U.S. COMMODITY FUTURES TRADING COMMISSION 

Three Lafayette Centre 

Division of Clearing and Risk 

Division of Market Oversight 

Division of Swap Dealer and 

Intermediary Oversight 

1155 21st Street, NW, Washington, DC 20581 

Telephone: (202) 418-5000 

Facsimile: (202) 418-5521 

www.cftc.gov 

November 14,2013 

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

Execution Facility 

Division of Clearing and Risk, Division of Market Oversight and Division of Swap Dealer 

and Intermediary Oversight Guidance on Application of Certain Commission Regulations 

to Swap Execution Facilities 

The Division of Clearing and Risk ("DCR"), the Division ofMarket Oversight ("DMO") 

and the Division of Swap Dealer and Intermediary Oversight ("DSIO") (together, the 

"Divisions") of the Commodity Futures Trading Commission ("Commission") are issuing 

guidance ("Guidance") to swap execution facilities ("SEFs") and applicants for registration as a 

SEF concerning certain Commission regulations. This Guidance addresses certain restrictions 

related to swaps executed or traded on or subject to the rules of a SEF that are intended to be 

cleared ("Intended-To-Be-Cleared Swaps" or "ITBC Swaps"). 1 In addition, this Guidance 

addresses requirements placed on eligible contract participants ("ECPs") for access to a SEF. 

1. Restrictions Relating to Intended-To-Be-Cleared Swaps 

The Divisions understand that some market participants'2 ability to interact on a SEF's 

trading systems or platforms for ITBC Swaps is restricted by the use of so-called "enablement 

mechanisms." The Divisions use the term "enablement mechanism" broadly to refer to any 

mechanism, scheme, functionality, counterpatiy filter, or other arrangement that prevents a 

market patiicipant from interacting or trading with, or viewing the bids and offers (firm or 

indicative) displayed by any other market participant on that SEF, whether by means of any 

condition or restriction on its ability or authority to display a quote to any other market 

patiicipant or to respond to any quote issued by any other market patiicipant on that SEF, or 

otherwise. For example, some SEFs establish that any two market patiicipants may only execute 

1 For purposes of this Guidance, the Divisions intend "ITBC Swaps" to include swaps that are (i) executed on or 

subject to the rules of a SEF; and (ii) intended to be submitted for clearing contemporaneously with execution. Such 

swaps are included regardless of whether the identities of the counterparties are anonymous or disclosed or whether 

the swap is subject to the trading requirement. The Divisions note that the term "ITBC Swaps" previously has been 

used in a slightly different context. See "No-Action Relief: Swaps Intended to be Cleared," CFTC Letter No. 13-33 

(corrected) (June 27, 2013). That definition is not applicable here. 2 Market patiicipant means a person that directly or indirectly effects transactions on a SEF. This includes persons 

with trading privileges on the SEF and persons whose trades are intermediated. See "Core Principles and Other 

Requirements for Swap Execution Facilities," 78 Fed. Reg. 33476 at 33506 (June 4, 2013). 
Division of Clearing and Risk, Division of Market Oversight and Division of Swap Dealer and 

Intermediary Oversight Guidance 

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an ITBC Swap on a SEF's trading systems or platforms if the market participants have a preexecution agreement, such as a breakage agreement. 3 Some SEFs limit the ability to stream 

indicative bids and offers to a subset of market participants, while other SEFs require that a 

market participant be a swap dealer or a clearing member in order to respond to a RFQ for an 

ITBC Sw~, thus disallowing non-dealers from participating in the RFQ process as liquidity 

providers. 

Such restrictions are inconsistent with the impartial access requirement set forth in the 

Commodity Exchange Act ("CEA") and Commission regulation 37.202.5 These provisions 

require a SEF to allow its market participants to fully access its trading systems or platforms with 

respect to ITBC Swaps. The statutory language of SEF Core Principle 2 requires that a SEF 

establish and enforce participation rules that "provide market participants with impmiial access 

to the market."6 Commission regulation 37.202(a) requires a SEF to provide any ECP and any 

independent software vendor ("ISV") with "impartial access to its market(s) and market services, 

including any indicative quote screens or any similar pricing data displays." The Commission 

stated in the preamble to the final SEF rules that the impatiial access requirement is intended to 

allow market participants to "compete on a level playing field" and increase the participation of 

SEF liquidity providers to improve the pricing and efficiency of the market and reduce systemic 

risk. 7 The Commission further stated that "[i]mpartial access requirements protect market 

participants from discriminatmy treatment by prohibiting similarly situated market patiicipants 

from receiving different access terms and fee structures."8 SEFs that apply or support 

enablement mechanisms that allow cetiain pmiicipants to interact with only certain other 

participants, or to interact in only certain ways, while other participants have broader abilities to 

interact, are imposing or allowing different access terms on similarly situated participants and are 

therefore engaging in prohibited discriminatory treatment. 

