), available at: 

http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-86.pdf.

2

For purposes of this letter, the terms “CDS Settlement Price Process” and “CDS Clearing-Related Swaps” have the 

same meaning as in the Division’s three previous letters using these terms. See CFTC Letters No. 13-86 (Dec. 31, 

2013); No. 13-36 (June 27, 2013); and No. 12-59 (Dec. 19, 2012).
2

The CDS Settlement Price Process No-Action Relief applies to certain occasional, offfacility, cleared CDS, and the counterparties thereto, that are entered into pursuant to a DCO’s 

rules related to its price submission process for determining end-of-day settlement prices for 

cleared CDS. As discussed in CFTC Letter No. 13-86, each Commission-registered DCO that 

is eligible to clear CDS has unique policies and procedures in place to facilitate accurate and 

reliable end-of-day pricing for cleared CDS products.3 Generally speaking, under the rules of 

those DCOs, clearing members are required to submit price quotes for any cleared CDS 

product in which the clearing member, or the clearing member’s customers, has open interest 

at the end of each day. The DCO relies on these quotes in setting the end-of-day settlement 

prices for all cleared CDS positions. In order to ensure that the prices submitted by clearing 

members as part of the CDS Settlement Price Process are reliable and reflect current market 

conditions, DCOs require their clearing members, from time to time, to enter into “firm” or 

“forced” trades at their submitted price quotes, which then result in cleared CDS positions. 

According to ICE Clear Credit, the CDS Settlement Price Process provides reliable, 

market-driven prices for use in determining settlement prices for each instrument. In addition,

ICE Clear Credit states that a procedure that requires clearing members to enter into CDS 

Clearing-Related Swaps at their submitted price quotes encourages clearing members to 

provide high quality quotes in connection with the clearing members’ obligation to support the 

price discovery process related to determining end-of-day settlement prices. CME states that

the potential of crossing CDS clearing members at submitted bids and offers continues to 

serve as an appropriate incentive for CDS clearing members to provide high quality quotes to 

the settlement price process. Based on such representations, the Division understands that this 

process facilitates a DCO’s determination of accurate pricing for CDS, particularly, although 

not exclusively, when liquidity is limited (for example, for new products or off-the-run CDS).

The CDS Settlement Price Process is implemented through a unique set of policies and 

procedures developed by each DCO to establish reliable settlement prices for the CDS 

instruments it clears, in association with the DCO’s efforts to fulfill its responsibilities in 

conducting settlements under Section 5b(c)(2)(E) of the Act (DCO Core Principle E) and 

Commission Regulation 39.14. The process is not one through which clearing members 

submit or competitively accept bids and offers through the clearinghouse. Rather, the swap 

execution that occurs occasionally as part of the CDS Settlement Price Process results from the 

requisite submissions by CDS clearing members of mid-prices for certain CDS products to the 

clearinghouse.

Although the required execution of swaps pursuant to the CDS Settlement Price 

Process does not represent the typical voluntary swaps activity between counterparties seeking 

to achieve their respective financial objectives, the execution of a CDS Clearing-Related Swap 

nonetheless has implications for SEF registration requirements, trade execution requirements, 

and swap data reporting. In this regard, under CEA Section 5h(a)(1) and Commission 

Regulation 37.3, multilateral facilities that provide for the execution of swaps transactions are

 

3 While the phrase “CDS Settlement Price Process” is used herein by the Division, DMO notes that the various 

DCOs may each use their own term. For example, CME refers to its CDS Settlement Price Process as the “Price 

Quality Auction” process, while ICE Clear Credit refers to its process as the “End-Of-Day” or “EOD” process.
3

required to register as a DCM or a SEF, while under CEA Section 2(h)(8) and Commission 

Regulations 37.10 and 38.12, swaps that are subject to clearing and have been made available 

to trade must be executed on a DCM or SEF. Moreover, CEA Section 2(a)(13)(G) requires all 

swaps, whether cleared or uncleared, to be reported to a registered swap data repository. For 

off-facility swaps, part 45 places the reporting obligation on the Reporting Counterparty as 

determined by Commission Regulation 45.8.

Extension of Grant of No-Action Relief

The CDS Settlement Price Process No-Action Relief is scheduled to expire on 

September 30, 2014. ICE Clear Credit represented that the market for CDS products benefits 

from the use of the CDS Settlement Price Process, that it believes is the best solution currently 

available for determining settlement prices for CDS, and that the extension of no-action relief 

would allow for continued analysis of industry developments over a period significant enough 

for meaningful industry change. According to CME, during the extension period, it would 

continue to analyze market data to consider whether there are alternatives to the CDS 

Settlement Price Process that would not require the relief provided under CFTC Letter No. 13-

86 and are at least as efficient and effective as the current process, noting that the extension 

would allow sufficient time for the research, development, testing and implementation of any

potential alternative. In addition, ICE Clear Credit and CME indicate their interest in the 

implementation on a permanent basis of relief that would achieve high-quality end-of-day 

settlement prices.

