November 29, 2022

Volume XII, Number 333

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November 28, 2022

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United States: CFTC Reaches Settlement with Oil and Natural Gas Advisor for Failure to Register as A SEF

On September 26, 2022, amidst a flurry of other enforcement actions, the Commodity Futures Trading Commission (“CFTC”) announced the settlement of its administrative action against Asset Risk Management, LLC (“ARM”) in the amount of $200,000. The CFTC found that ARM operated an unregistered swap execution facility (“SEF”) for a period of 5 years, from September 2017 to the present.

Under the Commodity Exchange Act and CFTC regulations, any entity that operates 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 register as a SEF or designated contract market (“DCM”).  In this case, ARM facilitated, negotiated and executed swaps between and among about 70 clients and 20 to 30 swap counterparties.  In doing so, ARM (i) obtained requests for swap pricing from clients; (ii) transmitted those requests to multiple swap counterparties; (iii) where authorized, approved or rejected counterparty pricing (leading to swap execution); and (iv) subsequently confirmed swap executions with the client.

Even though ARM did not have a traditional exchange platform, the CFTC determined that ARM’s business could indeed be classified as a “multiple-to-multiple” trading system designed to facilitate the execution of swaps.  Interestingly, the ARM Order focused on the ability of multiple participants to execute or trade swaps, regardless of whether the platform actually allows multiple participants to simultaneously request, make, or accept bids and offers.  The CFTC noted that certain “one-to-many” platforms may be considered as multiple-to-multiple trading systems, such as a request-for-quote (“RFQ”) system, where a single requestor initiates a one-to-many RFQ to multiple participants. The CFTC distinguished this type of platform from a liquidity provider, in which one sponsoring entity is the counterparty to all swaps executed through the platform. Under those circumstances, the platform would not be required to register as a SEF or DCM.  

The ARM Order serves as a reminder to derivatives market participants that it is necessary to examine the particular facts and circumstances of any given trading system in order to determine whether a “multiple-to-multiple” platform exists, and whether registration as a SEF or DCM is required.

Spencer D. Warkentin also contributed to this article.

Copyright 2022 K & L GatesNational Law Review, Volume XII, Number 272
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About this Author

Cheryl L. Isaac Washington D.C. Investment Lawyer K&L Gates
Of Counsel

Cheryl Isaac is of counsel in the firm’s Washington office, where she advises clients on compliance with derivatives laws and regulations, including those promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act by the CFTC, SEC, Federal Reserve and other federal regulators. She represents banks, commodity trading firms, asset managers and other market participants (both buy-side and sell-side) in interest rate, commodities and FX derivatives transactions, and has significant experience negotiating cleared derivatives documentation and ISDA Master...

202-778-9089
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