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. 13-33 Corrected

No-Action

June 27, 2013

Division of Swap Dealer and Intermediary Oversight

Re: No-Action Relief: Swaps Intended to be Cleared

Ladies and Gentlemen:

This letter responds to requests received by the Division of Swap Dealer and 

Intermediary Oversight (“Division”) of the Commodity Futures Trading Commission 

(“Commission”) from the International Swaps and Derivatives Association (“ISDA”) and the 

Asset Management Group of the Securities Industry and Financial Markets Association (“AMG” 

and, together with ISDA, the “Requesting Associations”), each on behalf of its members who 

enter into swaps that are intended to be submitted for clearing contemporaneously with 

execution.1 For these swaps, the Requesting Associations seek relief from certain disclosure and 

notice requirements and other duties imposed on swap dealers (“SDs”) and major swap 

participants (“MSPs”) pursuant to Commission regulations §§ 23.402, 23.430, 23.431, 23.432, 

23.434, 23.440, 23.450, and 23.451, as well as certain documentation requirements imposed on 

SDs and MSPs pursuant to Commission regulation § 23.504.

I. Background

On July 21, 2010, President Obama signed the Dodd-Frank Act.2 Title VII of the DoddFrank Act3

amended the Commodity Exchange Act (“CEA”)4to establish a comprehensive 

 

1 Although the relief contained herein was requested by ISDA and AMG on behalf of their members, such relief is 

available to all swap market participants that enter into swaps intended to be submitted for clearing 

contemporaneously with execution, subject to the conditions set forth herein.

2

 See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010). 

The text of the Dodd-Frank Act may be accessed at:

http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.

3

 Pursuant to Section 701 of the Dodd-Frank Act, Title VII may be cited as the “Wall Street Transparency and 

Accountability Act of 2010.”

4

 7 U.S.C. 1 et seq.
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regulatory framework to reduce risk, increase transparency, and promote market integrity within 

the financial system by, among other things: (1) providing for the registration and 

comprehensive regulation of SDs and MSPs; (2) imposing clearing and trade execution 

requirements on standardized derivative products; (3) creating rigorous recordkeeping and realtime reporting regimes; and (4) enhancing the Commission’s rulemaking and enforcement 

authorities with respect to all registered entities and intermediaries subject to the Commission’s 

oversight.

In the nearly three years since its enactment, the Commission has finalized approximately

50 rules to implement Title VII of the Dodd-Frank Act. Earlier this year, the Commission, 

jointly with the Securities and Exchange Commission, finalized the main foundational elements 

of the Dodd-Frank regulatory framework by adopting regulations further defining the terms 

“swap dealer” and “major swap participant,”5as well as the regulations further defining the term 

“swap.”6 The Commission also adopted regulations setting forth a comprehensive scheme for 

the registration process for SDs and MSPs.7 Other finalized rules include various substantive 

requirements applicable to SDs and MSPs under CEA section 4s,8 which address reporting and 

recordkeeping,9business conduct standards,10 documentation standards,11 duties,12 and 

designation of chief compliance officers.13

Among other things, upon registration, an SD or MSP must submit documentation 

demonstrating its compliance with any Commission regulation issued pursuant to section 4s(e), 

(f), (g), (h), (i), (j), (k), and (l) of the CEA that is applicable to it and for which the compliance 

date has passed. Such Commission regulations include business conduct standards under subpart 

H of part 23 of the Commission’s regulations promulgated under section 4s(h) of the CEA, and 

 

5

See Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major 

Security-Based Swap Participant,” and “Eligible Contract Participant,” 77 FR 30596 (May 23, 2012).

6

See Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; 

Security-Based Swap Agreement Recordkeeping, 77 FR 48208 (Aug. 13, 2012).

7

See Registration of Swap Dealers and Major Swap Participants, 77 FR 2613 (Jan. 19, 2012).

