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 

Division of 

Market Oversight 

CFTC Letter No. 15-60 


No-Action 


November 2, 2015 


Division of Market Oversight 


Re: Extension of No-Action Relief for Swap Execution Facilities from 

Certain "Block Trade" Requirements in Commission Regulation 43.2 

Ladies and Gentlemen: 

On September 19, 2014, the Division of Market Oversight ("Division") of the Commodity 

Futures Trading Commission (the "Commission" or "CFTC") issued CFTC Letter 14-118 ("No 

Action Letter 14-118") to provide relief for swap execution facilities ("SEFs") from the requirement 

in §43.2 that a swap block trade must "[o]ccur[] away from the registered [SEF's] or [DCM's] 

trading system or platform." 1 The no-action letter provided that the Division would not recommend 

enforcement action against a SEF which has rules and/or procedures that provide for the use of a 

SEF trading system or platform to facilitate the execution of block trades for swaps that are 

intended to be cleared, 2 and thus not complying with the requirement that a swap block trade occur 

away from the trading system or platform under §43.2, provided that ce1iain conditions set forth in 

the letter are met. Absent further action from the Division, No-Action Letter 14-118 will expire on 

December 15, 2015. By letter dated September 30, 2015, the Wholesale Markets Brokers' 

Association, Americas ("WMBAA") requested that the relief granted in No-Action Letter 14-118 be 

extended until November 15, 2016 ("WMBAA Letter"). 

Background 

Commission Regulation 43.2 defines a "block trade" as, among other things, a publicly 

rep01iable swap transaction that "[o]ccurs 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" (hereinafter the "'occurs away' requirement"). In a subsequent rulemaking 

establishing appropriate minimum sizes for block trades, the Commission further clarified this 

language by stating that "[by] definition, a block trade must occur away from the SEF['s] trading 

system or platform" and that "[a]ny swap that is executed on a SEF['s] or DCM's trading system or 

See CFTC Letter 14-118. 

2 Swaps that are intended to be cleared are swaps that are (i) of a type accepted for clearing by a DCO, and 

(ii) intended to be submitted for clearing contemporaneously with execution. 

1 
Page 2 

platform, regardless of whether it is for a size at or above the appropriate minimum block size for 

such swap, is not a block trade under this definition .... "

3 

Commission regulation 1.73 requires a Futures Commission Merchant ("FCM") that is a 

clearing member ("Clearing FCM") of a registered derivatives clearing organization ("DCO") to 

establish risk-based limits and to screen orders for compliance with those limits. Staff guidance 

specifies that this requirem~nt applies to orders for execution on or subject to the rules of a SEF or 

DCM, regardless of the method of execution.4 Commission regulation 37.702(b) requires a SEF to 

coordinate with each DCO to which it submits transactions for clearing and have rules and 

procedures to facilitate prompt and efficient processing by DCOs in accordance with Commission 

regulation 3 9 .12(b )(7). 5 Staff guidance specifies that a SEF must facilitate pre-execution screening 

by each Clearing FCM on an order-by-order basis. 6 

Relief Requested 

In its letter, WMBAA states, among other things, that "SEFs are uniquely positioned to 

ensure that FCMs have timely, accurate information needed to facilitate pre-execution credit 

checks."7 WMBAA's letter also asse1is, among other things, that Commission regulations should 

"be amended to provide market participants with a permanent solution."8 However, as an interim 

measure, WMBAA believes that "an extension of the relief granted under No-Action Letter 14-118 

would allow the WMBAA member firms, other SEFs, market participants and the Commission time 

to consider and develop best practices and a permanent solution to the issues attendant to block 

trades, including amendments to the Commission's regulations."9 Therefore, WMBAA requests an 

extension of the no-action relief in No-Action Letter 14-118 be provided by the Division until 

November 15, 2016. 10 

No-Action Relief 

The Division agrees that SEFs can facilitate the pre-trade credit checks that are required for 

FCMs and SEFs to comply with §§1.73 and 37.702(b), respectively. 11 Therefore, the Division has 

3 See Procedu.res To Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and 

Block Trades, 78 Fed. Reg. 32866, 32904 n.425 (May 31, 2013). 

4 See Staff Guidance on Swaps Straight-Through Processing (Sept. 26, 2013) ("STP Guidance") 

5 Commission regulation 3 9. l 2(b )(7) requires DCOs to accept or reject all trades executed competitively on a 

SEF or DCM as quickly as would be technologically practicable as if fully automated systems were used. 

6 See STP Guidance. 

7 WMBAA further states in support of its request for relief that execution of block trades on SEFs would 

fmther the goal of promoting swaps trading on SEFs and would "promote[] transparency and regulatory 

oversight as such trades would be required to compo1t with the core principles and other requirements for 

SEFs." See WMBAA Letter at 2. 

