Possible Role for NFA as a Utility for Swap Transactions 

Introduction

 In recent preliminary discussions, CFTC staff has discussed possible 

ways in which NFA could act as a utility with respect to swap transactions. Specifically, 

our discussions have focused on three main issues. First, in order to monitor 

compliance with aggregate position limits, the CFTC will need data regarding both 

futures and swaps from contract markets, SEFs and swap data repositories. The 

Commission has a well-established infrastructure to obtain the necessary information 

regarding exchange-traded futures. With respect to swaps, though, the Commission will 

need information from SEFs, contract markets trading swaps and swap data 

repositories. The issue we have explored is whether NFA can play a role in gathering 

and consolidating relevant data from those varied sources and transmitting that 

information to the Commission. Second, the statute requires each SEF to comply with 

certain core principles, including requirements to perform basic self-regulatory functions 

regarding its trading platform. While some potential SEFs may already have SRO 

infrastructures, others may not. The question arises whether NFA could play a selfregulatory role with respect to such SEFs. Finally, the Act requires the Commission to 

provide for real time reporting of price and notional value data relating to both cleared 

and uncleared swap transactions. Commission staff has asked NFA to consider 

whether there may be a role for NFA in that process. 

 We have outlined below possible roles that NFA could play in each of 

these areas. We have not attempted to detail how NFA would perform these functions 

but have described a conceptual framework for NFA’s role. Obviously, any 

undertakings by NFA in these areas would be subject to approval by NFA’s Board. We 

are confident that NFA’s Board would approve these initiatives. For the last 28 years 

NFA’s mission has been to help the Commission in any way possible. That mission will 

not change. 

Self-Regulation and SEFs

 The Commission could, by rule, provide that any SEF could satisfy its 

obligation to comply with specified core principles by becoming a member of a 

registered futures association that has undertaken to regulate certain activities of SEFs 

and their participants pursuant to rules adopted by the futures association and approved 

by the Commission. Successful implementation of such a regulatory program would 

require: 
• a clear delineation by the Commission of which core principles would be the 

responsibility of the SEF and which would be subject to NFA jurisdiction; 

• changes to NFA's governing structure to ensure SEF representation; 

• rulemaking by NFA, including incorporation by reference of CFTC rules 

adopted for SEFs, to cover core principles within NFA’s scope of 

responsibility; 

• rules to ensure that NFA has authority over participants trading on the SEF's 

platform; 

• adaptations to NFA's existing Trade Practice and Market Surveillance 

programs to ensure the capture and analysis of relevant data and to provide 

real time monitoring of trading; 

• hiring and training of additional staff in compliance, information systems and 

legal departments; and 

• development of funding mechanisms, subject to CFTC approval, to recapture 

NFA's costs of performing these regulatory services. 

 With respect to the core principles an SEF could satisfy by joining NFA, 

NFA's role would in some ways be similar to the role NFA has played for new 

exchanges that have outsourced certain functions to NFA over the last ten years. At a 

minimum, NFA would be responsible for the core principles set forth in Section 5h(f)(4), 

(5) and (6) of the Act. It would be NFA's responsibility to monitor trading on the SEF to 

prevent manipulation and price distortion, to obtain any information to perform those 

functions, to provide the Commission with information on request and, as described 

below, to monitor for compliance with position limits established by the Commission. 

NFA could also have responsibility for Section 5h(f)(2) to enforce SEF trading rules, 

such as block order rules, to deter trading abuses, though practically speaking, this 

would require a high degree of uniformity among the rules of the various SEFs. If the 

registration process for SEFs sets uniform standards for trading rules, NFA could 

monitor for compliance with those rules. 

Contrary to NFA's existing relationship with its exchange clients, however, 

NFA would not deliver the results of its surveillance and investigations to the SEF. 

Rather, NFA would have the authority to bring enforcement actions directly against SEF 

participants that violate NFA rules. NFA would obtain that authority by requiring each 

SEF member of NFA to require its participants to agree in writing to cooperate with any 

NFA investigation, to be bound by NFA rules and to submit to NFA jurisdiction with 

respect to the enforcement of those rules. 

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We expect that NFA's existing Trade Practice and Market Surveillance 

programs would be the starting point for the development of a system to receive and 

analyze audit trail data from SEF members. As the Commission develops specific 

requirements for SEFs, modifications to the current system may be necessary. 

Assumption of these additional responsibilities will certainly require 

additions to NFA staff in the compliance, information systems and legal departments. 

The size of staff increases will, of course, depend on the number of SEFs that become 

members of NFA but NFA is, as always, fully committed to providing whatever 

resources are necessary to fulfill all of our responsibilities. 

Surveillance for Compliance with Aggregate Position Limits

 The Commission recently issued for public comment proposed rules 

regarding account ownership and control reporting by FCMs and discussed in that 

notice the possibility of each customer being assigned a unique identifying number. 

That same issue arises in the context of surveillance for compliance with aggregate 

position limits. To monitor for compliance, each person trading futures contracts 

through a DCM, cleared swaps through an SEF or DCM or uncleared swaps reported to 

a swap data repository must have a unique identifying number. These numbers would 

be the functional equivalent of the NFA ID number that NFA assigns to each registrant. 

