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

 

CFTC Letter 16-58

No-Action 

June 10, 2016

Division of Market Oversight

Division of Clearing and Risk

Re: No-Action Relief for Swap Execution Facilities and Designated Contract Markets in 

Connection with Swaps with Operational or Clerical Errors Executed on a Swap 

Execution Facility or Designated Contract Market

Ladies and Gentlemen:

This letter responds to a request received from the Wholesale Markets Brokers’ 

Association, Americas ( “WMBAA”)1 that the Division of Market Oversight and the Division of 

Clearing and Risk (together, the “Divisions”) of the Commodity Futures Trading Commission 

(“CFTC” or “Commission”) extend the relief provided under CFTC Letter No. 15-24, which will 

expire on 11:59 p.m. (Eastern Time) June 15, 2016. In its request, the WMBAA contends that 

despite swap execution facility (“SEF”) efforts to continue to work on solutions to reduce 

operational and clerical errors,

2 market participants continue to encounter circumstances in 

which a trade is rejected from clearing due to a readily correctible clerical or operational error, 

resulting in void ab initio treatment, or an error is discovered after a trade has been cleared. The 

WMBAA does not believe it is likely that market participants will be able to entirely eliminate 

operational and clerical errors. The WMBAA encourages the Commission to adopt, via a 

rulemaking, a permanent, practicable process for addressing these types of errors. The WMBAA 

further requests that, until such permanent solution is achieved, the existing no-action relief be 

extended. 

 The Divisions continue to consider a permanent solution to clerical and operational 

errors and, until such permanent solution is achieved, the Divisions will extend the no-action 

relief provided under CFTC Letter No. 15-24 to SEFs and designated contract markets 

(“DCMs”)3

 until the earlier of (1) 11:59 pm (Eastern Time) June 15, 2017 or (2) the effective 

date of revised Commission regulations that establish a permanent relief.

 

1 The WMBAA is an independent industry body that represents BGC Derivatives Markets, L.P.; GFI Swaps 

Exchange LLC; tpSEF, Inc.; and Tradition SEF, Inc. Each of these WMBAA member firms is registered with the 

Commission as a SEF. 2 Staff construes operational or clerical errors to mean any type of error. Transactions that are rejected from clearing 

for credit reasons are not covered by this relief. 3 Consistent with the Divisions’ previous action in CFTC Letter No. 15-24 (April 22, 2015), this no-action letter also 

extends the relief provided herein to DCMs from the requirements under Commission Regulations 38.152 and 

38.500. See 17 C.F.R. §§ 38.152 and 38.500.
No-Action Relief for Swap Operational or Clerical Errors 

Page 2 

Background 

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act4 amended 

the Commodity Exchange Act (“CEA”) to establish a comprehensive new regulatory framework 

for swaps. Among other things, CEA section 2(h)(8) requires that transactions involving swaps 

subject to the CEA section 2(h)(1) clearing requirement be executed on or pursuant to the rules 

of a DCM or SEF, unless no DCM or SEF makes such swaps available to trade or such swaps 

qualify for the clearing exception under CEA section 2(h)(7) (the “trade execution 

requirement”).

5

 

On June 4, 2013, the Commission published regulations governing SEFs.6 Under 

Commission Regulation 37.9(a)(2), a swap that is subject to the trade execution requirement 

(referred to as a “Required Transaction”) and is not a block trade, as defined under Commission 

Regulation 43.2,7 shall be executed on a SEF through either (1) an Order Book, as defined in 

Commission Regulation 37.3(a)(3)8 or (2) a Request for Quote System, as defined in 

Commission Regulation 37.9(a)(3),9

 that operates in conjunction with an Order Book. 

Commission Regulation 37.203(a) requires that a SEF prohibit certain abusive trading practices, 

including pre-arranged trading (except for block trades or other types of transactions certified to 

or approved by the Commission, pursuant to Part 40 of the Commission’s regulations).

On April 9, 2012, the Commission published regulations governing DCMs that impose 

similar requirements.

10 Under Commission Regulation 38.152, a DCM must prohibit abusive 

trading practices on its markets by members and market participants including, among other 

things, pre-arranged trading. Commission Regulation 38.500 requires, with limited exceptions, 

that trades on a DCM be competitively executed as it requires a DCM to provide a competitive, 

open and efficient market and a mechanism for executing transactions that protects the price 

discovery process of trading in the centralized market. 

On April 9, 2012, the Commission also published regulations governing the clearing of 

swaps, including the timing of acceptance for clearing.

