Managing money and finding alpha is never easy. In addition to tough trading and market conditions, fund managers must also address cybersecurity risks.  Cyber-attacks against large banks generate most of the headlines, but asset managers are also targeted.  According to a 2015 report by the Securities and Exchange Commission (SEC) Office of Compliance Inspections and Examinations, 74% of registered investment advisors surveyed by the SEC have experienced cyber-attacks, either directly or through their vendors.

With malware, ransomware and other cyber-attacks becoming more sophisticated, fund managers could suffer bigger losses from a data breach than a bad trade”

Given the elevated data privacy risks, private equity and hedge fund managers, together with their technology, legal and compliance teams, should protect themselves against cyber-attacks and comply with SEC, Commodity Futures Trading Commission and National Futures Association regulations by undertaking a five step plan that includes designating a chief information security officer, assessing risk, maintaining written policies and procedures, developing cybersecurity controls and developing a comprehensive information security program.

Our summary of cyber-risk management and compliance procedures appear in the July – September 2017 issue of Risk & Compliance Magazine, a publication of Financier Worldwide.  Please click on the link to read the article: Cybersecurity for Investment Managers.

On February 23, 2017, the European Supervisory Authorities (ESAs) announced that neither the ESAs nor competent authorities (CAs) would provide over-the-counter (OTC) derivatives dealers subject to European Market Infrastructure Regulation (EMIR) with relief from the March 1, 2017 deadline to implement variation margin (VM) requirements. However, due to difficulties faced by small counterparties, and for consistency with the guidance issued by the U.S. banking agencies, the ESAs expect CAs to generally apply a risk-based approach in their day-to-day enforcement of VM requirements after March 1.  CAs will require European dealers to take into account counterparty exposures and risk of default, document their steps taken toward full compliance and put in place alternative arrangements to contain risk, such as using existing Credit Support Annexes to exchange VM.  The ESAs and CAs make clear that their risk-based approach does not entail a general forbearance, but that CAs will make a case-by-case assessment on the degree of a dealer’s compliance and progress.  In any case, the ESAs and CAs expect EU derivatives dealers to finalize all necessary documentation before September 1, 2017 and that OTC transactions entered into on or after March 1, 2017 will remain subject to VM obligations for non-centrally cleared derivatives under the EMIR Regulatory Technical Standards.

The European regulators made their announcement on the same day as the Federal Reserve Board (FRB) and Office of the Comptroller of the Currency (OCC) issued guidance for U.S. swap dealer banks.  On February 23, 2017, the FRB and OCC required U.S. swap dealer banks to be in full compliance with their VM requirements by March 1, 2017 for counterparties with significant exposures.  But for swap counterparties without significant exposures, the FRB and OCC expect swap dealer banks to make good faith efforts to comply with the final rule by September 1, 2017.  The FRB and OCC didn’t provide any definitions for significant exposures.

With guidance from the ESAs, CAs, FRB and OCC, as well as the announcement by the Japanese Financial Services Agency that it will delay VM requirements for Japanese dealers applicable to cross-border trades with counterparties in jurisdictions where VM requirements have not yet been implemented, only the Canadian regulators have yet to announce transitional measures or no-action relief.  The U.S. Commodities Futures Trading Commission, plus regulators in Australia, Hong Kong and Singapore elected to provide no-action relief from VM requirements until September 1, 2017 for dealers under their jurisdiction.  Let’s hope global regulators can use the next six months to agree on a consistent framework for VM requirements.  Without such harmonization, global markets could further fragment and liquidity in key OTC derivative products, such as foreign exchange swaps and forwards, could be reduced.  Risk-based approaches are good, but harmonized regulation is better.

