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CFTC stands by its line in the sand today: Expect minor adjustments, not wholesale delay

Ever since the swaps market became widely aware of ‘Footnote 88’ late last week, the regulatory spotlight has focused on whether the CFTC would stand firm on the swap execution facility (SEF) rules deadline of 2 October. In preparation, some of the less prepared market participants have been scrambling towards compliance for a far wider range of derivatives than they had been expecting.

The good news is that several firms seem to have been able to make it across the line at the 11^th hour. On September 27, the CFTC approved the ICAP and Thomson Reuters platforms for SEF trading, but a handful of others are still awaiting operational clearance. Additionally, the Commission issued a no-action letter to registered SEF entities on the grounds of specific rule exemptions.

This no-action letter contained temporary exemptions to a number of rules that pertain specifically to registration of SEF participants and data collection, citing concerns that even though the deadline is rapidly approaching new firms would not be able to comply properly. At the end of the day, this means if you have followed the rules and put in your bid, you’re more than likely to be able to keep participating in the market.

Overall, it would appear that the CFTC is adopting an ‘adjust’ don’t delay strategy.

• The government is willing to accept compliant applications up to the last minute and will issue no action letters where necessary
• The market’s  inevitable extension  requests are unlikely to bear fruit (for instance, read SIFMA’s Comments to the CFTC Requesting Relief Relating to SEF Implementation and Swap Trade Execution)
• If the government does not adjust course on its compliance date, expect to see a large amount of fragmentation in the derivatives market in both the US and across the EU (read Tabb’s article ‘SEFs: A very fragmented market‘)
• Calls to take a more holistic and less imperial approach will be considered in due course (for instance, Commissioner O’Malia’s speech entitled ‘Regulatory Harmonisation, Not Imperialism: A Workable Cross-Border Framework’)

Firms should take this as a hint that while the Commission appreciates the difficulty with the robust new rules, it appears that the 2 October deadline will be enforced. This should apply even in the face of a US government shutdown.

Market players cannot afford to wait and do nothing, hoping that the Commission will stall or push the compliance date back. It’s time to inform investors, sort out the data and get the systems ready.  Just don’t forget about the European rules as well.