11 Commission Regulations 1.74, 23.610 

and 39.12(b)(7)12 set forth time frames for futures commission merchants (“FCMs”), swap 

dealers (“SDs”), major swap participants (“MSPs”) and derivatives clearing organizations 

 

4 Pub. L. 111-203, 124 Stat. 1376 (2010). 5 7 U.S.C. § 2(h)(8).

6 Core Principles and Other Requirements for Swap Execution Facilities, 78 Fed. Reg. 33,476 (June 4, 2013). 7 See 17 C.F.R. § 43.2. 8 See 17 C.F.R. § 37.3(a)(3). 9 See 17 C.F.R. § 37.9(a)(3). 10 Core Principles and Other Requirements for Designated Contract Markets, 77 Fed. Reg. 33,612 (June 19, 2012). 11 See Customer Clearing Documentation, Timing of Acceptance for Clearing, and Clearing Member Risk 

Management, 77 Fed. Reg. 21,278 (Apr. 9, 2012). 12 See 17 C.F.R. §§ 1.74, 23.610, and 39.12(b)(7), respectively.
No-Action Relief for Swap Operational or Clerical Errors 

Page 3 

(“DCOs”), respectively, to accept or reject a trade for clearing.13 These regulations require that a 

trade be submitted and accepted or rejected for clearing as quickly as would be technologically 

practicable as if fully automated systems were used. 

 Finally, on September 26, 2013, the Divisions issued Staff Guidance on Swaps StraightThrough Processing (“Staff Guidance”).14 The Staff Guidance stated, among other things, that: 

(a) FCMs must screen orders for execution on a SEF pursuant to either Commission Regulations 

1.73(a)(2)(i) or (ii), regardless of the method of execution;15 (b) pursuant to Commission 

Regulation 37.702(b), each SEF must make it possible for clearing FCMs to screen as required 

by Regulation 1.73 on an order-by-order basis;

16 (c) SEFs must have rules stating that trades that 

are rejected from clearing are void ab initio;

17 and (d) SEFs, FCMs, SDs and MSPs may not 

require breakage agreements as a condition for trading swaps intended for clearing on a SEF.18

 After issuing the Staff Guidance, the Divisions were informed by market participants that 

some swap trades are rejected by a DCO because of operational or clerical errors that are readily 

correctable. For example, some clearing submissions fail to match on a material economic term 

due to an operational error; the trades are then rejected from clearing and deemed void ab initio. 

In response, on October 25, 2013, the Divisions issued CFTC Letter No. 13-66 providing time 

limited relief from Commission Regulation 37.9(a)(2), regarding methods of execution for 

required transactions, and Regulation 37.203(a), prohibiting pre-arranged trading, if, after a trade 

has been rejected for clearing, a SEF permits a new trade between the original parties, with terms 

and conditions that match the terms and conditions of the original trade, other than any such 

error and the time of execution, to be submitted for clearing without having been executed 

pursuant to the methods set forth in Regulation 37.9(a)(2).

19 On April 18, 2014, the Divisions 

provided similar relief to DCMs until June 30, 2014.20 Both letters expired on June 30, 2014. 

Market participants also informed the Divisions that issues could arise because DCOs 

clear package transactions on a leg-by-leg basis rather than clearing all legs simultaneously.21 

As a result, there may be an operational error in which an individual leg of a package transaction 

may be rejected by a DCO because the risk of the leg, measured in isolation, could cause a trader 

to exceed its credit limit; however, if the legs had been submitted in a different sequence or had 

 

13 See id. at 21,285. 14 See Staff Guidance on Swaps Straight-Through Processing (Sep. 26 2013) contained at 

http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/stpguidance.pdf.

15 Staff Guidance at 2. 16 Id. at 3 17 Id. at 6. 18 Id. 19 CFTC Letter No. 13-66 (Oct. 25, 2013). 20 CFTC Letter No. 14-50 (Apr. 18, 2014). 21 For purposes of this letter, a “package transaction” is a transaction involving two or more instruments: (1) that is 

executed between two or more counterparties; (2) that is priced or quoted as one economic transaction with 

simultaneous or near simultaneous execution of all components; (3) that has at least one component that is a swap 

that is made available to trade and therefore is subject to the CEA section 2(h)(8) trade execution requirement; and 

(4) where the execution of each component is contingent upon the execution of all other components.
No-Action Relief for Swap Operational or Clerical Errors 

Page 4 

been cleared simultaneously, the net risk may not have exceeded the credit limit and no legs 

would have been rejected. 

On May 1, 2014, the Divisions issued CFTC Letter No.14-62, which, in part, permitted 

SEFs and DCMs to establish a “new trade, old terms” procedure for legs of a package transaction 

that had been rejected from clearing because of the sequencing of the submission of the legs.22 

On September 30, 2014, the Divisions issued CFTC Letter No. 14-121, which extended the relief 

granted in CFTC Letter No. 14-62. The relief expired on February 16, 2015.23

In response to a request from the WMBAA, on April 22, 2015, the Divisions issued 

CFTC Letter No. 15-24, which reinstated the relief provided by CFTC Letter No. 14-121. 