Over the past decade, electronic trading and the use of automated code or algorithms to generate orders with execution times consisting of microseconds or milliseconds, otherwise known as high frequency trading, has largely replaced human floor brokers and market markers.  High frequency trading is now being reviewed by the SEC and is the subject of the CFTC’s proposed Regulation Automated Trading.  Derivations recently published an article examining high frequency trading’s risks to securities and derivatives markets, as well as potential benefits in the form of lower overall trading costs and improved resilience due to enhanced pre-trade risk controls and system safeguards.  Our article appears in the January – March 2017 issue of Risk & Compliance Magazine, a publication of Financier Worldwide.  Please click on the link to read the article: High Frequency Trading.The Path Forward for Market Liquidity and Stability.

Derivatives traders and lawyers are focused on March 1. Not for any basketball tournaments, but for the variation margin (VM) big bang.  From March 1, 2017, swap dealers and financial end-users will be required to exchange VM on uncleared swaps.  To comply with the applicable VM rules, swaps dealers and financial end users will need to amend their derivatives documentation, including credit support annexes (CSAs).  ISDA created the 2016 VM Protocol (the VM Protocol) to provide a documentation solution that complies with the U.S. banking prudential regulator and Commodity Futures Trading Commission (CFTC) VM rules, as well as similar rules in Canada, Japan and under European Market Infrastructure Regulation (EMIR).  In addition to selecting the relevant jurisdictions required for compliance, counterparties can elect to:

  1. Amend existing master agreements to add new CSAs for VM on terms determined by the VM Protocol.
  2. Amend existing master agreements and CSAs to cover new transactions (but not trades entered into before March 1, 2017) by creating a replica of their existing CSA and then amending it to comply with the jurisdictions selected.
  3. Amend existing CSAs in order to comply with the jurisdictions selected (which would cover all transactions under the master agreements).
  4. Create new ISDA 2002 Master Agreements (using agreed-upon boilerplate terms) with new compliant CSAs.

While the VM Protocol is quite flexible and can satisfy applicable VM requirements in the US, Canada, Europe and Japan, many market participants have elected to not use the VM Protocol. Rather, many participants have decided to negotiate new or amended CSAs on a bilateral basis. Considering that it often takes months to negotiate a single CSA, and that thousands of counterparties will be required to exchange VM on March 1, derivatives lawyers for swap dealers and investment managers are working diligently to finish the new documentation in time.

But, What If…?

If a substantial number of counterparties have not executed bilateral compliant CSAs or adhered to the VM Protocol by March 1, they will not be able to trade uncleared swaps. This could disrupt global swap markets by reducing liquidity and increasing risk by preventing market participants from hedging existing positions.  The easiest solution would be for the CFTC and other global regulators to postpone the March 1 deadline.  Hong Kong and Singapore have already announced a six month phase-in period for counterparties to continue to negotiate compliant documentation.  Australia has also postponed the deadline to September 1, so long as all transactions executed from March 1 are subject to VM requirements by September 1.  Unfortunately, the European Commission may be unwilling or unable to push back the March 1 effective date for the EMIR VM standards.  This could put acting CFTC Chairman Christopher Giancarlo in a difficult position. Chairman Giancarlo has emphasized the importance of harmonizing global derivatives regulation, particularly to prevent market fragmentation.

I am especially concerned that smaller firms, including American pension and retirement funds, may not be able to get their documentation done in time. If they do not, they will be abruptly forced to stop hedging their portfolios at a time of enormous changes in financial rates and global asset values.” – Acting CFTC Chairman Christopher Giancarlo


The CFTC could decide not to provide relief in order to maintain consistency with the EMIR VM standards.  The CFTC elect to provide short-term transitional period of relief, much as it did on September 1, 2016 for large swap dealers to complete the custodial arrangements needed to comply with the initial margin requirements applicable to dealers (the 2016 Relief).  However, the 2016 Relief was implemented at the last minute and offered only a 30-day period for a small number of dealers to complete less complex documentation.  Given that the VM rules have a global impact and the upcoming March 1 deadline will affect a much larger set of counterparty relationships, the most practical way forward would be for the CFTC to work with European and Asian regulators to push-back the March 1 deadline to September 1, 2017, or implement a six-month phase-in period.  Hopefully, with the post-election changes at the CFTC, U.S. regulators will have more flexibility to harmonize derivatives regulation than they did under the prior administration.  Let’s hope that U.S. and global regulators can agree on a consistent approach.  Otherwise, the March 1, 2017 VM big bang will cause March madness.