In light of the ongoing use by DCOs of the CDS Settlement Price Process in 

conjunction with the DCOs’ efforts to fulfill their responsibilities in conducting settlements, 

and in consideration that no comparably effective alternative approach has been developed, the 

Division will therefore extend the CDS Settlement Price Process No-Action Relief to the 

earlier of: (i) 11:59 p.m. on September 30, 2015; or (ii) the effective date of any Division or 

Commission action to facilitate a longer term approach to establishing settlement prices for 

CDSs. The extension should provide a reasonable amount of time for CME, ICE Clear Credit 

and similarly situated DCOs to obtain additional experience using the CDS Settlement Price 

Process, to collect additional price data, and to consider possible viable alternatives, all of 

which can assist the Division in considering a permanent approach to this issue.

Based on the facts presented and the representations made by CME and ICE Clear 

Credit, the Division will not recommend that the Commission take enforcement action against 

any DCO meeting the following specified conditions, for failure to register as a SEF pursuant to 

CFTC Regulation 37.3; additionally, the Division will not recommend that the Commission 

commence an enforcement action against any DCO clearing member for entering into a swap 

through the DCO’s CDS Settlement Price Process and not on a SEF or a DCM for CDS 

Clearing-Related Swaps, even if such swap is subject to CEA Section 2(h)(8)’s trade execution 

requirement, subject to the following conditions:

1. The no-action relief shall apply only to CDS Clearing-Related Swaps arising from,

or entered into pursuant to, a DCO’s CDS Settlement Price Process, and executed as 

required by the DCO’s rules and procedures.
4

2. Each trade must involve a clearing member of a DCO that is eligible to clear CDS 

indices and must participate in that DCO’s CDS Settlement Price Process, and must

be carried out by the DCO as part of equal and opposite paired transactions such that

the DCO’s net exposure remains unchanged.

3. The CDS Clearing-Related Swap trade is initiated solely by the DCO, pursuant to its 

rules and procedures.

4. A DCO relying on this relief will, upon request, promptly make available to any 

representative of the Commission, information regarding the CDS Settlement Price 

Process, in the form and manner specified.

In addition, the Division will not recommend that the Commission take enforcement 

action against a reporting counterparty for failure to comply with its obligations to report swap 

data as required by Part 45 for CDS Clearing-Related Swaps,

4

subject to the following

conditions:

1. The reporting counterparty, as defined in Part 45, must be a clearing member of a 

DCO that is eligible to clear CDS indices and must participate in that DCO’s CDS 

Settlement Price Process.

2. The no-action relief shall apply only to CDS Clearing-Related Swaps arising from, or 

entered into pursuant to, a DCO’s CDS Settlement Price Process, as required by the 

DCO’s rules and procedures.

3. The reporting counterparty and DCO agree, as evidenced by private agreement or 

pursuant to a DCO’s rules, that the DCO shall fulfill all of the reporting 

counterparty’s obligations with respect to reporting CDS Clearing-Related Swaps 

pursuant to Part 45.

The no-action relief contained in this letter shall expire on the earlier of: (i) 11:59 p.m. on 

September 30, 2015; or (ii) the effective date of any Division or Commission action to facilitate a 

longer term approach to establishing settlement prices for CDSs.

This letter, and the no-action position taken herein, represent the views of the Division of 

Market Oversight only, and do not necessarily reflect the views of the Commission or any other 

division or office of the Commission’s staff. Should the Commission promulgate rules in the 

future that are in conflict with any no-action relief granted in this letter, any such rules will 

supersede this letter. The no-action position taken herein does not excuse affected persons from 

compliance with any other applicable requirements of the CEA or the regulations promulgated 

thereunder. This position is based upon the representations contained in the ICE Clear Credit 

 

4 The Division notes that the No-Action Relief in CFTC Letter 13-86 did not grant any relief under Part 43 of the 

Commission’s regulations. This extension, therefore, does not address Part 43.
5

and CME request letters dated September 12 and 15, 2014, respectively, and it should be noted 

that any different, changed, or omitted material facts or circumstances may require a different 

conclusion or render this no-action letter void. Finally, as noted above, and as with all no-action 

letters, the Division of Market Oversight retains the authority to condition further, modify, 

suspend, terminate, or otherwise restrict the terms of the no-action relief provided herein, in its 

discretion.

If you have any questions concerning the content of this staff no-action letter, please 

contact David Van Wagner, Chief Counsel, Division of Market Oversight, at (202) 418-5481

or dvanwagner@cftc.gov, or Riva Spear Adriance, Senior Special Counsel, Division of Market 

Oversight, at (202) 418-5494 or radriance@cftc.gov.

Sincerely,

Vincent A. McGonagle

Director

Division of Market Oversight