8

 7 U.S.C 6s.

9

See Swap Dealer and Major Swap Participant Recordkeeping, Reporting, and Duties Rules; Futures Commission 

Merchant and Introducing Broker Conflicts of Interest Rules; and Chief Compliance Officer Rules for Swap 

Dealers, Major Swap Participants, and Futures Commission Merchants, 77 FR 20128 (Apr. 3, 2012).

10 See Business Conduct Standards for Swap Dealers and Major Swap Participants With Counterparties, 77 FR 9734 

(Feb. 17, 2012).

11 See Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship 

Documentation Requirements for Swap Dealers and Major Swap Participants, 77 FR 55904 (Sept. 11, 2012).

12 See supra note 9.

13 Id.
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documentation standards under subpart I of part 23 of the Commission’s regulations promulgated 

under section 4s(i) of the CEA.

Business Conduct Standards with Counterparties

With respect to business conduct standards with counterparties, section 4s(h) of the CEA 

provides the Commission with both mandatory and discretionary rulemaking authority to impose 

business conduct standards on SDs and MSPs 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 subpart H of part 23 of the Commission’s regulations.14 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, 2011.15 On February 17, 2012, the Commission 

adopted as final rules subpart H to part 23, which set forth business conduct standards for swap 

dealers and major swap participants in their dealings with counterparties (the “External 

BCS”).

16

 SDs and MSPs were required to comply with the External BCS by May 1, 2013.17

Of note in relation to this letter, a number of the Commission’s rules under the External 

BCS require SDs and MSPs to provide or obtain specific information from their counterparties, 

to obtain specific representations in writing from their counterparties, and to perform certain due 

diligence inquiries with respect to their counterparties prior to entering into (or in some cases, 

offering to enter into) a swap with such counterparties.18 Certain safe harbors under the External 

 

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

(proposed Dec. 22, 2010).

15 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).

16 Business Conduct Standards for Swap Dealers and Major Swap Participants With Counterparties, 77 FR 9734 

(Feb. 17, 2012).

17 The External BCS final rules required that SDs and MSPs must comply with the rules in subpart H of part 23 on 

the later of 180 days after the effective date of these rules or the date no which swap dealers or major swap 

participants are required to apply for registration pursuant to Commission rule 3.10. However, in subsequent 

rulemakings, the compliance date for §§ 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 was deferred first until 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)), and then again until May 1, 2013 (see Business Conduct and 

Documentation Requirements for Swap Dealers and Major Swap Participants; Extension of Compliance Date, 78 FR 

17 (Jan. 2, 2013)).

18 See Commission regulation § 23.402(b) (requiring SDs to obtain essential facts about their counterparty prior to 

execution of a transaction); § 23.430(a) (requiring SDs and MSPs to verify that a counterparty meets the eligibility 

standards for an eligible contract participant before offering to enter into or entering into a swap with such 

counterparty); § 23.431(a) (requiring SDs and MSPs to provide material information concerning a swap to its 

counterparty at a reasonably sufficient time prior to entering into the swap); § 23.431(b) (requiring SDs and MSPs to 
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BCS permit SDs and MSPs to rely on written representations from their counterparties and 

standardized disclosures, each of which may require amendments or supplements to an SD’s or 

MSP’s relationship documentation with such counterparties prior to entering into a swap with 

such counterparties.19 

Swap Trading Relationship Documentation

Documentation standards for SDs and MSPs have been adopted by the Commission 

pursuant to Section 4s(i)(1) of the CEA, which requires SDs and MSPs to “conform with such 

standards as may be prescribed by the Commission by rule or regulation that relate to timely and 

accurate confirmation, processing, netting, documentation, and valuation of all swaps,” and

Section 4s(i)(2) of the CEA, which requires the Commission to adopt rules “governing 

documentation standards for swap dealers and major swap participants.” On February 8, 2011, 

the Commission proposed regulations governing swap trading relationship documentation.20 