On January 12, 2017, the Commodity Futures Trading Commission (CFTC) proposed to amend its recordkeeping requirements set forth in Regulation 1.31.  The CFTC’s proposed amendments are intended to implement advances in information technology and adopt technologically neutral rules that anticipate developments such as blockchain or distributed ledger technology.  CFTC Regulation 1.31 currently requires that “all books and records … be kept in their original form (for paper records) or native file format (for electronic records) for a period of five years from the date thereof and shall be readily accessible during the first two years of the five-year period.”

In this age where terabytes of storage easily fit in one’s pocket, our rules should not refer to microfiche or require paper records.” – CFTC Chairman Massad

The CFTC’s proposed amendments would modernize recordkeeping requirements by making Regulation 1.31 principles-based. The CFTC would accomplish this by replacing references to “books and records” with “regulatory records” and clarifying that regulatory record means all books and records …, including any record of any correction or other amendment to such books and records; provided that, with respect to such books and records stored electronically, regulatory records shall also include all data produced and stored electronically that describes, directly or indirectly, the characteristics of such books and records, including, without limitation, data that describes how, when, and, if relevant, by whom such electronically stored information was collected, created, accessed, modified or formatted (i.e. data about data or “metadata”).  According to the CFTC, the ability to access a trader’s metadata is integral to its inspection and investigative functions. Finally, given the new principles-based definition of regulatory records, the CFTC proposed to remove the existing requirement to preserve records exclusively in a non-rewritable, non-erasable format (i.e. “write once, read many”, or “WORM” format) and delete the technologically-ancient definitions of “native file format”, “micrographic media”, and “electronic storage media.”  End users and buy-side firms have found compliance with the CFTC’s WORM requirement to be burdensome.  Eliminating the need to store records in a dated WORM format should result in substantial cost savings.

The CFTC’s proposal would not change recordkeeping time periods and would also retain requirements to establish written policies and procedures for recordkeeping obligations, including appropriate training of officers and personnel responsible for ensuring compliance with recordkeeping rules. However, the amendments would modernize recordkeeping and storage obligations and pave the first step in a regulatory path forward for market participants to realize one of the benefits of blockchain technology.  The CFTC proposed amendments would also further align Regulation 1.31 with the SEC’s technology neutral recordkeeping obligations for broker-dealers under SEC Rule 17a-4 and investment advisors under SEC Rule 204-2(g).  In sum, the CFTC’s proposed amendments should reduce compliance burden, provide for more regulatory consistency and help facilitate the development of blockchain and other innovations in financial technology.

Most derivatives and capital market lawyers usually spend more time worrying about the price of avocados than Constitutional law issues.  Hungry lawyers now have reason to be concerned about the rights of derivatives market participants under the 4th and 5th Amendment under the U.S. Constitution.  The 4th Amendment prohibits unreasonable searches and seizures by governmental agencies.  The 5th Amendment, among other things, affords due process of law which requires notice and an opportunity to be heard.  Because of the 4th and 5th Amendment protections, government agencies generally must seek a subpoena issued by a court before they can search or seize property.  The Commodity Futures Trading Commission (CFTC) has proposed a new rule that could require traders to hand over their intellectual property (IP) to the government without a subpoena.