3 The Divisions previously addressed the use ofbreakage agreements in the Staff Guidance on Swaps StraightThrough Processing. See "Staff Guidance on Swaps Straight-Through Processing" at 3 (Sep. 26, 2013) [hereinafter 

Straight-Through Processing Guidance] (describing clearing arrangements). The Divisions understand that some 

SEFs are permitting the enforcement oflegacy breakage agreements, while others are incorporating breakage 

provisions into their rulebooks. The Divisions clarify that all such agreements and provisions as applied to ITBC 

swaps are inconsistent with the CEA and the Commission's regulations. 4 Other examples of enablement mechanisms include arrangements that prevent market participants fi·om interacting 

or trading with market participants that have not enabled them, requirements that a resting order entered by a nondealer market patiicipant in a market may be viewed and/or acted upon only by dealers, or only by patties that have 

specifically enabled that non-dealer pmiicipant, and requirements that a market participant may only interact if it 

satisfies minimum transaction volume levels. 5 The Divisions understand that enablement mechanisms were historically used to eliminate credit risk. Such credit 

risk does not exist for ITBC swaps traded on or pursuant to the rules of a SEF. Under Commission regulations, 

ITBC swaps are subject to pre-execution credit checks and any trade that fails to clear wiii be void ab initio under 

SEF rules. 6 7 U.S.C. 7b-3(f)(2)(B)(i). 7 See 78 Fed. Reg. at 33508 (agreeing with the comments ofMallers et. al., that the impmiial access requirement 

allows ECPs to compete on a level playing field, and that the participation of additional liquidity providers will 

improve the pricing and efficiency of the market and reduce systemic risk). 8 See 78 Fed. Reg. at 33573. 
Division of Clearing and Risk, Division of Market Oversight and Division of Swap Dealer and 

Intermediary Oversight Guidance 

Page 3 

The Divisions believe that such restrictions also are inconsistent with respect to Order 

Book and request for quote ("RFQ") system requirements.9 The Commission's regulations 

require a SEF to provide all its market participants-dealers and non-dealers alike-with the 

ability to fully interact on the Order Book or RFQ system, which includes, but is not limited to, 

viewing, placing, or responding to all indicative or firm bids and offers and, similarly, to place, 

receive and respond to RFQs. The Commission emphasized in the preamble to the final SEF 

rules that an Order Book, which a SEF must offer to meet the minimum trading functionality 

requirement under Commission regulation 37.3(a), must "allow market participants the ability to 

make executable bids and offers, and to display them to all other market participants on the 

SEF."1° Further, under Commission regulation 37.9(a)(3), a SEF that offers an RFQ system 

must provide an RFQ system that allows a market participant to transmit a request for a quote "to 

which all such market participants may respond." 11 In addition, Commission regulation 

37.9(a)(3)(iii) provides: "[t]he swap execution facility shall ensure that its trading protocols 

provide each of its market participants with equal priority in receiving requests for quotes and in 

transmitting and displaying for execution responsive orders. " 12 Thus, an RFQ system may not 

discriminate among groups of market participants and all such market participants must be 

provided the same facilities to interact. 

In addition, if a swap dealer or futures commission merchant used (whether by an 

agreement or pursuant to a SEF's rules) an enablement mechanism, this would constitute an 

arrangement that conflicts with Commission regulations 23.608 and 1. 72. 13 Under Commission 

Regulation 23.608, "[N]o swap dealer or major swap participant entering into a swap to be 

submitted for clearing with a counterpmiy that is a customer of a futures commission merchant 

shall enter into an arrangement that .. (b) Limits the number of counterparties with whom a 

customer may enter into a trade; or ... (d) Impairs a customer's access to execution of a trade on 

terms that have a reasonable relationship to the best terms available." 14 Similarly, Commission 

regulation 1. 72 provides that "no futures commission merchant providing clearing services to 

customers shall enter into an arrangement that. .. (b) Limits the number of counterpmiies with 

whom a customer may enter into a trade; or ... (d) Impairs a customer's access to execution of a 

trade on terms that have a reasonable relationship to the best terms available." 15 These 

provisions were designed to work in combination with the impartial access provisions of the SEF 

regulations to provide all market participants with the ability to fully interact on a SEF's trading 

systems or platforms with respect to ITBC swaps. 16 

9 See Commission regulation 37.9(a)(3); 17 C.F.R. 37.9(a)(3) (setting forth requirements for an RFQ system). 10 See 78 Fed. Reg. at 33484 (emphasis added). 11 Commission regulation 37.9(a)(3); 17 C.F.R. 37.9(a)(3) (emphasis added). 12 Commission regulation 37.9(a)(3)(iii); 17 C.F.R. 37.9(a)(3)(iii) (emphasis added). 13 Commission regulation 23.608; 17 C.F.R. 23.608; Commission regulation 1.72; 17 C.F.R. 1.72. 

