Five entities that act like derivatives clearing organizations – ASX Clear (Futures) Pty Limited, Japan Securities Clearing Corporation, Korea Exchange, Inc., OTC Clearing Hong Kong Limited, and Shanghai Clearing House (“Relief DCOs”)– clear trades under exemptive orders or a no-action letter issued by staff at the Commodity Futures Trading Commission’s Division of Clearing and Risk. As market participants know, a derivatives clearing organization (“DCO”) reduces market risk by stepping into trades between two parties and facing each. For example, Party A and Party B enter a swap where Party A pays SOFR on a notional amount and Party B pays 3% on the same notional amount. That underlying, original swap between Party A and Party B is the “alpha swap”. Party A and Party B then submit their alpha swap to a DCO, which opens two replacement trades and the alpha swap is terminated. In one replacement trade the DCO will pay Party A 3% on the notional amount and receive SOFR, and in the other replacement trade the DCO will pay Party B SOFR on the notional amount and receive 3%. The DCO will then, in accordance with Part 45 of the Commodity Futures Trading Commission (“CFTC”) regulations, report termination of the alpha swap accepted for clearing and the data for the replacement swaps along with a unique swap identifier for each replacement swap. Under the historic exemptive orders or no-action letter, the Relief DCOs must make the same reports. Because the exemptive orders and no-action letter failed to relieve counterparties to alpha swaps submitted to Relief DCOs of reporting responsibilities, those counterparties remained responsible for reporting under Part 45. This resulted in cost, confusion, and duplicative reporting. Under the fifth CFTC staff letter issued in 2022, the CFTC’s Division of Data won’t recommend enforcement action against counterparties to swaps cleared by Relief DCOs that fail to report termination of the alpha swap or creation and continuation data for the swaps entered into with the Relief DCOs to replace the alpha swap, or fail to create unique swap identifiers for those replacement swaps. That no-action relief will continue until the earlier of December 5, 2022 or the revocation or expiration of the relevant Relief DCO’s exemptive order or no-action letter.
Relatedly, the CFTC Division of Data states it won’t recommend enforcement action against counterparties that intend to clear a swap with a Relief DCO and submit primary economic term reports as intended to be cleared via a Relief DCO if all data required by Parts 43 and 45 is completed. This no-action position also continues until the earlier of December 5, 2022 or the revocation or expiration of the relevant Relief DCO’s exemptive order or no-action letter.
December 5, 2022 will sound a familiar note for avid CFTC observers. You probably recall seeing that date in the CFTC staff’s 22-03 letter in which the Division of Data offered no-action relief until December 5, 2022 for failures to comply with the CFTC’s 2020 amendments to Parts 43 and 45 of the regulations.
For more information, please see https://www.cftc.gov/LawRegulation/CFTCStaffLetters/letters.htm