U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5977

Facsimile: (202) 418-5407

gbarnett@cftc.gov

Division of Swap Dealer and

Intermediary Oversight

Gary Barnett

Director

CFTC Letter No. 13-11

No-Action

April 30, 2013

Division of Swap Dealer and Intermediary Oversight

Re: Time Limited Relief for Swap Dealers in Connection with Prime Brokerage

Arrangements 

Ladies and Gentlemen:

This letter is in response to requests for relief from market participants to the Division of 

Swap Dealer and Intermediary Oversight (“Division”) of the Commodity Futures Trading 

Commission (“Commission”) regarding the application of certain business conduct standards for 

swap dealers (“SDs”) with counterparties1in the context of prime brokerage arrangements 

relating to swaps and certain foreign exchange transactions. Market participants have requested 

that the Division provide no-action relief to SDs from some obligations under the External 

Business Conduct Standards for certain transactions executed in accordance with prime 

brokerage arrangements where the SD has (i) allocated certain obligations under the External 

Business Conduct Standards to an executing dealer that is also an SD, or (ii) entered into prime 

brokerage arrangements with executing dealers that are not SDs.

The relief provided in this letter applies to swaps, as defined in Section 1a(47) of the 

Commodity Exchange Act (the “Act” or “CEA”) and Commission regulation 1.3(xxx) (other 

than swaps subject to the clearing requirement of section 2(h)(1)(A) of the Act and part 50 of the 

Commission’s regulations), and physically-settled foreign exchange forwards and swap 

agreements that have been exempted from the definition of swap by the U.S. Department of the 

Treasury2(“Exempt FX Transactions” and together with such swaps, the “Covered

Transactions”). 

 

1

See 17 CFR §§ 23.400-23.451 and Business Conduct Standards for Swap Dealers and Major Swap Participants 

with Counterparties, 77 FR 9734, Feb. 17, 2012 (hereinafter, the “External Business Conduct Standards”).

2 Determination of Foreign Exchange Swaps and Foreign Exchange Forwards Under the Commodity Exchange Act, 

77 Fed. Reg. 69694 (Nov. 20, 2012) (hereinafter, the “Treasury Determination”).
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Applicable Regulatory Requirements

Section 4s(h) of the CEA provides the Commission with both mandatory and 

discretionary rulemaking authority to impose business conduct standards on SDs and major swap 

participants in their dealings with counterparties, including Special Entities. Pursuant to section

4s(h) of the CEA, on December 22, 2010, the Commission published in the Federal Register 

proposed Business Conduct Standards for Swap Dealers and Major Swap Participants with 

Counterparties as subpart H of part 23 of the Commission’s regulations.3 There was a 60-day 

period for the public to comment on the proposing release. On May 4, 2011, the Commission 

published in the Federal Register a notice to re-open the public comment period for an additional 

30 days, which ended on June 3, 2011.4 On February 17, 2012, the Commission published in the 

Federal Register final business conduct rules for SDs and major swap participants as subpart H 

of part 23.

5

 The initial compliance date for the External Business Conduct Standards was the 

later of 180 days after the effective date of the External Business Conduct Standards or “the date 

on which swap dealers or major swap participants are required to apply for registration pursuant 

to Commission rule 3.10.”6 The Commission subsequently postponed the compliance date for a 

number of the provisions of the External Business Conduct Standards until May 1, 2013.7 

In the adopting release for the External Business Conduct Standards, the Commission 

recognized that counterparties may enter into swaps through a prime brokerage arrangement. 

With respect to compliance with the External Business Conduct Standards in transactions entered 

into through a prime brokerage arrangement, the Commission stated in the adopting release that 

“[s]wap dealers and major swap participants will be permitted to arrange with third parties, such 

as the counterparty’s prime broker, a method of providing disclosure or verifying that a Special 

Entity has an independent representative to satisfy its obligations under the rules.”

8

 However, 

 

3 Business Conduct Standards for Swap Dealers and Major Swap Participants With Counterparties, 75 FR 80638 

(proposed Dec. 22, 2010).