There was a 60-day comment period for the proposal. On September 11, 2012, the Commission 

issued final rules governing swap trading relationship documentation (§ 23.504).21 Commission 

regulation § 23.504 requires that an SD or MSP execute swap trading relationship documentation 

meeting the requirements of the rule with a counterparty prior to or contemporaneously with 

entering into a swap transaction with such counterparty.22 

Regarding the content of swap trading relationship documentation, each SD and MSP

must establish policies and procedures reasonably designed to ensure that the parties have agreed 

in writing to all terms governing their trading relationship, including, among other things, terms 

related to credit support arrangements, such as initial and variation margin requirements and 

custodial arrangements, and terms addressing payment obligations, netting of payments, events 

of default or other termination events, calculation and netting of obligations upon termination, 

transfer of rights and obligations, governing law, valuation, and dispute resolution.

23

 With 

 

provide notice to counterparties that they can request and consult on the design of a scenario analysis; § 23.431(d) 

(requiring SDs and MSPs to provide notice to counterparties of the right to receive the daily mark from a DCO for 

cleared swaps); § 23.432 (requiring SDs and MSPs to provide notice to counterparties of the right to select clearing 

and the DCO on which a swap is to be cleared); § 23.434 (requiring SDs and MSPs that recommend a swap to have 

a reasonable basis to believe that the swap is suitable for the counterparty); § 23.440 (requiring SDs and MSPs that 

act as an advisor to a Special Entity to act in such entity’s best interest); § 23.450 (requiring SDs and MSPs to 

inquire into the knowledge and status of a representative of a counterparty that is a Special Entity); and § 23.451 

(prohibiting SDs from entering into swaps with certain governmental entities if it has made political contributions to 

an official of such entity).

19 See § 23.402(d), (e), and (f).

20 Swap Trading Relationship Documentation for Swap Dealers and Major Swap Participants, 76 FR 6715 (proposed 

Feb. 8, 2011).

21 Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation 

Requirements for Swap Dealers and Major Swap Participants, 77 FR 55904 (Sept. 11, 2012). 

22 See § 23.504(a)(2).

23 See § 23.504(b)(1) and (3).
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respect to valuation of swaps, SDs and MSPs must include agreement on the process for 

determining the value of each swap at any time from execution to the termination, maturity, or 

expiration of the swap, for the purposes of complying with: (1) the margin requirements under 

section 4s(e) of the CEA and Commission regulations; and (2) the risk management 

requirements under section 4s(j) of the CEA and Commission regulations.24 The documentation 

also must include either: (1) alternative methods for determining the value of the swap, in the 

event of the unavailability or other failure of any input required to value the swap; or (2) a 

valuation dispute resolution process.25 SDs and MSPs are also required to perform a periodic 

audit of their swap trading relationship documentation, and the audit must be sufficient to 

identify any material weakness in documentation policies and procedures.26

Straight-Through-Processing of Cleared Swaps

A number of Commission regulations, acting in concert, require that swaps that are 

intended to be cleared are in fact cleared within a reasonably short period of time. Ensuring a 

short period between swap execution and acceptance for clearing by a derivatives clearing 

organization (“DCO”) mitigates the credit risk that exists from the swap prior to novation to the 

DCO.27 

Relevant for this letter, Commission regulation § 23.506 (Swap processing and clearing) 

requires each SD and MSP to have the capacity to route swap transactions intended to be cleared, 

but not executed on a SEF or DCM28, to a DCO in coordination with the DCO to facilitate 

prompt and efficient swap transaction processing in accordance with the requirements of 

Commission regulation § 39.12(b)(7) (Time frame for clearing).

