U.S. COMMODITY FUTURES TRADING COMMISSION 

Three Lafayette Centre 

To: 

1155 21st Street, NW, Washington, DC 20581 

Telephone: (202) 418-5430 

Facsimile: (202) 418-5536 

September 26, 2013 

All CFTC registered Futures Commission Merchants ("FCMs") 

All CFTC temporarily registered Swap Execution Facilities and applicants for temporary 

registration as Swap Execution Facilities ("SEFs") 

All CFTC registered Designated Contract Markets ("DCMs") 

All CFTC registered Derivatives Clearing Organizations ("DCOs") 

Staff Guidance on Swaps Straight-Through Processing 

The Divisions of Market Oversight ("DMO") and Clearing and Risk ("DCR") (together 

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

this joint guidance ("Guidance") to remind FCMs, SEFs, DCMs, and DCOs of their obligations 

to comply with cetiain Commission regulations with respect to swap trades on a SEF or DCM 

that are intended to be cleared. These obligations relate to the clearing of swaps that are traded 

on or through the facilities of SEFs or DCMs and cleared at DCOs by FCMs that are clearing 

members of the DCO ("Clearing FCMs"). 

I Pre-Execution Risk Management by Clearing FCMs 

Commission Regulation 1. 73 (Clearing futures commission merchant risk management) 

imposes risk management requirements on Clearing FCMs. The Divisions remind Clearing 

FCMs that they are responsible for compliance with all requirements of Regulation 1. 73. 

Specifically, Regulation 1.73(a)(l) requires each Clearing FCM to establish risk-based 

limits for each proprietary account and each customer account that are based on position size, 

order size, margin requirements, or similar factors. Regulation 1.73(a)(2) requires each Clearing 

FCM to screen orders for compliance with those limits.

1 

Regulation 1.73(a)(2)(i) states that when a Clearing FCM provides electronic market 

access to a DCM or SEF or accepts orders for automated execution on a DCM or SEF, it shall 

use automated means to screen orders for compliance with such risk-based limits.2 The 

Divisions note that the requirements of Regulation 1.73(a)(2)(i) apply to orders placed pursuant 

to a request for quote procedure, if the means of order execution is automated. 

1 See 17 C.F.R. § 1.73(a)(l)-(2). 2 See 17 C.F.R. § 1.73(a)(2)(i). 
Regulation 1.73(a)(2)(ii) provides that when a clearing FCM accepts orders for nonautomated execution, it shall establish and maintain systems of risk controls reasonably designed 

to ensure compliance with the limits.3 The Commission has noted that orders executed by nonautomated means (e.g., voice broker) can be screened automatically if they are routed 

automatically.

4 

Regulation 1.73(a)(2)(iii) provides that when a clearing FCM accepts transactions that 

were executed bilaterally and then submitted for clearing, it shall establish and maintain systems 

of risk controls reasonably designed to ensure compliance with the limits. 5 

The Divisions note that subparagraphs (i) and (ii) apply to "orders" while subparagraph 

(iii) applies to "transactions." In addition, subparagraph (iii) is limited to transactions executed 

"bilaterally." By contrast, the Commission stated in the preamble that subparagraph (i) in the 

Federal Register refers to "automated trading systems" such as Globex and the discussion of 

subparagraph (ii) refers to "non-automated markets such as open outcry exchanges or voice 

brokers."6 Because the Commission affirmatively included voice brokers in connection with 

subparagraph (ii), transactions executed through voice brokers do not fall under subparagraph 

(iii). 

The distinctions among these subparagraphs have several implications. Because SEFs 

and DCMs are multilateral trading facilities, trades executed on or subject to the rules of such 

platforms are not bilateral trades for the purposes of Regulation 1.73(a)(2)(iii). For the purposes 

of this provision, bilateral trades are transactions not intended for clearing. Thus, the 

creditworthiness of each party is a material factor at the time of execution for bilateral trades. 

Accordingly, Clearing FCMs must screen orders for execution on a SEF or DCM pursuant to 

either Regulation 1.73(a)(2)(i) or (ii) regardless of the method of execution. The provisions of 

Regulation 1. 73( a)(2)(iii) only apply where two patties transact directly with one another, 

outside of a trading facility. As noted above, this letter only applies to orders intended for 

clearing. 

II Pre-Execution Clearing Anangements and Clearing FCM Guarantee of SEF and DCM 

Trades 

Regulations 1.74, 37.702(b), 38.601, and 39.12(b)(7) establish straight-throughprocessing ("STP") requirements for FCMs, SEFs, DCMs, and DCOs respectively. 7 A nearinstantaneous acceptance or rejection of each trade provides ce1tainty of execution and clearing, 

reduces costs, and decreases risk. 

3 See 17 C.F.R. § 1.73(a)(2)(ii). 4 See Customer Clearing Documentation, Timing of Acceptance for Clearing, and Clearing Member Risk 

Management, 77 Fed. Reg. at 21 ,288. 5 See 17 C.F.R. § 1.73(a)(2)(iii). 6 See Customer Clearing Documentation, Timing of Acceptance for Clearing, and Clearing Member Risk 

Management, 77 Fed. Reg. at 21,288. 7 hi. at 21,285. 