4 Reopening and Extension of Comment Periods for Rulemakings Implementing the Dodd-Frank Wall Street 

Reform and Consumer Protection Act, 75 FR 25274 (May 4, 2011).

5

See supra note 1.

6 External Business Conduct Standards at 9734.

7

In September 2013, the Commission changed the compliance date of §§ 23.402; 23.410(c); 23.430; 23.431(a)–(c); 

23.432; 23.434(a)(2), (b), and (c); 23.440; and 23.450 to January 1, 2013. See Confirmation, Portfolio 

Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation Requirements for Swap 

Dealers and Major Swap Participants, 77 FR 55904, 55942 (Sept. 11, 2012). The Commission later changed the 

compliance date for these provisions to May 1, 2013. See Business Conduct and Documentation Requirements for 

Swap Dealers and Major Swap Participants; Extension of Compliance Date, 78 FR 17, 20 (Jan. 2, 2013).

8 External Business Conduct Standards at 9741.
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the Commission made clear that “the swap dealer or major swap participant [that offers to enter 

into a swap with the counterparty] will remain responsible for compliance with the rules.”

9

With respect to the Exempt FX Transactions, pursuant to Section 1a(47)(E) of the CEA,10

the Secretary of the Treasury (“Secretary”) is vested with the authority to determine whether 

foreign exchange swaps and foreign exchange forwards should be regulated as swaps under the 

CEA, provided that the Secretary makes a written determination satisfying certain criteria 

specified in CEA Section 1b. On November 16, 2012, the Secretary issued a written 

determination that foreign exchange swaps and forwards should not be regulated as swaps under 

the CEA.11 Nonetheless, CEA Section 1a(47)(E)(iv) provides that, notwithstanding the 

Secretary’s written determination, “any party to a foreign exchange swap or forward that is a 

swap dealer or major swap participant shall conform to the business conduct standards contained 

in section 4s(h) [of the CEA].”12 Thus, SDs and major swap participants are required to comply 

with the External Business Conduct Standards with respect to Exempt FX Transactions, 

including those for which the compliance date is May 1, 2013.

Description of Prime Brokerage Arrangements

As explained by market participants, prime brokerage arrangements in Covered 

Transactions currently operate in two distinct forms, but each begins with a market participant 

who is not a SD (the “counterparty”) opening an account (or otherwise entering into an 

arrangement) with a prime broker that may be an SD. Prior to approving and entering into the 

prime brokerage arrangement, the prime broker will conduct due diligence and know-your 

customer reviews with respect to the counterparty. 

In the first form of prime brokerage, prevalent in the market for Covered Transactions

involving foreign exchange, the prime broker may grant limited agency powers to the 

counterparty, enabling the counterparty, as an agent for the prime broker, to negotiate Covered 

Transactions with a number of other approved counterparties known as executing dealers, 

subject to specified limits and parameters. 

In the second form of prime brokerage, the counterparty is not granted agency powers, 

but rather agrees to specified limits and parameters with the prime broker for Covered 

Transactions that the counterparty will enter into with approved executing dealers, which will 

subsequently be “given up” to the prime broker. In this respect, the prime broker will also enter 

into “give-up” agreements with the approved executing dealers in which the executing dealers 

either agree to negotiate Covered Transactions within specified parameters with the counterparty, 

 

9

Id. at 9741.

10 7 U.S.C. 1a(47)(E).

11 See Treasury Determination, supra note 2.

12 Additionally, foreign exchange swaps and forwards are subject to reporting obligations, pursuant to Section 

1a(47)(E)(iii) of the CEA, 7 U.S.C. § 1a(47)(E)(iii).
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who is acting as an agent for the prime broker, or agree to “give-up” Covered Transactions

entered with the counterparty to the prime broker. 

The counterparty, or an asset manager or other representative of the counterparty, will 

seek bids or offers for a desired Covered Transaction from one or more of the approved 

executing dealers within the parameters established by the prime broker for the counterparty and 

executing dealer. Once the counterparty and executing dealer agree on the terms, the 

counterparty and executing dealer will either provide a notice of the terms to the prime broker (in 

the first form of prime brokerage) or enter into the Covered Transaction themselves (in the 

second form). 