29

 For swaps subject to 

 

24 See § 23.504(b)(4)(i).

25 See § 23.504(b)(4)(ii).

26 See § 23.504(c).

27 See Customer Clearing Documentation, Timing of Acceptance for Clearing, and Clearing Member Risk 

Management, 77 FR 21278, 21284 (Apr. 9, 2012), stating:

Minimizing the time between trade execution and acceptance into clearing is an important risk 

mitigant. This time lag potentially presents credit risk to the swap counterparties, clearing 

members, and the DCO because the value of a position may change significantly between the time 

of execution and the time of novation, thereby allowing financial exposure to accumulate in the 

absence of daily mark-to-market. Among the purposes of clearing are the reduction of risk and the 

enhancement of financial certainty, and this time lag diminishes the benefits of clearing swaps that 

Congress sought to promote in the Dodd-Frank Act.

28 Pursuant to Commission regulations §§ 37.702 and 38.601, each SEF and DCM must coordinate with each DCO 

to which it submits transactions for clearing in the development of rules and procedures to facilitate prompt and 

efficient transaction processing to meet the requirements § 39.12(b)(7). Commission regulation § 39.12(b)(7)(ii) 

requires a DCO to accept or reject swaps executed on a SEF or DCM for clearing “as quickly after execution as 

would be technologically practicable if fully automated systems were used.” See id. at 21309.

29 See 17 CFR §§ 23.506(a) and Customer Clearing Documentation, Timing of Acceptance for Clearing, and 

Clearing Member Risk Management, 77 FR 21278, 21307 (Apr. 9, 2012).
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mandatory clearing, an SD or MSP must submit the swap to the DCO as soon as technologically 

practicable but no later than the close of business on the day of execution; swaps not subject to 

mandatory clearing must be submitted by the next business day after execution of the swap.30 

Regulation § 39.12(b)(7) in turn requires DCOs to accept or reject swaps not executed on 

a SEF or DCM “as quickly after submission to the derivatives clearing organization as would be 

technologically practicable if fully automated systems were used.”31 In addition, Commission 

regulation § 1.74 (FCM acceptance for clearing) requires each futures commission merchant 

(“FCM”) that is a clearing member of a DCO to establish systems that enable the FCM to accept 

or reject each trade submitted to the DCO by the FCM for a customer of the FCM as quickly as 

would be technologically practicable if fully automated systems were used.32 

Finally, Commission regulation § 1.35 (Records of commodity interest and cash 

commodity transactions) allows for bunched orders to be executed in a single trade with the 

intention that the position will be allocated among multiple counterparties after execution (such 

as when an asset manager executes a single swap with the intention to allocate the swap to 

multiple accounts under its management). For such bunched orders in swaps not executed on a 

SEF or DCM, but submitted for clearing by a DCO, the swap must be allocated “no later than a 

time sufficiently before the end of the day the order is executed to ensure that clearing records 

identify the ultimate customer for each trade.”33 

II. Relief Requested

The Requesting Associations note that many of the Commission’s regulations under the 

External BCS do not apply either (i) when the SD or MSP does not know the identity of the 

counterparty to a swap prior to the execution of the swap, or (ii) when the swap is initiated on a 

designated contract market (“DCM”) or swap execution facility (“SEF”) and the SD or MSP 

does not know the identity of the counterparty to a swap prior to the execution of the swap.34 

 

30 See 17 CFR §§ 23.506(b) and Customer Clearing Documentation, Timing of Acceptance for Clearing, and 

Clearing Member Risk Management, 77 FR 21278, 21307-08 (Apr. 9, 2012). See also 17 CFR § 50.2 and Clearing 

Requirement Determination Under Section 2(h) of the CEA, 77 FR 74284, 74335-36 (Dec. 13, 2012) (requiring all 

swaps subject to a clearing requirement to be submitted to a DCO as soon as technologically practicable after 

execution, but in any event by the end of the day of execution).

31 See 17 CFR §§ 23.506(a) and 39.12(b)(7)(iii), and Customer Clearing Documentation, Timing of Acceptance for 

Clearing, and Clearing Member Risk Management, 77 FR 21278, 21306-10 (Apr. 9, 2012). As stated in the 

adopting release, these rules, taken as a whole, “require SEFs, DCMs, SDs, MSPs, and DCOs to coordinate in order 

to facilitate real time acceptance or rejection of trades for clearing.” Id. at 21296.

