U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5430

Facsimile: (202) 418-5536

CFTC Letter No. 13-62

No-Action

September 30, 2013

Division of Clearing and Risk

Division of Market Oversight

Time-Limited No-Action Relief for (1) Futures Commission Merchants from Requirement 

to Comply with Commission Regulations 1.73(a)(2)(i) and (a)(2)(ii); and (2) Temporarily 

Registered Swap Execution Facilities from Requirement to Comply with Commission 

Regulation 37.702(b)

The Division of Clearing and Risk and the Division of Market Oversight (together, “the 

Divisions”) of the Commodity Futures Trading Commission (“Commission”) are issuing this 

letter to provide time-limited and specific no-action relief for futures commission merchants 

(“FCMs”) from the requirement to comply with Commission Regulations 1.73(a)(2)(i) and 

(a)(2)(ii).1 The Divisions are also providing time-limited and specific no-action relief for 

temporarily registered swap execution facilities (“SEFs”) from the requirement to comply with 

Commission Regulation 37.702(b). This no-action relief shall commence on the date of issuance 

of this letter and shall expire on November 1, 2013.

I. Background

On April 9, 2012, the Commission published clearing member risk management 

regulations.

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 The regulations are codified in Part 1 of the Commission’s regulations and became 

effective on October 1, 2012. Regulation 1.73 requires an FCM that is a clearing member 

(“Clearing FCM”) of a registered derivatives clearing organization (“DCO”) to establish riskbased limits and screen orders for compliance with those limits. Regulation 1.73 applies to

Clearing FCMs that clear products for which the clearing organization is registered with the 

Commission as a DCO. Regulation 37.702(b) requires a SEF to coordinate with each DCO to

which it submits transactions for clearing, to develop rules and procedures to facilitate prompt 

and efficient transaction processing in accordance with the requirements of Regulation 

39.12(b)(7). Regulation 39.12(b)(7) sets forth time frames for DCOs to accept or reject trades 

for clearing.

 

1 Commission regulations are codified in 17 C.F.R Ch. I.

2 Customer Clearing Documentation, Timing of Acceptance for Clearing, and Clearing Member Risk Management,

77 Fed. Reg. 21,278 (Apr. 9, 2012).
2

Regulation 1.73(a)(1) requires each Clearing FCM to establish risk-based limits for each 

proprietary account and each customer account, which are based on position size, order size, 

margin requirements, or similar factors. Regulation 1.73(a)(2) requires each Clearing FCM to 

screen orders for compliance with those limits.

Regulation 1.73(a)(2)(i) states that when a Clearing FCM provides electronic market 

access to a designated contract market (“DCM”) or SEF or accepts orders for automated 

execution on a DCM or SEF, the Clearing FCM shall use automated means to screen orders for 

compliance with such risk-based limits. 

Regulation 1.73(a)(2)(ii) provides that when a Clearing FCM accepts orders for nonautomated execution, it shall establish and maintain systems of risk controls reasonably designed 

to ensure compliance with the limits. The Commission has noted that orders executed by nonautomated means (e.g., voice broker) can be screened automatically if they are routed 

automatically.3 

Regulation 37.702(b)(2) directs SEFs to have rules and procedures to facilitate prompt 

and efficient processing by DCOs in accordance with Regulation 39.12(b)(7). Subparagraph (ii) 

of Regulation 39.12(b)(7), in turn, requires DCOs to accept or reject all trades executed 

competitively on a SEF or DCM as quickly as would be technologically practicable as if fully 

automated systems were used.

In Staff Guidance on Swaps Straight-Through Processing issued on September 26, 2013

(“Staff Guidance”), the Divisions noted that Clearing FCMs must screen orders for execution on 

a SEF or DCM pursuant to either paragraph (a)(2)(i) or (a)(2)(ii) of Regulation 1.73, regardless 

of the method of execution. The Divisions also noted that a SEF must facilitate pre-execution 

screening by each Clearing FCM in accordance with Regulation 1.73 on an order-by-order basis. 

That is, the SEF should make it possible for Clearing FCMs to screen in accordance with 

Regulation 1.73 on an order-by-order basis. 

II. Compliance with FCM and SEF Regulations 

The Divisions have been informed by some Clearing FCMs and temporarily registered 

SEFs that they are facing several obstacles to achieving compliance with the specific 

requirements, noted above, of Commission Regulations 1.73(a)(2)(i) and (a)(2)(ii), and 

37.702(b), prior to the October 2, 2013 compliance date for the SEF final rules. According to 

some Clearing FCMs and SEFs, the process of pre-execution screening of orders presents certain 

administrative and operational challenges for swaps market participants. One of the challenges 

highlighted is that SEFs have not had an adequate amount of time to update their rulebooks or 

implement means to facilitate pre-execution credit checks by Clearing FCMs.

While recognizing the important regulatory objectives underlying Commission 

Regulations 1.73(a)(2)(i) and (a)(2)(ii) and 37.702(b), the Divisions nevertheless believe that 

SEFs should be provided additional time to comply with the requirements of Commission 

 

3

See 77 Fed. Reg. at 21,288.
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Regulation 37.702(b) to facilitate pre-execution credit checks by Clearing FCMs. The Divisions

further believe that Clearing FCMs should be provided additional time to comply with 

Commission Regulations 1.73(a)(2)(i) and (a)(2)(ii) for swaps executed on or subject to the rules 

of any SEF that does not currently facilitate pre-execution screening on an order-by-order basis 

by Clearing FCMs in accordance with Regulation 1.73. 