On December 17, 2015, the CFTC published a notice of proposed rulemaking (NPRM) to improve regulation of automated trading of listed derivatives on designated contract markets (DCMs) (collectively, Reg AT).  The NPRM for Reg AT includes a number of important risk controls and other safeguards intended to enhance the safety and soundness of electronic derivatives trading.  The NPRM also proposes that traders must create a source code repository for its trading algorithms in accordance with the CFTC’s basic recordkeeping requirements under Regulation 1.31.  This raises Constitutional issues because, under the NPRM, the CFTC would not be required to obtain a subpoena to inspect a trader’s source code.

A trader’s source code is best defined as a collection of computer instructions as they are originally written (i.e., typed into a computer) in plain text (i.e., human readable alphanumeric characters) comprising executable software capable of exercising discretion over an order on the production environment of a DCM without human intervention.  In this context, discretion means the ability to (i) submit, modify, or cancel the order and (ii) determine and set the relevant order details submitted to the DCM.  Source code is a trader’s valuable IP that forms the basis of a trader’s present and future trading strategies.  Public disclosure of a trader’s IP could result in a substantial economic loss.  Forced disclosure of IP should not be taken lightly.  Given the Constitutional law issues and potential risks created by disclosing source code, the CFTC sought further comment on its NPRM for Reg AT.

On November 4, 2016, the CFTC published a Supplemental Notice of NPRM on Reg AT (Supplemental Notice) to address comments received from market participants.  The CFTC’s Supplemental Notice acknowledged concerns over source code disclosure and proposed additional limits to the CFTC’s access to a trader’s source code.  Under the Supplemental Notice, the CFTC could only gain access to a trader’s source only via a subpoena or through a new CFTC “special call”.  The Supplemental Notice doesn’t provide much detail on the “probable cause” required by the CFTC to approve a special call or for traders to be afforded notice or an opportunity to be heard.  The Supplemental Notice does require the CFTC to maintain in confidence any records turned over to the CFTC pursuant to a special call.  The records protected under a special call include data and information that would separately disclose the market positions, business transactions, trade secrets or names of customers of any person.  Unfortunately, the CFTC’s technical ability to maintain the data privacy of a trader’s source code or other records is uncertain.

The CFTC’s disregard for the Constitutional issues triggered proposed Reg AT is troubling. No other governmental agencies can require market participants to disclose IP without a subpoena or similar judicial process.  If a farmer developed a genetically modified avocado that’s always ripe and never turns brown when made into guacamole, the Food & Drug Administration can’t require the farmer to turn over the IP behind a genetically engineered avocado.  The genetic code for the super-avocado is the farmer’s IP, and although it may sound like a silly example, the issues at stake are serious.  Under Reg AT, as currently proposed, the CFTC could have access to IP that no other government regulator currently has.  More crucially, the NPRM and Supplemental Notice for Reg AT jeopardize fundamental rights under the 4th and 5th Amendments because the proposed rules don’t provide market participants with due process.  Regardless of whether the government seeks IP related to avocados or source code, derivatives lawyers should consider the Constitutional issues at stake and prevent the CFTC from demanding that traders hand over their IP or other property without a subpoena.

On November 1, 2016, under No-Action Letter (NAL) 16-76, the CFTC Division of Market Oversight (DMO) extended its time-limited no-action relief for certain swaps executed as part of package transactions from the requirement to trade on a swap execution facility (SEF) (the “trade execution requirement”).  DMO extended its relief to November 15, 2017.  A tabulated summary of affected package types is available here.  This marks the fifth time DMO has delayed compliance from the trade execution requirement for particular types of package trades, highlighting the practical difficulty of implementing the trade execution requirement for certain instruments. (CFTC Commissioner Giancarlo has previously criticized the process of issuing time-limited relief for packaged trades, available here.)  Prior no-action letters include NAL 15-55, NAL 14-137, NAL 14-62 and NAL 14-12. Readers interested in puzzles may find it an interesting exercise to read through these letters and parse out how the relief applied at each stage and to what instruments.