Subject to the conditions listed therein, the letter provided that the Divisions would not 

recommend that the Commission take any enforcement action against a SEF or DCM for failure 

to comply with Commission Regulations’ 37.9(a)(2) and 38.500 required methods of execution 

or Commission Regulations’ 37.203 and 38.152 prohibition against pre-arranged trading if, after 

a trade had been rejected for clearing, the SEF or DCM corrected an error by permitting a new, 

pre-arranged trade with terms and conditions that matched the terms and conditions of the 

original trade, other than any such error and time of execution, to be submitted for clearing 

without having been executed pursuant to methods set forth in Commission Regulations 

37.9(a)(2) or 38.500. 

The Divisions also provided relief in the case of an operational or clerical error that was 

not discovered until after a swap had been cleared. Thus, relief was provided to a SEF or a DCM 

if, after a trade had been cleared and an error discovered, the SEF or DCM permitted a prearranged trade between the original parties that offset the erroneous swaps carried on the DCO’s 

books, without that trade having been executed pursuant to the methods required in Commission 

Regulations 37.9(a)(2) and 38.500. The SEF or DCM could also permit the original or 

intended24 counterparties to enter into a pre-arranged transaction that reflected the terms to which 

the parties had mutually assented without that trade having been executed pursuant to the 

methods set forth in Commission Regulations 37.9(a)(2) and 38.500. 

Requested Relief

As noted above, in its no-action request, the WMBAA states, that despite SEF’s efforts, 

market participants continue to encounter circumstances in which a trade is rejected from 

clearing due to a readily correctible clerical or operational error or an error is discovered after a 

trade has been cleared. As the WMBAA does not believe that market participants will be able to 

entirely eliminate operational and clerical errors, it encourages the Commission to adopt, via a 

rulemaking, a permanent, practicable process for modifying previously-executed and cleared 

 

22 CFTC Letter No. 14-62 (May 1, 2014). The letter expired September 30, 2014. 23 CFTC Letter No. 14-121 (Sep. 30, 2014). 24 In certain instances, the wrong legal entity may be assigned as a counterparty to a trade. The relief will allow the 

swap with the wrong counterparties to be undone and the execution of a new swap with the correct counterparties.
No-Action Relief for Swap Operational or Clerical Errors 

Page 5 

swaps. Until there is a permanent solution, the WMBAA requests extending the existing noaction relief.

No-Action Relief

The Divisions are issuing this no-action letter to extend the relief provided in CFTC 

Letter 15-24. Specifically, subject to the conditions listed below, the Divisions will not 

recommend that the Commission take any enforcement action against a SEF for failure to 

comply with Commission Regulation 37.9(a)(2) or against a DCM for failure to comply with 

Commission Regulation 38.500, regarding methods of execution or to comply with Commission 

Regulations’ 37.203 and 38.152 prohibition against pre-arranged trading if, after a trade has been 

rejected for clearing, the SEF or DCM permits a new trade, with terms and conditions that match 

the terms and conditions of the original trade other than any such error and time of execution, to 

be submitted for clearing without having been executed pursuant to methods set forth in 

Commission Regulations 37.9(a)(2) or 38.500. 

The Divisions also will provide relief in the case of an operational or clerical error that is 

not discovered until after a swap has been cleared. Thus, relief is provided to a SEF or a DCM 

if, after a trade has been cleared and an error is discovered, the SEF or DCM permits a prearranged trade between the original parties that offsets the swaps carried on the DCO’s books, 

without that trade having been executed pursuant to the methods required in Commission 

Regulations 37.9(a)(2) and 38.500. The SEF or DCM may also permit the original or intended 

counterparties to enter into a pre-arranged transaction that reflects the terms to which the parties 

mutually assented without that trade having been executed pursuant to the methods set forth in 

Commission Regulations 37.9(a)(2) and 38.500. 

This relief is subject to the following conditions:

 

1. The pre-arranged transactions subject to this relief must be only (1) for the correction 

of an operational or clerical error or omission made by the SEF, DCM, one of the 

counterparties, or an agent of one of the counterparties that causes a trade to be 

rejected from clearing and void ab initio, or (2) for the purpose of offsetting swaps 

carried on a DCO’s books where a clerical or operational error or omission made by 

the SEF, DCM, counterparty, or an agent of the counterparty is not identified until 

after the trade has been cleared. In the latter situation, a new transaction that corrects 

the errors in the original transaction also is subject to this relief.25

2. The SEF or DCM must have error trade rules that are consistent with Commission 

regulations and provide for trade price adjustments or trade cancellations and rules 

 