The Divisions emphasize that the relief provided by this letter does not apply in instances 

where a SEF does have the ability to facilitate pre-execution screening of orders by Clearing 

FCMs. Any Clearing FCM that provides electronic market access or accepts orders for 

execution on such SEFs is not eligible for the relief granted herein.

III. Scope of No-Action Relief

The Divisions are issuing this no-action letter to provide time-limited and specific relief 

for Clearing FCMs to comply with Commission Regulations 1.73(a)(2)(i) and (a)(2)(ii) for 

swaps trading on or subject to the rules of any SEF that does not currently have the rules and 

procedure to facilitate pre-execution screening by Clearing FCMs in accordance with Regulation 

1.73 on an order-by-order basis. If a SEF does facilitate such screening, then Clearing FCMs are 

not relieved of their obligation to conduct pre-execution screening. The Divisions are also 

issuing this no-action letter to provide time-limited and specific relief for SEFs that are 

temporarily registered as of October 2, 2013, from the requirement of Commission Regulation 

37.702(b) that they facilitate pre-execution screening by each Clearing FCM in accordance with 

Commission Regulation 1.73 on an order-by-order basis, if the SEFs do not already have the 

ability to facilitate pre-execution screening. 

Under this relief, the Divisions will not recommend that the Commission take any 

enforcement action against Clearing FCMs that do not screen orders in accordance with 

Regulation 1.73, only with respect to trades executed on SEFs that do not facilitate such 

screening. In addition, the Divisions will not recommend that the Commission take any 

enforcement action against SEFs that do not already facilitate pre-execution screening by 

Clearing FCMs in accordance with Regulation 1.73 on an order-by-order basis. This no-action 

relief shall commence on the date of issuance of this letter and shall expire on November 1, 

2013, at 12:01 am EST. 

The no-action relief in this letter only applies to a Clearing FCM’s obligation to comply 

with Commission Regulation 1.73 for swaps trading on any SEF that does not currently facilitate 

pre-execution screening by Clearing FCMs in accordance with Regulation 1.73 on an order-byorder basis, or a SEF’s obligation to comply with Commission Regulation 37.702(b) by 

facilitating pre-execution screening by each Clearing FCM in accordance with Commission 

Regulation 1.73 on an order-by-order basis, if the SEF does not already. This letter does not 

relieve FCMs or SEFs from any other requirements applicable to FCMs or SEFs under the 

Commodity Exchange Act or the Commission’s regulations thereunder.
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In addition, any SEF that intends to avail itself of the relief provided herein, shall, as a 

condition of obtaining such relief, submit to the Secretary of the Commission, no later than 

October 10, 2013:

(1) Pursuant to Commission Regulation 40.6, any rule amendments that are necessary for 

full compliance with Commission Regulation 37.702(b), and any rule amendments 

that are necessary to facilitate full compliance with Commission Regulation 

1.73(a)(2)(i) and (a)(2)(ii), in accordance with the Staff Guidance;

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and 

(2) A written representation that the SEF is undertaking all steps necessary to fully

comply with Commission Regulation 37.702(b), and is undertaking all steps 

necessary to facilitate full compliance with Commission Regulation 1.73(a)(2)(i) and 

(a)(2)(ii), in accordance with the Staff Guidance.

IV. Conclusion 

This letter, and the no-action position taken herein, reflects the views of the Divisions

only, and not necessarily the position or views of the Commission or of any other division or 

office of the Commission’s staff. The no-action position taken herein does not excuse affected 

persons from compliance with any other applicable requirements of the Commodity Exchange 

Act or the Commission’s regulations thereunder. As with all no-action letters, the Divisions

retains the authority, in its discretion, to further condition, modify, suspend, terminate or 

otherwise restrict the terms of the no-action relief provided herein.5

If you have any questions concerning this correspondence, please contact John C. 

Lawton, Deputy Director, Division of Clearing and Risk, at (202) 418-5480 or 

jlawton@cftc.gov, Chris Hower, Special Counsel, Division of Clearing and Risk, at (202) 418-

6703 or chower@cftc.gov, Nancy Markowitz, Deputy Director, Division of Market Oversight, at 

(202) 418-5453 or nmarkowitz@cftc.gov, or Amir Zaidi, Special Counsel, Division of Market 

Oversight, at 202-418-6770 or azaidi@cftc.gov.

Sincerely,

Ananda Radhakrishnan David P. Van Wagner Nancy Markowitz 

Director Chief Counsel Deputy Director

Division of Clearing and Risk Division of Market Oversight Division of Market Oversight

 

4 The Divisions note that under Regulation 40.6(a)(2), a SEF must post a notice of pending certification on the 

SEF’s web site concurrently with the filing of a submission to the Commission.

5 Commission guidance or action taken during the pendency of this no-action relief, could supersede the relief 

granted herein.
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