The Division of Market Oversight (DMO) of the Commodity Futures Trading Commission (CFTC) has withdrawn its previous staff advisory letter on swap execution facility (SEF) registration requirements (Letter 21-19).
Published on March 13, CFTC’s staff letter 25-05 (Letter 25-05) withdrew Letter 21-19 due to DMO’s understanding that it “created regulatory uncertainty” regarding whether certain entities operating in the swaps markets were required to register as SEFs. Letter 21-19 was therefore withdrawn with immediate effect.
The withdrawal of Letter 21-19 has removed what was seen by many parts of the swaps industry as a problematic widening of the interpretation of SEF regulatory requirements, which was difficult to apply and raised more questions than it answered.
A Look Back at Letter 21-19 and SEF Registration Requirements
Letter 21-19 was published in September 2021 as a “reminder” for entities of the SEF registration requirements under the Commodity Exchange Act (CEA). The entities specifically in scope of the remainder were those: (1) facilitating trading or execution of swaps through one-to-many or bilateral communications; (2) facilitating trading or execution of swaps that are not subject to the trade execution requirement under the CEA; (3) providing non-electronic means for the execution of swaps; or (4) falling within the SEF definition and operated by an entity currently registered with the CFTC in some other capacity, such as a commodity trading advisor (CTA) or an introducing broker.
In relation to the first set of entities (i.e., facilities offering one-to-many or bilateral communications), the CEA defines a SEF as, in relevant part, “a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system.” Prior to Letter 21-19, the wider swaps industry had interpreted this as multiple-to-multiple trading; in other words, two or more market participants interacting with two or more other market participants to execute swaps. Letter 21-19 drastically increased the scope of such SEF requirement, however, by providing that the multiple-to-multiple trading requirement could be met even if (1) the platform only allows bilateral or one-to-one communications; and (2) multiple participants cannot simultaneously request, make, or accept bids and offers from multiple participants. DMO went on to express its view that a one-to-many system or request for quote (RFQ) system would satisfy the multiple-to-multiple requirement if more than one participant were able to submit an RFQ on the platform.
Letter 21-19 coincided with the CFTC’s settlement of an enforcement action with Symphony Communication Services, LLC (Symphony) for failure to register as a SEF. The CFTC found that Symphony had operated a multiple-to-multiple platform by operating a communications platform that allowed participants to send RFQ messages to multiple other market participants. Subsequently, the CFTC also relied on Letter 21-19 when it issued an order against Asset Risk Management, LLC, a registered CTA, for failing to register as a SEF.
What is the Cross-Border Impact
The potential relaxation of the SEF registration scope in the United States stands in contrast to similar regimes in the EU and the UK. The European Securities and Markets Authority (ESMA) and the UK’s Financial Conduct Authority (FCA) each published guidance in 2023, similar to Letter 21-19, which focused on the registration requirements for multilateral platforms. However, there are no signs that the EU or UK regulatory guidance will be amended. Technology service providers and trading venues may, therefore, wish to reconsider their cross-border service offerings in light of Letter 25-05 and the differing positions in the EU and UK.
Letter 21-19 is available here and Letter 25-05 is available here.