Swap Execution Facility Requirements: CFTC Proposes Rules for Swap Execution Facility Requirements

Sullivan & Cromwell LLP - January 21, 2011

The Commodity Futures Trading Commission (the “CFTC”) has proposed rules setting forth requirements for Swap Execution Facilities (“SEFs”). SEFs are a new type of regulated marketplace under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). The rules are intended to codify the statutory principles defining the required and permissible activities of SEFs.

A market participant trading on a SEF can avoid executing trades under the proposed rules if the market participant is trading swaps not required to be cleared, executing block trades of swaps or trading illiquid or bespoke swaps. Under the proposed rules, to facilitate trades of swaps that are liquid and not bespoke or traded in blocks, SEFs are subject to specific transparency requirements related to making bids, offers and trades available to all market participants. The proposed rules permit requests for quotes subject to specific requirements and apply cross-trading rules on the timing of trades. One Commissioner dissented and specifically objected to these requirements.

The rules propose to place other obligations on SEFs such as, among other things, the appointment by SEFs of a Chief Compliance Officer who is not the general counsel of the SEF and asset-reserve requirements. Comments to these proposed rules are due March 8, 2011.