If the counterparty and executing dealer do not enter into a Covered Transaction

themselves, they will provide the prime broker with notice of the terms negotiated. As long as 

the Covered Transaction is with an approved executing dealer, the terms are within the 

parameters established by the prime broker, and other conditions that may have been agreed 

among the parties are satisfied, upon receiving notice of the negotiated terms the prime broker 

will be obligated, either by contract or custom, to face the counterparty in a Covered Transaction

with the same terms agreed upon by the executing dealer and counterparty. Once this first 

Covered Transaction is entered into by the prime broker, the prime broker will enter into a 

second Covered Transaction with equal but opposite terms with the executing dealer. 

If the counterparty and executing dealer enter into a Covered Transaction themselves, and 

the Covered Transaction falls within the parameters set by the prime broker, the prime broker 

would be obligated to become a party to the Covered Transaction with the counterparty (or the 

executing dealer) through a novation. The prime broker will subsequently enter into a second 

Covered Transaction with the executing dealer (or the counterparty) with equal but opposite 

terms to the Covered Transaction with the other party. 

In either form of prime brokerage, the end result would be two Covered Transactions

with equal but opposite terms. One Covered Transaction will be between the prime broker and 

the counterparty (“Counterparty-PB Transaction”) and the other between the prime broker and 

the executing dealer (the “ED-PB Transaction”). 

A number of market participants have described the benefits of prime brokerage 

arrangements. They have represented that prime brokerage arrangements (1) increase market 

liquidity and allow market participants to obtain more favorable pricing from an executing dealer 

with whom the market participant may not have a credit relationship; (2) permit market 

participants who are customers of SDs to simplify management of counterparty risk by 

minimizing the number of firms they face; (3) lower costs for market participants by eliminating 

the need to enter into extensive trading documentation with each executing dealer with which 

they want to trade; (4) increase collateral efficiencies by permitting prime brokers to net 

collateral obligations across all trades for a market participant handled by the prime broker; and 

(5) decrease operational risk. 

Summary of Request for Relief
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Market participants have represented to the Division that it would be difficult or 

impracticable for prime brokers and executing dealers to fully comply with the External Business 

Conduct Standards as each entity has access to different information at different points of time. 

They have represented that only the prime broker usually maintains detailed credit and other 

portfolio information regarding the counterparty. On the other hand, the executing dealer will 

often not know the identity of the underlying counterparty. In many instances, an asset manager 

or other representative of the counterparty will negotiate the terms of a Covered Transaction with 

the executing dealer on behalf of a number of counterparties and allocate the transaction to the 

counterparties only after the execution of the Counterparty Mirror Transaction. Thus, market 

participants argue that the prime broker is in the best position to take responsibility for 

compliance with the External Business Conduct Standards that relate to the general relationship 

between the SD and its counterparty, such as “know-your-counterparty” obligations under 

§ 23.402. 

Conversely, the executing dealer, but not the prime broker, often will have access to 

timely trade information and information about the inherent risks relating to both the ED-PB 

Transaction and the Counterparty Mirror Transaction. As a result, market participants argue that 

the executing dealer (assuming that such dealer is a SD)13 is in the best position to take 

responsibility for compliance with External Business Conduct Standards that are transaction 

specific, such as providing the pre-trade mid-market quote and risk disclosures under § 23.431. 

To facilitate compliance with the External Business Conduct Standards in the context of 

prime brokerage arrangements, market participants have proposed that SDs be permitted to 

allocate responsibility between two SDs for compliance with certain obligations to counterparties 

under the External Business Conduct Standards. In addition, relief has also been requested for 

SDs acting as prime brokers from compliance with certain External Business Conduct Standards 

altogether when an executing dealer is not required to be registered with the Commission as a 

SD.14 In such circumstances, the executing dealer is not required to comply with any part of the 

External Business Conduct Standards and thus has nothing to allocate to a prime broker in return 

for accepting an allocation of certain obligations of the prime broker. The Division notes that 

there is no request to relieve SDs from, or permit an allocation of, the anti-fraud, fair dealing, 

confidentiality, and other general conduct requirements under the External Business Conduct 

Standards, which would be complied with by both the SD acting as prime broker and an SD 

acting as executing dealer as applicable to their activities. 