On October 11, 2016, the Commodity Futures Trading Commission (CFTC) proposed new rules governing cross-border swap transactions (Proposed Rules).  The Proposed Rules would supersede the CFTC’s July 2013 Interpretive Guidance (2013 Guidance) and apply to future CFTC cross-border rule makings.  The Proposed Rules define the terms, “U.S. person” and “Foreign Consolidated Subsidiary”, clarify certain swap dealer de minimis calculations, and simplify the application of the CFTC’s external business conduct (EBC) standards.  The Proposed Rules also address how the swap dealer de minimis calculations and EBC standards would apply to swap arranged, negotiated, or executed using personnel located in the U.S.

Key Definitions

The definition of “U.S. Person” is largely consistent with the definition set forth in the 2013 Guidance. However, the Proposed Rules’ definition of U.S. person doesn’t include a commodity pool, pooled account, investment fund, or other collective investment vehicle that is majority-owned by one or more U.S. persons.  In addition, the Proposed Rules don’t include the catchall provision found in the 2013 Guidance.  These exclusions provide much needed legal certainty by limiting the definition of ‘‘U.S. person’’ to those persons enumerated in the Proposed Rules.  The Proposed Rules also define “Foreign Consolidated Subsidiary” (FCS) as a non-U.S. person consolidated for accounting purposes with an ultimate parent entity that is a U.S. person, which is typically somewhat easier for firms to apply in practice given it leverages understood and widely applied accounting methods.  The FCS definition is key to applying the Proposed Rules’ swap dealer de minimis calculations.

Swap Dealer De Minimis Calculations

The Proposed Rules may simplify swap dealer de minimis calculations, but could potentially result in additional swaps counting toward the registration threshold. The 2013 Guidance counted swap dealing by conduit affiliates and guaranteed affiliates toward the threshold, but it didn’t count dealing activity by FCSs. After the CFTC issued its 2013 Guidance, some U.S. financial institutions removed their guarantees of non-U.S. affiliates, but such non-U.S. affiliates were still consolidated for accounting purposes with the U.S. institution’s ultimate parent.  The Proposed Rules would require an FCS to count all swap dealing transactions.  U.S. persons will continue to count swap dealing activity toward the registration threshold.  Non-U.S. persons would count dealing activity with FCSs, U.S. persons and guaranteed affiliates of U.S. persons, unless the swap is traded anonymously on a registered exchange and cleared.

External Business Conduct Standards

The Proposed Rules should clarify the application of the CFTC’s EBC standards. Under the Proposed Rules, U.S. swap dealers must continue to comply with the EBC standards, as would non-U.S. swap dealers facing U.S. persons.  However, non-U.S. swap dealers and foreign branches of U.S. swap dealers would not be subject to EBC standards for their swaps with non-U.S. persons and foreign branches of a U.S. swap dealers; except that, foreign branches of any swap dealer (U.S. or non-U.S.) that use personnel located in the U.S. to “arrange, negotiate, or execute” swaps will continue to be subject to CFTC Regulations 23.410 (Prohibition on Fraud, Manipulation) and 23.433 (Fair Dealing), without substituted compliance.  The Proposed Rules consider the terms “arrange” and “negotiate” to mean market-facing activity normally associated with sales and trading, and not internal, back-office activities, such as ministerial or clerical tasks, performed by personnel not involved in the actual sale or trading of swaps.  The Proposed Rules adopt the same definition of “execute,” the market-facing act of becoming legally and irrevocably bound to the terms of a swap transaction under applicable law, as used in the 2013 Interpretations.

The CFTC expects to address additional cross-border application of other swap requirements in subsequent rulemakings. Additionally, the CFTC may also amend or extend CFTC Letter 16-64, its time-limited no action relief from compliance with certain “Transaction-Level Requirements” associated with swaps arranged, negotiated, or executed in the U.S.  Derivations will provide more analysis of the CFTC’s cross-border interpretations, including the potential impact on margin rules, before the European margin regulations come into force in 2017.  The CFTC’s fact sheet on the Proposed Rules is available here.

