CFTC Issues No-Action Relief for Prime Brokerage Trading on SEFs
The Division of Swap Dealer and Intermediary Oversight (DSIO) of the Commodity Futures Trading Commission has issued no-action relief to swap dealers (SDs) for certain swaps with prime brokerage customers where the customer initiates the swap by executing a trade as agent for the SD on a swap execution facility (SEF).
SDs generally are required to make certain disclosures to non-SD counterparties prior to entering into a swap, unless the transaction is executed anonymously on a designated contract market or a SEF. In a derivatives prime brokerage relationship, a swap can arise automatically between the SD and a non-SD prime brokerage customer as a result of a mirror swap negotiated by the customer on behalf of the SD, in which case the SD has no opportunity to make any disclosures to the customer.
In recognition of that practical problem, DSIO has extended the disclosure requirement exclusion to include transactions occurring off-SEF pursuant to a prime brokerage arrangement, so long as the terms of the off-SEF transaction are determined by a transaction that is executed by the prime brokerage customer for the SD anonymously on a SEF.
CFTC Letter No. 19-06 is available here.