 

13 The External Business Conduct Standards apply only to SDs and major swap participants. See, e.g., § 23.400 and 

CEA Section 1a(47)(E)(iv).

14 Not all dealers in the Covered Transactions are required to be registered with the Commission as SDs. For 

example, dealers in swaps that have not entered into swaps with an aggregate notional amount above a de minimis 

threshold set by Commission regulations are not required to be registered with the Commission as SDs. See 17 CFR 

§ 1.3(ggg)(4). In addition, entities that are dealers exclusively in Covered Transactions that are Exempt FX 

Transactions are not required to register as SDs.
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Market participants have represented to the Division that unless SDs are permitted to 

allocate compliance with the External Business Conduct Standards between the prime broker and 

the executing dealer, it will be impossible to continue existing prime brokerage arrangements or, 

at a minimum, such arrangements will be significantly impacted. To comply with the External 

Business Conduct Standards, trading that currently occurs through prime brokerage 

arrangements would need to occur bilaterally between the executing dealer and the counterparty 

in full compliance with the External Business Conduct Standards. Since many executing dealers 

do not, and, due to risk limits, will not, have bilateral contractual relationships covering 

compliance with the External Business Conduct Standards with many counterparties, they would 

need to negotiate and enter into the necessary documentation or forego transacting with prime 

brokerage customers, which would, if a significant number of executing dealers did forego such 

transactions, decrease price competition and, at a minimum, disrupt trading for a significant 

period of time. 

In addition, the Division understands that counterparties in prime brokerage arrangements 

may receive price quotes for an Exempt FX Transaction from 20-30 executing dealers or more, 

and that some counterparties transact in large block sizes that can only be filled by many 

executing dealers each taking a part of the counterparty’s large block trade. For Exempt FX 

Transactions, many executing dealers may not be SDs registered with the Commission. As nonregistered dealers, these executing dealers do not have any obligations under the External 

Business Conduct Standards, so a prime broker that is a registered SD would bear the entire 

burden of compliance with such standards. The Commission understands that due to this burden, 

prime brokers may cease to participate in prime brokerage arrangements with executing dealers 

that are not registered SDs, eliminating a portion of executing dealers that provide counterparties 

with competitive pricing. In the market for Exempt FX Transactions, the portion of executing 

dealers eliminated could be significant. 

In sum, counterparties that currently depend on prime brokerage arrangements to meet 

their needs fear that the implementation of the External Business Conduct Standards will 

eliminate or severely curtail their ability to seek prices from a wide range of executing dealers, 

leaving them with only their prime broker(s) as potential counterparties. Indeed, the Division

understands that some counterparties have already been contacted by executing dealers 

informing them that the executing dealer will not trade with the counterparty following the 

compliance date for the relevant External Business Conduct Standards. Such counterparties 

recognize that their prime broker(s) will be aware of their limited ability to seek competitive 

prices, and fear that this may lead to higher prices for the counterparty. In addition, the 

implementation of the External Business Conduct Standards may cause a large number of 

executing dealers to be eliminated from the prime brokerage portion of the market for Exempt 

FX Transactions or to have their ability to transact with a wide range of counterparties 

significantly curtailed. Market participants argue that as a result of the foregoing, the market 

will suffer reduced liquidity through a sudden drop in the number of participants in the markets, 
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the management of counterparty credit risk will be more difficult for non-SD market participants, 

and such non-SD market participants will experience decreased collateral efficiency.15 

Division No-Action Position

Based on the representations made by market participants, the Division believes that noaction relief is warranted with respect to the External Business Conduct Standards as they relate 

to Covered Transactions executed under prime brokerage arrangements where the prime broker 

and the executing dealer are each SDs. Accordingly, the Division will not recommend that the 

Commission commence an enforcement action against a SD for failure to comply with the 

obligations of the SD under Commission regulations §§ 23.402(b)-(f) (Know your counterparty, 

True name and owner, Reasonable reliance on representations, Manner of disclosure and 

Disclosures in a standard format, respectively), 23.430 (Verification of counterparty eligibility), 