2 
In order to achieve STP, Regulations 1.74, 37.702(b), 38.601, and 39.12(b)(7) each 

contain a provision requiring coordination with other registrants or registered entities. In 

patticular, 3 7. 702(b )(2) directs SEFs to have rules and procedures to facilitate prompt and 

efficient processing by DCOs in accordance with Regulation 39.12(b)(7). Subparagraph (ii) of 

39.12(b)(7), in turn, 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. 

The Divisions note that the Commission has previously stated, in the context of "multiple 

exchanges and clearinghouses for swaps" that "patties would need to have clearing arrangements 

in place with clearing members in advance of execution. "

8 The Commission further stated that 

"[i]n cases where more than one DCO offer[ed] clearing services, the patties also [would] need 

to specify in advance [of execution] where the trade should be sent for clearing. "9 The Divisions 

also note that Number 20 of the List of Exhibits (Exhibit T) requires an applicant for SEF or 

DCM registration to provide, as part of Form SEF or DCM, a "list of the name[s] of the clearing 

organization(s) that will be clearing the Applicant's trades, and a representation that clearing 

members of that organization will be guaranteeing such trades." 10 

The interaction of the pre-execution risk controls in Regulation 1.73 with the STP 

requirements ofRegulations 1.74, 37.702(b), 38.601, and 39.12(b)(7) has several consequences. 

First, because a SEF must "facilitate" STP under Regulation 37.702(b), no trade intended for 

clearing may be executed on or subject to the rules of a SEF unless a clearing member has been 

identified in advance for each patty on an order-by-order basis. Second, a SEF must facilitate 

pre-execution screening by each Clearing FCM in accordance with Regulation 1. 73 on an orderby-order basis. That is, the SEF should make it possible for Clearing FCMs to screen in 

accordance with Regulation 1. 73 on an order-by-order basis. This is also consistent with the 

obligations of a SEF to provide impattial access under Regulation 37.202. Third, screening 

orders pursuant to Regulation 1. 73 provides Clearing FCMs the ability to reject orders before 

execution. Therefore, 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. Accordingly, a Clearing FCM may not reject a trade that has passed its pre-execution 

filter because this would violate the requirement that trades should be accepted or rejected for 

clearing as soon as technologically practicable. 11 

III Routing of Swap Transactions by SEFs to DCOs 

Regulation 37.701 (Required clearing) provides that transactions executed on or through 

8 !d. at 21,284. 

9 /d. 

Io See Core Principles and Other Requirements for Swap Execution Facilities, 78 Fed. Reg. 33,476 at 33,598 (June 

4, 2013); Core Principles and Other Requirements for Designated Conh·act Markets, 77 Fed. Reg. 36,612 at 36,717 

(June 19, 20 12). 

II See 17 C.P.R.§ 1.74. 

3 
a SEF, which are required to be cleared or are voluntarily cleared, must be cleared through a 

Commission registered DCO or a DCO that is exempt from registration. 12 As of the date of this 

Guidance, the Commission has not exempted any DCO from registration. 

Regulation 37.702 (General financial integrity) provides, among other things, that with 

respect to transactions cleared by a DCO, a SEF must ensure that it has the capacity to route 

transactions to the DCO in a manner acceptable to the DC0. 13 This means that it is the 

responsibility of SEFs to route transactions to a DCO for the purpose of clearing. 

With respect to the pe1missibility of using so-called "affirmation hubs," the Divisions 

note that the Commission has stated that "[i]fthe DCO views the use of an affirmation hub as an 

acceptable means for routing the swap, the routing otherwise complies with [Regulation] 

37.702(b), and the trade is processed in accordance with the standards set forth in [Regulations] 

1.74, 39.12., 23.506, and 23.610 ofthe Commission's regulations, then the use of an affirmation 

hub for routing a swap to a DCO for clearing would be permissible." 14 However, the Divisions 

remind patticipants that the trade must still be routed "as quickly after execution as would be 

technologically practicable iffully automated systems were used." 15 Use of a third patty 

affirmation hub does not excuse compliance with this timing standard. 

IV Routing of Swap Transactions by DCMs to DCOs 

Regulation 38.601 (Mandatory clearing) provides that all transactions executed on or 

subject to the rules of a DCM must be cleared through a registered DCO. The regulation fmther 

obliges DCMs to coordinate with each DCO to which they submit transactions for clearing in the 

development of rules and procedures to facilitate prompt and efficient transaction processing in 

accordance with the requirements of Regulation 39.12(b)(7). 16 For the avoidance of doubt, the 

Divisions interpret this provision to mean that it is the responsibility of a DCM to submit an 

executed swap transaction to a DCO for clearing. 