Fund managers in Chicago and elsewhere that manage Illinois public pension plan investments should be aware of Illinois House Bill 6292 (the IL Bill). The IL Bill, if passed, would amend the Illinois Pension Code to require managers of any private equity fund, hedge fund, absolute return fund, total return fund, or any investment pool that is privately organized (Private Fund) to disclose the existence of certain key deal provisions contained in the limited partnership agreement (Agreement).  The IL Bill would also require disclosure of fees and expenses paid directly by an Illinois pension fund or retirement system (Illinois Plan) to a Private Fund.  The IL Bill (in its current form) incorporates certain elements of the Institutional Limited Partners Association (ILPA) reporting template (ILPA Template), but would not necessarily require that Private Funds use the ILPA Template. Nonetheless, the IL Bill would require disclosures beyond what is required by Assembly Bill 2833, California’s first-in-the-nation fee disclosure bill (the Cal Bill).

Key Provisions in the Limited Partnership Agreement

The IL Bill would require an Illinois Plan to disclose the existence of the Agreement with the Private Fund. Furthermore, unlike the Cal Bill, an Illinois Plan would have to disclose any management fee waiver, indemnification and clawback provisions (Key Provision) contained in the Agreement.  Key Provisions include the following:

  1. All management fee waiver provisions, including, but not limited to, provisions that permit the Private Fund’s external manager or general partner to waive fees, or that specify the mechanics of the fee waiver or its repayment, or that specify the magnitude of the fee waiver, or that are necessary to understand how the fee waiver works, and all defined terms related to or affecting the fee waiver.
  2. All indemnification provisions, including, but not limited to, provisions that require the Private Fund or its investors to indemnify the fund’s external manager or general partner, or any of its affiliates, for settlements or judgments paid, and including all provisions necessary to understand how the indemnification works and all defined terms related to or affecting indemnification.
  3. All clawback provisions, including, but not limited to, provisions that allow the Private Fund’s external manager or general partner to pay back an amount less than the full cost of the overpayment received by the manager, and including all provisions necessary to understand how the clawback works and all defined terms related to or affecting clawbacks.
  4. The cover page and signature block of the Agreement.

The ILPA Template requires disclosure of these Key Provisions, but not the Cal Bill.

Fee and Expense Information

In addition to the Key Provisions above, Private Funds would be required to disclose the following fee and expense information (Fee Information):

  1. The fees and expenses that the Illinois Plan pays directly to the Private Fund, or to the Private Fund’s external manager or general partner.
  2. The Illinois Plan’s share of all fees and expenses not included in paragraph (1) of the Fee Information, including carried interest, paid or allocated from the Private Fund to the Private Fund’s external manager or general partners, or deducted from payments owed from the Private Fund’s external manager or general partners to the Private Fund. The IL Bill defines “carried interest” to mean a share of the profits of a Private Fund paid, accrued, or due to the general partner or the external manager of their affiliates.
  3. The amount of all management fee waivers made by the Private Fund’s external managers or general partners.
  4. The total amount of portfolio holding fees incurred by each portfolio holding of the Private Fund as payment to any person who is a member of the external manager group. The IL Bill defines “external manager group” to mean (1) the external manager, (2) its affiliates, (3) any other parties described in the external manager’s marketing materials for the relevant alternative investment fund as providing services to or on behalf of portfolio holdings, and (4) any other parties described in the external manager’s affiliated adviser’s SEC Form ADV filing as receiving portfolio holding fees or portfolio holding other compensation. The external manager group does not include the affiliated Private Fund in which the Illinois Plan is an investor, nor does it include a Private Fund used to effectuate investments of the affiliated fund in which the Illinois Plan is an investor.

If Private Funds elect to use the ILPA Template, such use would constitute compliance with the Key Provision and Fee Information disclosure requirements.