23.431 (Disclosures of material information), 23.432(b) (Clearing disclosures for swaps not 

required to be cleared—right to clearing), 23.434 (Recommendations to counterparties--

institutional suitability), 23.440 (Requirements for swap dealers acting as advisors to Special 

Entities), 23.450 (Requirements for swap dealers and major swap participants acting as 

counterparties to Special Entities), and 23.451 (Political contributions by certain swap dealers)

(collectively, the “apportionable business conduct obligations”) with respect to a Covered 

Transaction with a counterparty executed under a prime brokerage arrangement to the extent any 

such obligations have been allocated to another SD and such other SD has accepted such 

allocation, subject to the following conditions:

(a) The prime brokerage arrangement meets the following description: An arrangement 

between or among two SDs and the counterparty evidenced by written agreements 

pursuant to which:

(1) With respect to the first type of prime brokerage arrangement:

(i) One SD (the “executing dealer”), together with the counterparty, commits

to the material terms and conditions of a Covered Transaction;

(ii) Upon satisfaction of certain conditions, the second SD (the “prime 

broker”) is required to enter into two Covered Transactions, one with the 

counterparty and one with the executing dealer; and

(iii) As a result of the foregoing:

(A) The prime broker and the counterparty are parties to a Covered 

Transaction in which all material terms and conditions are 

substantially identical (other than adjustments attributable to 

intermediation fees charged by the prime broker) to the terms and 

conditions to which the counterparty and the executing dealer 

previously committed; and

 

15 As support for these representations, a swap industry trade association has represented that approximately 18% of 

swaps in the credit and interest rate asset classes are executed under prime brokerage arrangements. For the foreign 

exchange asset class, the percentage of trades that have been represented as executed under prime brokerage 

arrangements appears to vary widely by currency pair and type of transaction, but ranges from an average of 

approximately 10% for foreign exchange options to almost 30% for non-deliverable forwards. 
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(B) The prime broker and the executing dealer are parties to a Covered 

Transaction with substantially equal but opposite terms and 

conditions to the Covered Transaction between the prime broker 

and the counterparty; or

(2) With respect to the second type of prime brokerage arrangement:

(i) One SD (the “executing dealer”) enters into a Covered Transaction with 

the counterparty (the “original Covered Transaction”);

(ii) Upon satisfaction of certain conditions, the second SD (the “prime 

broker”) is required to accept novation of the original Covered 

Transaction; and

(iii) As a result of the foregoing:

(A) The executing dealer and the counterparty are no longer parties to 

the original Covered Transaction;

(B) The prime broker and the counterparty are parties to a Covered 

Transaction in which all material terms and conditions are 

substantially identical (other than adjustments attributable to 

intermediation fees charged by the prime broker) to the terms and 

conditions of the original Covered Transaction; and

(C) The prime broker and the executing dealer are parties to a Covered 

Transaction with substantially equal but opposite terms and 

conditions to the Covered Transaction between the prime broker 

and the counterparty.

(b) The apportionable business conduct obligations with respect to the counterparty are 

allocated between the two SDs and no apportionable business conduct obligation is left 

unallocated between such SDs.

(c) The counterparty with respect to which apportionable business conduct obligations have 

been so allocated (or its duly authorized representative) is provided with notice of the 

apportionable business conduct obligations that have been allocated to each SD prior to 

the time at which any such obligation is required to be performed.

(d) The allocation of the apportionable business conduct obligations is in writing and 

includes an agreement by each SD that:

(1) It will perform or otherwise be responsible for each apportionable business 

conduct obligation it has agreed to be allocated to it to the full extent of such 

obligation; 

(2) It will not be responsible for the compliance of the other SD with the 

apportionable business conduct obligations allocated solely to such other SD; and

(3) The counterparty (or its duly authorized representative) will be provided notice of 

any expiration or termination of the allocation of apportionable business conduct 

obligations no later than 30 days prior to such expiration or termination, and each 

SD will remain responsible for fulfilling all applicable apportionable business 

conduct obligations allocated to it until such expiration or termination.
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(e) Each SD makes and retains a record of the applicable prime brokerage arrangement, the 

written allocation of apportionable business conduct obligations, and the delivery of 

notice of such written allocation to the applicable counterparty (if the obligation to 

deliver such notice shall have been allocated to it) in accordance with Commission 

regulation § 23.203 (Records; retention and inspection), and makes such records 

available to the Commission upon request.