8 Id. 

9 Id. 

io Id. 

11 As stated in No Action Letter 14-118, the Division understood that an FCM that has no involvement in a 

block transaction occurring away from a SEF's trading system or platform would be unable to implement a 

credit screening of the trade prior to the counterpaities' execution of the block. See CFTC Letter 14-118 at 2­
Page 3 

determined to extend the no-action relief provided in No-Action Letter 14-118. During the 

extended period of relief, Division staff will continue to review and evaluate SEF trading practices 

and functionalities for pre-execution credit checks and will consider, develop and evaluate best 

practices and more permanent solutions to the issues involved in screening block trade orders for 

compliance with risk-based limits including, if appropriate, amendments to Commission 

regulations. The Division will not recommend that the Commission take enforcement action against 

any SEF which has rules and/or procedures that provide for the use of a SEF trading system or 

platform to facilitate the execution of block trades for swaps that are intended to be cleared and thus 

not complying with the "occurs away" requirement under §43.2 during the extended period of 

relief, provided that the conditions set fo1ih in No-Action Letter 14-118 continue to be met. These 

conditions are as follows : 

• The block trade is not executed on the SEF's Order Book functionality, as defined in 

§37.3(a)(3); 12 

• The SEF adopts rules pertaining to cleared blocks that indicate that the SEF is relying on 

the relief provided in this no-action letter 13 and require each cleared block trade execution on a 

non-Order Book trading system or platform to comply with the requirements set fo1ih in the 

block trade definition in §43.2. Specifically, the block trade must: 

1. Involve a swap that is listed on a registered SEF; 

2. Be executed pursuant to the SEF's rules and procedures; 

3. Meet the notional or principal amount at or above the appropriate minimum 

block size applicable to the swap; and 

4. Be reported to a swap data repository pursuant to the SEF's rules and 

procedures and the Commission's rules and regulations. 

• The FCM completes the pre-execution credit check pursuant to § 1.73 at the time the order 

for a block trade enters the SEF's non-Order Book trading system or platform; 14and 

• The block trade is subject to void ab initio requirements where the swap is rejected on 

the basis of credit. 15 

3. The Division confirms that this no action, similar to No Action Letter 14-118 does not affect the 

compliance requirements for pre-trade credit checks and, as such, does not extend relief from the obligation 

to obtain a pre-trade credit for block transactions which occur away from the trading system or platform. 

12 The Division notes that while block trades may not be facilitated through a SEF's Order Book 

functionality, pursuant to this no-action letter, SEFs are permitted to use RFQ functionalities to facilitate the 

execution of a block trade. Also, the Division notes that a block trade executed through a SEF's RFQ 

functionality pursuant to this no-action relief would not be subject to the minimum patticipant requirement 

set f01th in§ 37.9(a)(3). Finally, the Division notes that trades above the minimum block size may occur on 

the SEF's Order Book, however, they will not receive treatment as block trades and will not be afforded a 

rep01ting time delay. 

13 These rules should include a citation to this no-action letter as "NAL 15- 60, expiring November 15, 

2016." 

14 Consistent with the STP Guidance, the § 1.73 credit check must be done before execution, no matter the 

means of execution. ' 
Page4 

The relief shall expire at 11 :59 pm, Eastern Standard Time, on November 15, 2016. 

Conclusion 

Market participants should be aware that the no-action position taken herein does not excuse 

affected persons from compliance with any other applicable requirements of the Commodity 

Exchange Act or the Commission's regulations thereunder, in paiiicular, the applicable swap data 

repmiing requirements, clearing requirements, pre-execution credit check requirements, and 

straight-through processing requirements. 16 This letter, and the no-action position taken herein, 

represent the views of the Division only, and do not represent the position or views of the 

Commission or of any other division or office of the Commission's staff. As with all no-action 

letters, the Division retains the authority to condition fmiher, 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 

Lois Gregory, Associate Director, Division of Market Oversight, at (202) 418-5569 or 

lgregory@cftc.gov. 

Sincerely, 

~~tlo~gl Director 

Division of Market versight 

15 See STP Guidance. 

16 The applicable swap data repo1ting requirements are set f01th under paits 43, 45, and 50 of the 

Commission's regulations. The applicable clearing requirements are set fo1th under Commodity Exchange 

Act section 2(h)(l) and pait 50 of the Commission's regulations. The applicable pre-execution credit check 

requirements are set fo1th under §1.73 of the Commission's regulations. The applicable straight-through 

processing requirements are set fo1th under§ 1.74, §37.702(b), and §39.12(b)(7) of the Commission's 

regulations.