14 Commission regulation 23.608; 17 C.F.R. 23.608. 15 Commission regulation 1.72; 17 C.F.R. 1.72. 16 See "Customer Clearing Documentation, Timing of Acceptance for Clearing, and Clearing Member Risk 

Management," 77 Fed. Reg. 21278 at 21280 (April9, 2012). 
Division of Clearing and Risk, Division of Market Oversight and Division of Swap Dealer and 

Intermediary Oversight Guidance 

Page4 

2. Access Requirements for Eligible Contract Participants 

Restrictive requirements on ECPs to obtain access are inconsistent with the impartial 

access requirements in Commission regulation 37.202(a). 17 SEF rules specifically require 

market participants on a SEF to be ECPs, as defined in Commission regulation 1.3(m). 18 While 

the preamble to the final SEF rules states that a SEF may exercise its own "reasonable 

discretion"19 in establishing access criteria, such criteria must be "impartial, transparent, and 

applied in a fair and nondiscriminatory manner."20 As noted earlier, the Commission made it 

clear in the preamble that "the impaliial access requirement allows ECPs to compete on a level 

playing field, and that the patiicipation of additional liquidity providers will improve the pricing 

and efficiency of the market and reduce systemic risk." 21 Accordingly, limiting access to a 

SEF' s trading systems or platforms to cetiain types of ECPs or ISV s is inconsistent with "the 

impaliial access requirement of Core Principle 2 ..... '.22 

For example, the Divisions have learned that some SEFs provide access to an ECP that is 

either a liquidity provider or a liquidity taker, but not to an ECP that is both a liquidity provider 

and taker. Some SEFs also prohibit an individual from obtaining access, even if such individual 

comes within the definition of an ECP.Z3 Other SEFs limit access to ECPs that satisfy minimum 

transaction volume level requirements; and others require that an ECP be a clearing member or 

have an agreement with a clearing member to access the SEF even just to trade swaps that are 

not intended to be cleared. The Divisions view these ECP qualifications to be inconsistent with 

the impaliial access requirement as they limit access to cetiain types ofECPs. 

In addition, the Divisions have learned that some SEFs are allowing only intermediated 

access to the SEF, while other SEFs are allowing only direct access. The Divisions are 

concerned that in some circumstances these provisions may impede impatiial access. The 

Divisions expect SEFs to re-examine their rulebooks and ensure that the rules they adopted do 

not impede impaliial access. 

The Divisions fmiher point out that a requirement by a SEF that a market paliicipant has 

a clearing agreement with a clearing member or be a clearing member before it executes a swap 

intended to be cleared is necessary for the SEF to be compliant with Commission regulation 

37.702?4 However, the Divisions here again are concerned with a SEF's requirement that a 

market paliicipant also execute that trade through the clearing member, and not by direct access, 

may impede the impaliial access requirement. Once a trade is guaranteed by a clearing member, 

17 See Commission regulation 37.202(a); 17 C.F.R. 37.202(a). 18 See Commission regulation 37.702(a); 17 C.F.R. 37.702(a). 19 See 78 Fed. Reg. at 33508. 2

° Commission regulation 37.202(a); 17 C.F.R. 37.202(a). 21 See 78 Fed. Reg .. at 33508. 

22 Id. 

23 See Commission regulation 1.3(m); 17 C.F.R. 1.3(m). 24 See Straight-Through Processing Guidance at 3 (describing clearing arrangements). 
Division of Clearing and Risk, Division of Market Oversight and Division of Swap Dealer and 

Intermediary Oversight Guidance 

Page 5 

the Divisions see no reason for a SEF to require that the execution also be done through that 

clearing member.25 

The Divisions remind SEFs that they may make changes to their rulebooks at any time, 

pursuant to either the certification or approval procedures set forth 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 supplements previous Guidance issued by the Divisions on these topics. 

This Guidance, and the positions taken herein, represent the views of the Divisions 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 John Lawton, 

Deputy Director, Division of Clearing and Risk, at (202) 418-589 or ilawton@cftc.gov, Frank 

Fisanich, Deputy Director, Division of Swap Intermediary Oversight, at (202) 418-5949 or 

FFisanich@cftc.gov, Nancy Markowitz, Deputy Director, Division of Market Oversight, at (202) 

418-5453 or nmarkowitz@cftc.gov, Jonathan Lave, Associate Director, Division ofMarket 

Oversight, at (202) 418-5983 or jlave@cftc.gov, or Nhan Nguyen, Special Counsel, Division of 

Market Oversight, at (202) 418-5932 or nnguyen@cftc.gov. 

Sincerely, 

Director 

Division Market Oversight 

Director 

Division of Market Ov 

Gary 

b~~ Barnett 

Director 

Division of Swap Dealer and Intermediary Oversight 

25 The Division of Market Oversight and the Division of Clearing and Risk noted in the Straight-Through Processing 

Guidance that orders which have satisfied the Clearing FCMs' pre-execution limits are deemed accepted for clearing 

and thereby subject to a guarantee by the Clearing FCM upon execution. See Straight-Through Processing Guidance 

at 3.