32 See id. at 21307.

33 See 17 CFR § 1.35(b)(5)(iv)(A) and Adaptation of Regulations to Incorporate Swaps, 77 FR 66288, 66326 (Nov. 

2, 2012).

34 See § 23.402(b) and (c) (requiring SDs and MSPs to obtain and retain certain information only about each 

counterparty “whose identity is known to the SD or MSP prior to the execution of the transaction”), § 23.430(e) (not 
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Similarly, the Requesting Associations observe that § 23.504 contains an exception to the 

requirement that an SD or MSP execute swap trading relationship documentation with a 

counterparty prior to or contemporaneously with entering into a swap transaction with such 

counterparty. Section 23.504(a)(1) states that such documentation is not required with respect to 

swaps executed on a DCM or anonymously on a SEF if such swaps are cleared by a DCO and all 

terms of the swaps conform to the rules of the DCO and § 39.12(b)(6) of the Commission’s 

regulations.35 

The Division recognizes that rationales for these exceptions include: (i) the impossibility 

or impracticability of compliance with certain rules, or the full extent of certain rules, by an SD 

or MSP when the identity of the counterparty is not known prior to execution; (ii) the likelihood 

that swaps initiated anonymously on a DCM or SEF will be standardized and, thus, information 

about the material risks and characteristics of such swaps is likely to be available from the DCM 

or SEF or other widely available source (including the product specifications of a DCO if the 

swaps are accepted for clearing); and (iii) the fact that following clearing of a swap, the SD or 

MSP and its counterparty have no further obligations to each other, so there is no on-going 

relationship that would be governed by the trading relationship documentation required by 

Commission regulation § 23.504. The Division also notes that relief from certain requirements 

of the External BCS for swaps initiated anonymously on a DCM or SEF would provide an 

incentive to transact on such platforms, enhancing transparency in the swaps market, a major 

policy goal of the Dodd-Frank Act. Similarly, the relief from the swap trading relationship 

documentation requirements for swaps submitted for clearing would provide an incentive to clear 

swaps, another major policy goal of the Dodd-Frank Act.

 

requiring SDs and MSPs to verify counterparty eligibility when a transaction is entered on a DCM or SEF and the 

SD or MSP does not know the identity of the counterparty prior to execution), § 23.431(c) (not requiring disclosure 

of material information about a swap if initiated on a DCM or SEF and the SD or MSP does not know the identity of 

the counterparty prior to execution), § 23.450(h) (not requiring SDs and MSPs to have a reasonable basis to believe 

that a Special Entity has a qualified, independent representative if the transaction with the Special Entity is initiated 

on a DCM or SEF and the SD or MSP does not know the identity of the Special Entity prior to execution), and 

§ 23.451(b)(2)(iii) (disapplying the prohibition on entering into swaps with a governmental Special Entity within 

two years after any contribution to an official of such governmental Special Entity if the swap is initiated on a DCM 

or SEF and the SD or MSP does not know the identity of the Special Entity prior to execution).

35 Section 39.12(b)(6) of the Commission’s regulations provides:

(6) A derivatives clearing organization that clears swaps shall have rules providing that, upon 

acceptance of a swap by the derivatives clearing organization for clearing:

(i) The original swap is extinguished;

(ii) The original swap is replaced by an equal and opposite swap between the derivatives 

clearing organization and each clearing member acting as principal for a house trade or acting 

as agent for a customer trade;

(iii) All terms of a cleared swap must conform to product specifications established under 

derivatives clearing organization rules; and

(iv) If a swap is cleared by a clearing member on behalf of a customer, all terms of the swap, 

as carried in the customer account on the books of the clearing member, must conform to the 

terms of the cleared swap established under the derivatives clearing organization’s rules.
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Recognizing the exceptions to the documentation requirements and the External BCS

outlined above, and encouraged by the pre-clearing risk mitigation provided by compliance with 

the Commission’s regulations for straight-through-processing of swaps intended to be cleared in 

parts 1, 23, 39, and 50 of the Commissions regulations, the Requesting Associations are seeking 

relief that would extend such exceptions based on the same rationales outlined above. Thus, the 

