Swap Execution Facilities (SEFs) are trading facilities that operate under the regulatory oversight of the CFTC, pursuant to Section 5h of the Commodity Exchange Act (“the Act”), 7 U.S.C. 7b-3. SEFs were created by the addition of Section 5h of the Act by Section 733 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) for the trading and processing of swaps. The stated goals of the Dodd-Frank Act are to promote the trading of swaps on SEFs and to promote pre-trade price transparency in the swaps market. To that end, a swap, as defined by 17 C.F.R. Part 1, can be traded on a SEF or pursuant to the rules of a SEF by Eligible Contract Participants (ECPs).
Section 5h(a)(1) of the Act provides that any person who offers a trading system or platform in which more than one market participant has the ability to execute or trade swaps with more than one other market participant on the system or platform must apply to the Commission to register as a SEF or be designated as a DCM operating under the regulatory oversight of the CFTC, unless some exemption or exclusion would apply. Criteria, procedures, and requirements for registration as a SEF are set forth in Section 5 of the Act, 7 U.S.C. 7, and Part 37 of the CFTC’s regulations.
As provided for in Section 37.3(c) of the CFTC’s regulations, an applicant seeking registration as a SEF may request that the Commission grant the applicant temporary registration. An applicant may operate as a SEF upon the Commission granting temporary registration. No applications for temporary registration will be considered after August 5, 2015, pursuant to CFTC regulation 37.3(c)(5).
ONGOING COMPLIANCE WITH CORE PRINCIPLES
To obtain and maintain its registration, a SEF must also comply, on an initial and ongoing basis, with the following fifteen Core Principles established in Section 5h of the CEA, 7 U.S.C. 7b-3 and Part 37 of the CFTC’s regulations and with the implementing regulations under Part 37 of the CFTC’s regulations:
- Compliance with Core Principles
- Compliance with Rules
- Swaps Not Readily Susceptible to Manipulation
- Monitoring of Trading and Trade Processing
- Ability to Obtain Information
- Position Limits or Accountability
- Financial Integrity of Transactions
- Emergency Authority
- Timely Publication of Trading Information
- Recordkeeping and Reporting
- Antitrust Considerations
- Conflicts of Interest
- Financial Resources
- System Safeguards
- Designation of Chief Compliance Officer
Appendix A to Part 37 of the CFTC’s regulations includes Form SEF, which contains instructions and a list of necessary information and documentation required to initiate the registration process. Appendix B to Part 37 provides guidance on complying with certain core principles. For certain core principles, Appendix B also provides acceptable practices for meeting selected requirements.
The Division of Market Oversight’s Compliance Branch conducts regular reviews of each SEF’s ongoing compliance with core principles and the implementing regulations under Part 37, examining the self-regulatory programs operated by the exchange in order to enforce its rules, prevent market manipulation and customer and market abuses, and ensure the recording and safe storage of trade information, among other requirements. These reviews are known as rule enforcement reviews (RERs).
SWAP EXECUTION FACILITY FILINGS
SEFs may implement new rules or rule amendments by filing with the CFTC a certification that the rule or rule amendment complies with the CEA and CFTC regulations and policies and/or by requesting approval from the CFTC, pursuant to the requirements under Part 40 of the CFTC’s regulations. SEFs, like other entities, may submit requests that the CFTC take action on a number of other issues, including requesting no-action relief, interpretations, or guidance on particular issues.
SEFs may also list new products by filing with the CFTC, among other things, a certification that the product complies with the CEA and CFTC regulations and policies and/or by requesting approval from the CFTC.
DORMANT SWAP EXECUTION FACILITIES
A dormant swap execution facility defined in CFTC Regulation 40.1(f), is any SEF on which no trading has occurred during a period of twelve consecutive calendar months, preceding the first day of the most recent calendar month. However, no SEF shall be considered to be dormant if its initial and original Commission order of registration was issued within the preceding 36 consecutive calendar months.
Prior to listing or re-listing products for trading (including listing new contract months in existing products), a dormant SEF must reinstate its registration. To be reinstated, a dormant SEF must submit an application for reinstatement under the procedures found in CFTC Regulation 37.3(b). The application may rely on previously submitted materials if such materials accurately describe the dormant SEF’s conditions at the time that it applies for reinstatement of its registration.