Persons registered as swap dealers or as major swap participants would receive their 

NFA ID number through the registration process. For non-registrants trading swaps, 

CFTC rules would require either an FCM, swap dealer, SEF or swap data repository to 

obtain from NFA an identifying number for each customer whose trades it will process. 

To avoid confusion over similar names, a social security number or tax identification 

number would have to be provided when available, similar to the process for obtaining 

NFA ID numbers for registrants. For traders that are self-clearing members of an 

exchange, the unique identifying number would have to be obtained by either the 

appropriate DCM or clearing organization. 

 Information regarding futures trading on DCMs would be provided to the 

Commission by the exchanges. The Commission could require each SEF, DCM trading 

swaps and swap data repository to provide NFA with a daily electronic record of swap 

trades that included the positions traded and the customer account identifying number. 

NFA would receive this information and consolidate positions for customers trading 

swaps on multiple forums according to guidelines set by the Commission and transmit 

the information to the Commission. The Commission could then combine this 

information with the data received from the exchanges to monitor overall compliance 

with aggregate position limits. In performing this function, NFA would not be acting as 

an SRO but as a delegee of the Commission, just as we do now with respect to 

registration and CPO/CTA disclosure documents. 

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Real Time Reporting of Swap Transactions

 Under Section 2a(13) of the Act, the Commission is required to provide for 

the real time reporting of price and notional value information for both cleared and 

uncleared swaps. Designated contract markets have always provided for the public 

dissemination of volume and price information for exchange-traded futures. Designated 

contract markets, SEFs and designated clearing organizations certainly could perform 

the same function for cleared swaps. With respect to uncleared swaps, the 

Commission could require each swap data repository to make publicly available price 

and notional value information for each swap transaction reported to the depository, 

using the same product description provided to the repository by the parties. For 

uncleared swaps for which there is no repository, the statute provides that the required 

information be reported by the parties to the Commission. The Commission could 

delegate that function to NFA by requiring the parties to submit the required data to 

NFA, which would then make it publicly available. 

 If the Commission decided to centralize the public reporting of information 

regarding uncleared swaps, it could require each swap data repository to report price 

and notional value information for each transaction reported to it to NFA. NFA would 

then disseminate this information along with price and notional value information 

reported to it as the Commission's delegee. In our preliminary discussions, the 

Commission staff also raised the possibility of NFA generating a "consolidated tape" of 

all price and notional value information regarding both cleared and uncleared swap 

transactions. It was our understanding that such a "consolidated tape" would not be 

intended to preclude SEFs or designated contract markets from disseminating their own 

trading data, including price and notional value information. We recognize there may be 

legal issues regarding the ownership of trading data generated by an SEF or designated 

contract market. To the extent that NFA were to disseminate only price and notional 

value data on a slightly delayed basis, such issues may be rendered moot. 

Costs Associated with NFA Acting as a Swaps Utility

 Construction of the systems to implement the utility functions described 

above would be a significant undertaking but is well within NFA’s demonstrated 

capabilities. Over the years NFA has designed and built virtually every filing and 

reporting system used at NFA, including systems for registration, trade practice and 

market surveillance, financial reporting by FCMs, IBs and CPOs, and CPO and CTA 

disclosure documents. NFA would be able to leverage its existing technology to design 

and build the new systems that would be required to perform these additional 

responsibilities. For example, the surveillance component of NFA’s trade practice and 

market surveillance system would be adapted to perform similar functions regarding 

swaps and aggregate position limits. Similarly, NFA’s forex trade reporting system 

accepts and consolidates feeds from numerous sources and could provide a building 

block for real time reporting of swaps trades. Based on our experience, we are 

confident that NFA could build the systems necessary to perform these functions within 

one year of being formally requested to do so. In estimating our costs of performing 

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these functions we have assumed that NFA would be required to construct a back-up 

data center that would meet the Commission's proposed disaster recovery standards. 

We have also estimated the costs of adding 15 staff to NFA's Information Systems 

Department, the cost of new hardware for both NFA's main and backup data centers 

and the cost of communication lines and equipment. We estimate that the initial cost of 

establishing systems to perform these functions to be at least $6.5 million and the 

annual cost of maintaining and operating these systems to be at least $3 million. There 

would, of course, be additional costs related to operational staffing and overhead. 

These estimates could, of course, change based on decisions ultimately made by the 

Commission on the scope of NFA's responsibilities and the number and size of SEF 

members. 

 Each time NFA has taken on new areas of responsibility, for example, with 

respect to forex or trade practice surveillance for electronic exchanges, we have 

attempted to operate as a utility, charging fees and membership dues that are set to 

recover NFA's costs over time. We would take the same approach with respect to swap 

transactions. The exact level and structure of fees and dues would be determined by 

NFA's board, which will be modified to ensure adequate representation of SEFs as well 

as swap dealers and major swap participants, if they are subject to NFA regulation. 

Any issues regarding fees and dues will also be reviewed by an advisory committee 

drawn from members in the affected membership category. NFA rules regarding dues 

and fees are also subject to the CFTC's review and approval. 

F:/djr/cftc swaps SEFs