Requesting Associations seek relief from certain requirements under the External BCS and 

certain aspects of the documentation requirements of Commission regulation § 23.504 that the 

Requesting Associations find superfluous, and therefore unduly burdensome, in the execution 

and post-trade processing of swaps that are not executed on a SEF or DCM, but (i) are executed 

without the SD or MSP knowing the identity of the counterparty, in some instances, and (ii) 

intended to be submitted for clearing contemporaneously with execution, in all instances (such 

swaps, “Intended-To-Be-Cleared Swaps” or “ITBC Swaps”).

As noted above, many of the External BCS require SDs and MSPs to provide notices or 

disclosures to, or obtain specific information or representations from, their counterparties prior to 

entering into (or in some cases, offering to enter into) a swap with such counterparties.36 

Knowledge of its counterparty’s identity is, of course, essential to comply with these

requirements under the External BCS, but the Requesting Associations argue that these 

requirements meant to protect counterparties are either impossible to perform if the 

counterparty’s identity is not known prior to execution of an ITBC Swap, or only meaningful or 

effective where an SD or MSP has an on-going relationship with the counterparty, which it will 

not in the case of ITBC Swaps.

Similarly the Requesting Associations argue that the swap trading relationship 

documentation required by § 23.504 is not relevant for ITBC Swaps because there is no on-going 

relationship between the SD or MSP and its counterparty once the swap is accepted for clearing 

by a DCO.

With respect to the acceptance for clearing by a DCO, the Requesting Associations

acknowledge that the consequences of the failure of an ITBC Swap to clear may raise issues with 

respect to both the External BCS and the swap trading relationship documentation requirement. 

Specifically, if the result of the failure of an ITBC Swap to clear is that the SD or MSP and its 

 

36 See Commission regulation § 23.402(b) (requiring SDs to obtain essential facts about their counterparty prior to 

execution of a transaction); § 23.430(a) (requiring SDs and MSPs to verify that a counterparty meets the eligibility 

standards for an eligible contract participant before offering to enter into or entering into a swap with such 

counterparty); § 23.431(a) (requiring SDs and MSPs to provide material information concerning a swap to its 

counterparty at a reasonably sufficient time prior to entering into the swap); § 23.431(b) (requiring SDs and MSPs to 

provide notice to counterparties that they can request and consult on the design of a scenario analysis; § 23.431(d) 

(requiring SDs and MSPs to provide notice to counterparties of the right to receive the daily mark from a DCO for 

cleared swaps); § 23.432 (requiring SDs and MSPs to provide notice to counterparties of the right to select clearing 

and the DCO on which a swap is to be cleared); § 23.434 (requiring SDs and MSPs that recommend a swap to have 

a reasonable basis to believe that the swap is suitable for the counterparty); § 23.440 (requiring SDs and MSPs that

act as an advisor to a Special Entity to act in such entity’s best interest); § 23.450 (requiring SDs and MSPs to 

inquire into the knowledge and status of a representative of a counterparty that is a Special Entity); and § 23.451 

(prohibiting SDs from entering into swaps with certain governmental entities if it has made political contributions to 

an official of such entity).
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counterparty will be deemed to have entered into a bilateral swap, with on-going obligations to 

each other, than the rationales for relief from the External BCS and documentation requirements 

are not present. 

