U.S. COMMODITY FUTURES TRADING COMMISSION 

Three Lafayette Centre 

Division of Market Oversight 

1155 21st Street, NW, Washington, DC 20581 

Telephone: (202) 418-5000 

Facsimile: (202) 418-5521 

www.cftc.gov 

September 30, 2013 

To: All CFTC Registered Swap Execution Facilities and Applicants for Registration as a Swap 

Execution Facility 

Division of Market Oversight Guidance on Application of Certain Commission Regulations 

to Swap Execution Facilities 

The Division of Market Oversight (the "Division") of the Commodity Futures Trading 

Commission (the "Commission") is issuing this guidance ("Guidance") to remind swap 

execution facilities ("SEFs") of the substance of cetiain Commission regulations. It has come to 

the Division's attention that some SEF rule books contain provisions which appear to be 

inconsistent with the Commission's regulations. 1 Specifically, this Guidance addresses: (1) the 

definition of "member" in the swap execution facility final rulemaking (the "SEF Final 

Rulemaking"),2 (2) the exception to the aggregation prohibition in order to satisfy the minimum 

block trade size or cap size requirement in Commission regulation 43.6(h)(6),3 (3) the liquidation 

or transfer of open positions in any contract and the i~osition of margin requirements in 

emergency situations under Commission regulation 37.801, (4) the repmiing of block trade data 

to swap data repositories ("SDRs") under Commission regulation 43.6(g),S and (5) the time delay 

requirement under Commission regulation 37.9(b).6 

I. Definition of Member 

The Division notes that some SEF rulebooks define "member" in an unclear or overly 

expansive manner. This lack of clarity is significant as "membership" carries, among other 

1 The Division notes that it did not undertake a substantive review of the SEFs' rulebooks during the temporary 

registration process. However, to the extent that the Division is aware that SEFs have rules which are inconsistent 

with the Commission's regulations, the Division believes it is incumbent to reiterate the substance of those 

regulations. 

2 Core Principles and Other Requirements for Swap Execution Facilities, 78 FR 33476 (Jun. 4, 2013). 

3 Commission regulation 43.6(h)(6). 

4 Commission regulation 37.801 and the applicable guidance in Appendix B to part 37. 

5 Commission regulation 43.6(g). 

6 Commission regulation 37.9(b). 
Page 2 

things, liability and regulatory responsibilities? In this regard, the Division notes that the SEF 

Final Rulemaking stated that "member" has the meaning set forth in section la(34) of the 

Commodity Exchange Act ("CEA"). 8 Section la(34) provides that the term "member" means, 

with respect to a registered entit/ . . . "an individual, association, partnership, corporation, or 

trust- (A) owning or holding membership in, or admitted to membership representation on, the 

registered entity ... or (B) having trading privileges on the registered entity .... ". 10 The Division 

notes that "trading privileges," in section la(34) in the SEF context, is generally understood to 

mean the rights granted to a person by a SEF to directly, or through an independent software 

vendor, I I effect transactions on the SEF. The Division does not believe that the term "member" 

means a client/customer of a trading privilege holder that has neither a membership interest in a 

SEF nor any direct access trading privileges to a SEF' s trading platform. The Division reminds 

SEFs that persons or entities that do not fall within the scope of CEA section la(34) should not 

be considered members of the SEF and subject to the SEF rules applicable to members. 

II. Exception to Aggregation Prohibition 

The Division has also learned that certain SEFs prohibit investment and/or trading 

advisors from aggregating orders for different accounts to satisfy their block trade minimum 

requirements, notwithstanding that section 43.6(h)(6) of the Commission's regulations would 

permit such aggregation. 12 The Division reminds SEFs that they should include such exceptions 

in their rulebooks. 

III. Liquidation or Transfer of Open Positions and Margin Requirements 

It has also come to the Division's attention that some SEF rule books grant the SEF rights 

to impose cetiain requirements on patiicipants, such as rights related to liquidation and/or 

transfer and additional margin. The Division notes that the statute in Core Principle 8 requires a 

7 For example, members have recordkeeping obligations under § 37.203(b) and are subject to a SEF's annual 

reviews of its audit trail and recordkeeping requirements under § 37.205( c )(I). 

8 78 FR 33506. 

9 Registered entity is defined in CEA section la(40) to include a SEF. 7 U.S. C. la(40). 

1

° CEA section Ia(34); 7 U.S.C. la(34). 

11 See 78 FRat 33508 n. 423 for examples of independent software vendors. 

12 Specifically, section 43.6(h)(6) of the Commission's regulations provides that the aggregation of orders for 

different accounts in order to satisfy the minimum block trade size or the cap size requirement is prohibited, except 

it is permissible if done by a person who "(i)(A) Is a commodity trading advisor registered pursuant to Section 4n of 

the Act, or exempt from registration under the Act, or a principle thereof, who has discretionary trading authority or 

directs client accounts, (B) Is an investment adviser who has discretionary trading authority or directs client 

accounts and satisfies the criteria of§ 4.7(a)(2)(v) of this chapter or (C) Is a foreign person who performs a similar 

role or function as the persons described in paragraphs (h)(6)(i)(A) or (h)(6)(i)(B) of this section and is subject as 

such to foreign regulation; and (ii) Has more than $25,000,000 in total assets under management." Commission 

regulation 43.6(h)(6). 
Page 3 

SEF to adopt rules to provide for the exercise of emergency authority, in consultation or 

cooperation with the Commission, as is necessary and appropriate, including the authority to 

liquidate or transfer open positions in any swap or to suspend or cmiail trading in a swap 