V Time frame for clearing of Swap Transactions Executed Competitively on DCMs and 

SEFs 

Regulation 39.12(b)(7) requires a DCO to have rules that provide that the DCO will 

accept or reject for clearing as quickly after execution as would be technologically practicable if 

fully automated systems were used, all contracts that are listed for clearing by the DCO and are 

executed competitively on or subject to the rules of a DCM or SEF. 17 As explained in the 

preamble to the rule, this standard was designed to accommodate developments in technology 

that continue to reduce trade processing times in order to minimize costs and enhance trade . 18 ce1tamty. 

12 See 17 C.F.R. § 37.701. 13 See 17 C.F.R. § 37.702(b)(l). 14 See Core Principles and Other Requirements for Swap Execution Facilities, 78 Fed. Reg. at 33,535. 15 See 17 C.F.R. § 39.12(b)(7). 16 See 17 C.F.R. § 38.601. 17 See 17 C.F.R. § 39.12(b)(7)(ii). 18 See 77 Fed. Reg. 21,278 at 21,286. 

4 
DCR previously inte1preted "as soon as technologically practicable" to be 60 seconds. 

Recent data received by DCR shows that DCOs now accept at least 93% of trades within three 

(3) seconds or less, and 99% oftrades within ten (10) seconds or less. Accordingly, "as soon as 

technologically practicable" is now within 10 seconds. Therefore, DCOs clearing swaps that are 

executed competitively on or subject to the rules of a DCM or SEF and are accepting or rejecting 

trades within 10 seconds after submission are compliant with the timing standard of Regulation 

39.12(b)(7). DCR expects DCOs to contemporaneously notify the relevant DCM or SEF and 

clearing FCMs whether a trade has been accepted or rejected. 

VI Effect of Rejection from Clearing 

The price of a swap depends, in part, on whether it is intended to be cleared. 

Consequently, if a swap that is intended to be cleared is rejected, a material term to the contract 

is unfulfilled. Therefore, the Divisions believe that any trade that is executed on a SEF or DCM 

and that is not accepted for clearing should be void ab initio. 19 

This result is consistent with Section 22(a)(4)(B) of the Act. 20 That provision must be 

read in conjunction with Section 2(h) which requires certain swaps to be cleared. Section 22 is 

captioned "Private Rights of Action" and paragraph (a)(4) is captioned "Contract Enforcement 

Between Eligible Counte1parties." Section 22(a)(4)(B) ofthe Act prohibits pmiicipants in a 

swap from voiding a trade. It does not prohibit the Commission or a SEF from declaring a trade 

to be void. If it were to be read otherwise, it would enable pmiies to evade the clearing 

requirement by deliberately entering trades that exceeded their credit limits and then enforcing 

them as bilateral trades. 

Experience indicates that pre-trade checks will make rejection a rare event and that STP 

has made the time between execution and any rejection a matter of seconds. This combination of 

rarity and minimal financial exposure to the pmiies obviates the need to have so-called "breakage 

agreements" between market pmiicipants. 21 The imposition of such agreements would be an 

impairment to impmiial access to SEFs.22 

19 This would not apply to backloaded trades; that is, trades originally executed without an intent to clear, where the 

pmties subsequently decide to clear the h·ades. 20 Section 22(a)(4)(B) of the CEA states that "[n]o agreement, conh·act, or transaction between eligible conh·act 

pmticipants or persons reasonably believed to be eligible contract pmticipants shall be void, voidable, or 

unenforceable, and no party to such agreement, contract, or h·ansaction shall be entitled to rescind, or recover any 

payment made with respect to, the agreement, conh·act, or transaction under this section or any other provision of 

Federal or State law, base,d solely on the failure of the agreement, contract, or transaction (i) to meet the definition of 

a swap under section la of this title; or (ii) to be cleared in accordance with section 2(h)(l) of this title." 21 For these reasons, breakage agreements are not used in the futures markets. 22 See Section 5h(t)(2) of the Act and 17 C.F.R. § 37.202 ("A swap execution facility shall provide any eligible 

contract participant and any independent software vendor with impmtial access to its market(s) and market services, 

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

5 
Accordingly, the Divisions expect DCMs and SEFs to have rules stating that trades that 

are rejected from clearing are void ab initio. Further, DCMs, SEFs, FCMs,23 and swap dealers24 

should not require breakage agreements as a condition for access to trading on a SEF or DCM. 

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

This staff guidance, and the positions taken herein, represent the views of the Divisions only, and 

do not necessarily represent the view of the Commission or of any other office or division of the 

Commission. If you have any questions concerning this guidance, please call Nancy Markowitz, 

Deputy Director, 202-418-5453 nmarkowitz@cftc.gov, or Arnir Zaidi, Special Counsel, 202-

418-6770, azaidi@cftc.gov, DMO or John C. Lawton, Deputy Director, 202-418-5480, 

jlawton@cftc.gov, or Christopher Hower, Special Counsel, 202-418-6703, chower@cftc.gov, 

DCR. 

Nancy arkowitz ~ Director, DCR Deputy Director, DMO 

23 See 17 C.F.R. § 1.72. 24 See 17 C.F.R. §§ 23.506,23.608-23.610. 

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