Because it is possible that an ITBC Swap may, due to unforeseen circumstances, fail to 

be accepted for clearing by a DCO, for purposes of this relief the Requesting Associations have 

represented that the result of such failure will not, in any event, be a bilateral swap between the 

SD or MSP and its counterparty. Rather, the Requesting Associations have represented that an 

ITBC Swap that fails to be accepted for clearing by a DCO will be subject to an agreement 

between the SD or MSP and its counterparty requiring either:

(i) That the ITBC Swap will immediately be resubmitted for clearing with:

(A) The clearing member for the SD or MSP as party to the ITBC Swap if the SD or 

MSP is responsible for the ITBC Swap’s failure to clear; or 

(B) The clearing member for the counterparty as party to the ITBC Swap if the 

counterparty is responsible for the ITBC Swap’s failure to clear; or 

(C) Both the clearing member for the SD or MSP and the clearing member for the 

counterparty as parties to the ITBC Swap if both the SD or MSP and the 

counterparty are responsible for the ITBC Swap’s failure to clear; or 

(ii) That the ITBC Swap is void or automatically terminated as of the time that the ITBC Swap 

fails to clear, with any cost or other amount attributable to automatic termination to be 

payable as agreed between the parties.

III. Staff Position

Based on the foregoing, the Division believes that no-action relief for SDs and MSPs is 

warranted with respect to certain External BCS requirements (enumerated below) and the swap 

trading relationship documentation requirement under Commission regulation § 23.504 in the 

context of an ITBC Swap where the SD or MSP does not know the identity of the counterparty to 

the ITBC Swap. In addition, the Division believes that no-action relief for SDs and MSPs is 

warranted with respect to the swap trading relationship documentation requirement under 

Commission regulation § 23.504 in the context of an ITBC Swap, even if the SD or MSP knows

the identity of the counterparty. 

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

enforcement action against an SD or MSP for either (A) failure to comply with the requirements 

of the External BCS specified on Appendix A attached hereto, or the requirements of 

Commission regulation § 23.504 (Swap trading relationship documentation) with respect to an 

ITBC Swap where the SD or MSP does not know the identity of the counterparty prior to 

execution of the swap (an “Anonymous ITBC Swap”), or (B) failure to comply with the 

requirements of Commission regulation § 23.504 (Swap trading relationship documentation) 
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with respect to an ITBC Swap where the SD or MSP does know the identity of the counterparty

prior to the execution of the swap, subject to the following conditions:

1. If the ITBC Swap is an Anonymous ITBC Swap, such swap is not of a type that:

(a) Has been listed on any DCM for more than thirty (30) days;

(b) Is a required transaction37 that is listed on any SEF; or 

(c) Is a permitted transaction38 that has been listed on any SEF for more than thirty 

(30) days;

2. Such ITBC Swap is of a type accepted for clearing by a DCO;

3. The SD or MSP is either a clearing member of such DCO, or has entered into an 

agreement with a clearing member of such DCO for clearing of swaps of the same type as 

the ITBC Swap;

4. The SD or MSP has a reasonable basis to conclude that the counterparty is either a 

clearing member of such DCO, or has entered into an agreement with a clearing member 

of such DCO for clearing of swaps of the same type as the ITBC Swap;

5. Prior to execution of the ITBC Swap:

(a) The SD or MSP and the counterparty (or the counterparty’s duly authorized 

representative) have agreed in writing that the ITBC Swap will be submitted for 

clearing by both the SD or MSP and the counterparty to either the DCO, or to 

their respective clearing members as quickly after execution as technologically 

practicable; or

(b) In the case of an Anonymous ITBC Swap executed as a bunched order by an 

eligible account manager (as defined in Commission regulation § 1.35(b)(5)39), 

the SD or MSP, the counterparty (or the counterparty’s duly authorized 

representative), and such eligible account manager have agreed in writing that:

(i) The Anonymous ITBC Swap will be submitted for clearing by both the 

SD or MSP and the counterparty to either the DCO, or to their respective 

clearing members within:

 

37 As defined in Commission regulation § 39.7. See Core Principles and Other Requirements for Swap Execution 

Facilities at 431, available at 

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister051613b.pdf.