25 Consistent with the prior no-action letter, relief also will be extended to apply to the leg of a package transaction 

that is rejected from clearing or for which an error is discovered after the leg has been cleared. However, this relief 

only will apply to the leg with an error and will not apply to the other legs of the package that have been accepted 

for clearing and do not contain errors. 
No-Action Relief for Swap Operational or Clerical Errors 

Page 6 

that are transparent to the market and subject to standards that are clear, fair and 

publicly available. Further, consistent with the obligations of SEFs and DCMs to 

prevent market abuses, such standards should account for whether a transaction 

cancellation or price adjustment will adversely impact market integrity, facilitate 

market manipulation or other illegitimate activity, or otherwise violate the CEA, 

Commission regulations, or the SEF’s or DCM’s rules. 

3. For swaps rejected for non-credit reasons, the new trade must be executed on the SEF 

or DCM and submitted for clearing as quickly as technologically practicable after 

receipt of notice of the rejection by the DCO to the clearing members, but, in any 

event, no later than one hour from the issuance of the notice. For erroneous cleared 

swaps, the trade to offset the swaps carried on the DCO’s books and the new 

transaction that corrects the errors in the original transaction must be executed and 

submitted for clearing no later than three days after the erroneous cleared swap was

executed. 

4. The SEF or DCM must have rules setting forth the conditions, if any, under which it 

will determine that an error has occurred, and the procedures it will follow to execute 

a trade subject to the relief set forth in this letter. The rules must provide that if the 

facility is able to determine how to correct an error, the facility will execute the new 

trades without obtaining consent from the counterparties. The rules must also provide 

what the facility will do if it is unable to determine how to correct an error. The 

facility may either not fix the error, or it may seek guidance on how to address the 

error from the counterparties. Any such guidance may not be implemented without 

consent from both counterparties. 

5. With respect to swaps rejected from clearing for non-credit reasons, if the new 

transaction that corrects the errors in the original transaction is also rejected for 

clearing, it is void ab initio and the parties will not be provided a second opportunity 

to submit a new trade subject to the relief provided herein.26

6. In making its determination whether to permit the execution of a trade subject to this 

relief, a SEF or DCM must make an affirmative finding that the trade or some term 

therein resulted from an error.27

7. The SEF or DCM must report the swap transaction data to the relevant swap data 

repository (“SDR”) as soon as technologically practicable after the original trade is 

rejected by the DCO, including: 

 

26 As explained in the Staff Guidance, all trades executed on or subject to the rules of a SEF or DCM that are 

rejected from clearing, whether for credit or non-credit reasons, are void ab initio. This no-action letter allows for 

the submission of a new trade with the old terms, correcting for the error, for non-credit rejections. However, 

submission of a second new trade with the original old terms is not permissible.

27 A SEF is not required to keep any additional records with respect to conditions four and six. 
No-Action Relief for Swap Operational or Clerical Errors 

Page 7 

i. A part 43 cancellation for the original trade; 

ii. A part 45 termination indicating that the original trade is void ab initio; and

iii. Swap transaction data pursuant to Parts 43 and 45 for the newly executed trade(s). 

Staff reminds SEFs and DCMs that both the erroneous trade and any subsequent trade 

subject to the relief in this letter must be subject to pre-execution credit checks that comply with 

Commission Regulation 1.73 and/or Regulation 23.609 and the Staff Guidance. In addition, both 

the erroneous trade and any subsequent trade subject to relief in this letter must be processed in 

accordance with the time frames set forth in Commission Regulations 1.74, 23.610, 39.12(b)(7), 

43.3(e), 45.14, and the Staff Guidance. 

This no-action relief shall commence on the date of issuance of this letter and shall expire 

on the earlier of (1) 11:59 pm (Eastern Time) June 15, 2017 or (2) the effective date of revised 

Commission regulations that establish a permanent solution to addressing clerical or operational 

errors. 

Market participants should be aware that the no-action positions taken herein do not 

excuse affected persons from compliance with any other applicable requirements of the CEA or 

the Commission’s regulations thereunder, in particular, the applicable swap data reporting 

requirements and clearing requirements. This letter, and the no-action positions taken herein, 

represent the views of the Divisions only, and do not necessarily represent the positions or views 

of the Commission or of any other division or office of the Commission’s staff. As with all noaction letters, the Divisions retain 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 this correspondence, please contact Nancy 

Markowitz, Deputy Director, Division of Market Oversight, at (202) 418-5453 or 

nmarkowitz@cftc.gov, or Jonathan Lave, Associate Director, Division of Market Oversight, at 

(202) 418-5983 or jlave@cftc.gov.

Sincerely,

Vincent A. McGonagle

Director 

Division of Market Oversight 

 Jeffrey M. Bandman

Acting Director

Division of Clearing and Risk