Public Disclosure Details

Within 90 days of entering into an Agreement with a Private Fund, an Illinois Plan must disclose the Key Provisions by making filings with the Public Pension Division of the Illinois Department of Insurance (the DOI) and the Illinois Secretary of State. The Illinois Plan must also post and maintain the Key Disclosures on its website.  Private Funds must provide the Fee Information to the Illinois Plan, which then must disclose the Fee Arrangements by making a filing with the DOI and including the Fee Information on its website.  The IL Bill would apply to Agreements proposed or executed after February 1, 2019, and includes modifications or amendments to agreements that modify or alter any of the provisions discussed under the IL Bill.

Next Steps

The Illinois House is expected to vote on the version of the IL Bill already passed by the Senate. The Illinois House will likely vote on this version of the IL Bill in November 2016.  However, it’s unclear whether Governor Rauner would sign the current IL Bill into law or if the Illinois Senate may further amend the IL Bill.  If Illinois does further amend the IL Bill, it could take a national approach and require disclosures consistent with the Cal Bill.  Alternatively, Illinois could mandate that Private Funds use the ILPA Template.  Many Illinois Plans may prefer no additional fee disclosures at all.  For example, large plans may lose leverage to negotiate custom arrangements with reduced fees or favorable terms for substantial capital commitments.  Smaller plans could be turned away from new alternative investment vehicles if pension plans require fund managers to disclose certain terms or fees.  To be sure, more transparency is better when making investment decisions, but politicians in Springfield and Chicago should consider the unintended consequences before voting on any new Private Fund disclosure bills.

On October 7, 2016, the Commodity Futures Trading Commission (CFTC) issued no-action letter 16-74 (NAL 16-74) to extend time-limited relief to Swap Execution Facilities (SEFs) from certain requirements before facilitating cleared block trades. Block trades present a number of compliance challenges for SEFs and futures commission merchants (FCMs).  Block trades are reportable swap transactions (above the appropriate minimum notional or principal amounts) that occur away from a SEF’s order book or a designated contract market (DCM), but are executed pursuant to a SEF’s or DCM’s rules and procedures to facilitate prompt and efficient clearing.  Clearing mandates that FCMs and SEFs apply certain risk management filters before trade execution.  CFTC Regulation 1.73 requires FCMs to establish risk-based limits based on position size, order size, margin requirements, or similar factors and to screen orders for compliance with such risk-based limits (Credit Check Requirements).  CFTC Regulation 37.702(b) requires SEFs ensure that they have capacity to route trades to clearinghouses and to coordinate with clearinghouses to facilitate prompt and efficient clearing (Coordination Requirements).  For block trades intended to be cleared that occur away from a SEF’s order book, FCMs and SEFs are still working towards automated solutions to ensure compliance with the Credit Check and Coordination Requirements.


The CFTC’s NAL 16-74 provides SEFs with addition time to develop processes to ensure compliance with Credit Check and Coordination Requirements. The conditions for compliance with NAL 16-74 are as follows:

  • The block trade occurs away from the SEF’s order book and such trade:

involves a swap listed on a registered SEF;

is executed pursuant to the SEF’s rules and procedures;

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

is reported to a swap data repository pursuant to the SEF’s rules and procedures and the CFTC’s rules and regulations.

  • The SEF adopts rules pertaining to cleared blocks that indicate that the SEF is relying on the relief provided in NAL 16-74 and that requires each cleared block trade executed on a non-order book trading system or platform to comply with other requirements for block trades.
  • The FCM completes the Credit Check Requirements before execution on the SEF’s non-order book trading system or platform.
  • The block trade is subject to void ab initio requirements where the swap is rejected on the basis of credit.

NAL 16-74 extends relief that the CFTC had previously provided in CFTC Letter 14-118 and CFTC Letter 15-60.  The CFTC’s no-action relief will expire on the earliest of midnight (New York time) on November 15, 2017, or the effective date of any additional CFTC action on Credit Check and Coordination Requirements.