38 As defined in Commission regulation § 39.7. See id at 433. 

39 See Adaptation of Regulations to Incorporate Swaps, 77 FR 66288, 66325 (Nov. 2, 2012).
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(A) Two (2) hours after execution during the 60 day period from the 

date of this letter; or

(B) One (1) hour after execution during the 30 day period beginning 60 

days from the date of this letter; or

(C) As quickly after execution as technologically practicable from and

after the date that is 90 days after the date of this letter; and 

(ii) The eligible account manager has agreed to be responsible for any

obligations of the counterparty under the ITBC Swap, whether in the form 

of trade breakage costs or as otherwise agreed between the eligible 

account manager and the SD or MSP, from execution until the swap is 

accepted or rejected for clearing by the counterparty’s clearing member, 

an interim clearing member, or the DCO; and

(c) The SD or MSP and the counterparty (or the counterparty’s duly authorized 

representative) have agreed in writing (a “fallback agreement”) that in the event 

the ITBC Swap fails to be accepted for clearing by a clearing member or the

DCO:

(i) The ITBC Swap will be:

(A) Immediately resubmitted for clearing by the DCO under alternative 

arrangements agreed40 in the fallback agreement; 

(B) Void as of execution, with no cost or other amount payable to 

either party; or 

(C) Automatically terminated as of the time that the ITBC Swap fails 

to clear, with costs or other amounts attributable to such automatic 

termination to be payable as agreed between the SD or MSP and 

the counterparty (or the counterparty’s duly authorized 

representative), if any; and

(ii) If the ITBC Swap fails to be accepted for clearing by a clearing member or 

the DCO under the alternative arrangements agreed in the fallback 

agreement, the ITBC Swap will be:

(A) Void as of execution, with no cost or other amount payable to 

either party; or 

 

40 Such alternative arrangements may consist of multiple fallback arrangements (i.e., a so-called “waterfall”) so long 

as each fallback is applied immediately upon the failure of the previous fallback and the arrangements have been 

agreed in good faith and not with the intention to delay clearing of the ITBC Swap.
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Cleared Swaps

(B) Automatically terminated as of the time that the ITBC Swap fails 

to clear, with costs or other amounts attributable to such automatic 

termination to be payable as agreed between the SD or MSP and 

the counterparty (or the counterparty’s duly authorized 

representative), if any; and

6. Each SD or MSP that relies on this letter makes and retains a record of each fallback 

agreement required by this letter in accordance with Commission regulation § 23.203 

(Records; retention and inspection).

For the avoidance of doubt, no SD or MSP may fail to comply with the External BCS or 

the swap trading relationship documentation requirements in reliance on this letter unless it shall 

first have entered into a fallback agreement that meets the conditions of this letter with the 

applicable counterparty (or its duly authorized representative).

This letter, and the positions taken herein, represent the view of this 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 persons relying on it 

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

Regulations issued thereunder, including all antifraud provisions of the Act. Specifically, 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 representations made to the 

Division. Any different, changed or omitted material facts or circumstances might render this 

no-action relief void.

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

Frank Fisanich, Chief Counsel, at 202-418-5949.

Very truly yours,

Gary Barnett

Director

Division of Swap Dealer and

Intermediary Oversight

cc: Regina Thoele, Compliance

National Futures Association, Chicago
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APPENDIX A

Specified External BCS Requirements

Commission Regulation Subject Matter

§ 23.402(b)-(f) Know your counterparty, True name and 

owner, Reasonable reliance on representations, 

Manner of disclosure, and Disclosures in a 

standard format

§ 23.430 Verification of counterparty eligibility

§ 23.431(a) Material risks, characteristics, incentives, midmarket mark

§ 23.431(b) Scenario analysis

§ 23.431(d)(1) Notice of right to receive daily mark from 

DCO for cleared swaps

§ 23.432(a) Notice of right to select DCO

§ 23.432(b) Notice of 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

§ 23.451 Political contributions by certain swap dealers