(emphasis added). 13 The guidance to Core Principle 8 states that to address perceived market 

threats, a SEF should have rules that allow it to take emergency actions to, among other things, 

impose special margin requirements or order the liquidation or transfer of open positions in any 

contract. 14 The Division notes that the guidance to Core Principle 8 is intended to apply only to 

emergencies as defined in section 40.l(h) of the Commission's regulations - not to normal 

business operations. 15 A SEF's exercise of such emergency action must be carried out pursuant 

to Core Principle 8 and part 40 of the Commission's regulations. 16 Part 40 requires that rules or 

rule amendments implemented to respond to an emergency be filed with the Commission prior to 

implementation, if practicable, and if not, within twenty-four hours after implementation. 17 

Thus, any emergency actions by a SEF to impose special margin or other requirements must be 

filed as a rule. 

IV. Block Trade Repmiing 

The Division has also learned that cetiain SEFs may not repmi swap transaction data for 

block trades executed pursuant to the rules of a SEF to a registered SDR. The Division reminds 

SEFs that they are obligated to report such data for block trades (as defined below) to a 

registered swap data repository pursuant to Commission regulation 43 .6(g). 18 The Division notes 

that "block trade" is defined in Commission regulation 43 .2, as a "publicly reportable swap 

transaction that: (1) Involves a swap that is listed on a registered [SEF] or [DCM]; (2) Occurs 

away from the registered [SEF's] or [DCM's] trading system or platform and is executed 

pursuant to the registered [SEF's] or [DCM's] rules and procedures; (3) Has a notional or 

principal amount at or above the appropriate minimum block size applicable to such swap; and 

(4) Is reported subject to the rules and procedures of the registered [SEF] or [DCM] and the rules 

described in [pmi 43] .... ". 19 In addition, the Division notes that Commission regulation 43.6(g) 

requires that when the counterparties to a block trade notify the SEF of the election to have the 

publicly reportable swap transaction treated as a block trade, the SEF must notify the SDR of 

such block trade election when transmitting swap transaction and pricing 4ata to the SDR in 

13 CEA section 5h(f)(8); 7 U.S.C. 7b-3(f)(8). In the SEF Final Rulemaking, regulation 37.801 provides that a SEF 

may reference the guidance in appendix B to part 3 7 to demonstrate compliance with the requirements of Core 

Principle 8. Commission regulation 37.801. 

14 Guidance to Core Principle 8 in Appendix B to part 37. 

15 See Commission regulation 40.l(h) for the defmition of emergency. 

16 See Commission regulation 40.6(a)(6). 

17 Id. 

18 Commission regulation 43.6(g). 

19 Commission regulation 43.2. 
Page 4 

accordance with section 43.3(b)(1).20 The Division further notes that SEFs have corollary 

regulatory obligations under part 45 for swaps that are executed on, or pursuant to, the rules of a 

SEF. 

V. Time Delay Requirement 

The Division has further learned that some SEF rule books expand the scope of the time 

delay requirement under Commission regulation 3 7 .9(b) to situations where there is no form of 

pre-arrangement or pre-negotiation. The Division reminds SEFs that the time delay requirement 

under Commission regulation 37.9(b) applies when there is some form of pre-arrangement, prenegotiation, or pre-execution communications. The Division notes that the time delay 

requirement states that a SEF must require that "a broker or dealer who seeks to either execute 

against its customer's order or execute two of its customers' orders against each other through 

the [SEF's] Order Book, following some form of pre-anangement or pre-negotiation of such 

orders, be subject to at least a 15 second time delay between the entry of those two orders into 

the Order Book, such that one side of the potential transaction is disclosed and made available to 

other market pmiicipants before the second side of the potential transaction, whether for the 

broker's or dealer's own account or for a second customer, is submitted for execution."21 The 

Division also notes that a SEF that allows pre-execution communications must adopt rules 

regarding such communications, and orders that result from pre-execution communications 

would also be subject to the time delay requirement.22 

Finally, the Division reminds SEFs that they may make changes to their rulebooks at any 

time, pursuant to either the cetiification or approval procedures set fmih in part 40 of the 

Commission's regulations, provided that such rule changes are not inconsistent with the Act or 

the Commission's regulations. 

This Guidance supersedes any previous guidance issued by the Division on these topics. 

This Guidance, and the positions taken herein, represent the views of the Division only, and do 

not necessarily represent the views of the Commission or of any other office or division of the 

Commission. If you have any questions concerning this Guidance, please contact 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. 

2

° Commission regulation 43.6(g). 

21 Commission regulation 37.9(b)(l). 

22 78 FRat 33503. 
Page 5 

Sincerely, 

rJP~gner Chief Counsel 

Division of Market Oversight 

Nancy Marl witz 

Deputy Director 

Division of Market Oversight