Further, with respect to the market for Exempt FX Transactions where the Division 

understands there is significant participation by executing dealers that are not required to be 

registered as SDs, the Division believes that no-action relief is warranted with respect to the 

External Business Conduct Standards as they relate to Exempt FX Transactions executed under 

prime brokerage arrangements where the prime broker is an SD, but the executing dealer is not 

an SD. However, the Division believes that such relief should be limited to relief, for the SD 

acting as prime broker, from the obligations under Commission regulations §§ 23.431(a)(3)(i) 

and 23.431(b), which require the disclosure of the mid-market mark of the Exempt FX 

Transaction, and that the SD provide its counterparty with a scenario analysis if requested. The 

Division believes that these are the only obligations of an SD acting as prime broker in a prime 

brokerage arrangement with an executing dealer that is not an SD that would be impossible or 

impracticable for such SD to perform. The Division is not persuaded that such SD should be 

given relief from the remainder of the External Business Conduct Standards at this time. 

Accordingly, the Division will not recommend that the Commission commence an enforcement 

action against a SD for failure to comply with the obligations of the SD under Commission 

regulations §§ 23.431(a)(3)(i) or 23.431(b) with respect to an Exempt FX Transaction with a 

counterparty executed under a prime brokerage arrangement, subject to the following conditions:

(a) The SD (as prime broker) has entered into a prime brokerage arrangement that meets the 

description above but for the fact that the executing dealer is not a SD; and

(b) Prior to entering into the Exempt FX Transaction, the SD notifies the counterparty that it 

will not perform its obligations under Commission regulations §§ 23.431(a)(3)(i)

(disclosure of the price and mid-market mark) or § 23.431(b) (scenario analysis) with 

respect to Exempt FX Transactions entered under the applicable arrangement in reliance 

on this letter. 

The Division recognizes that the conditions of the no-action relief described above may 

require SDs to complete new documentation and provide certain notices to qualify for such 

relief. To allow time for such conditions to be met and to avoid market disruption in the 

meantime, the Division will not recommend that the Commission commence an enforcement 

action against a SD for failure to comply with any apportionable business conduct obligations (as 

defined in this letter) with respect to Covered Transactions until May 15, 2013, provided that 

such Covered Transactions are conducted under prime brokerage arrangements of such SD in 

existence on the date of this letter. Such relief does not apply to Covered Transactions with any 

counterparty not executed under a prime brokerage arrangement in existence on the date of this 

letter. All relief in this letter is time-limited and will end at 12:01 eastern time on the later of the 

effective date or the compliance date of any final rule or final order providing relief from the 
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External Business Conduct Standards as they relate to Covered Transactions executed under 

prime brokerage arrangements, as described in this letter.

This letter, and the positions taken herein, represent the view of the Division only, and do 

not necessarily represent the position or view of the Commission or of any other office or 

division of the Commission. The relief issued by this letter does not excuse the affected persons 

from compliance with any other applicable requirements contained in the CEA or in the 

Commission’s regulations issued thereunder. For example, and without limitation, the relief 

issued by this letter does not relieve any person from an obligation to report a swap or 

information concerning a swap under part 43 or part 45 of the Commission’s regulations. 

Further, this letter, and the relief contained herein, is based upon the information made available 

to the Division. Any different or changed material facts or circumstances might render this letter 

void.

Should you have any questions, please do not hesitate to contact me at (202) 418-5977; 

Frank Fisanich, Chief Counsel, at (202) 418-5949; Adam Kezsbom, Special Counsel, at (202) 

418-5372, or Jason Shafer, Attorney-Advisor, at (202) 418-5097.

Very truly yours,

Gary Barnett

cc: Regina Thoele, Compliance

National Futures Association, Chicago

Jamila A. Piracci, OTC Derivatives

National Futures Association, New York