So Who Does Need to Register as a SEF?

In September 2021 CFTC staff issued an advisory (Letter 21-19) “reminding entities” of SEF registration requirements.  The “entities” specifically in scope of the reminder, per that advisory, 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 Commodity Exchange Act; (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 or an introducing broker.  

After that first step, in the last few months, other shoes have started to drop.  In September the CFTC, citing Letter 21-19, settled its first enforcement action against a CTA for failure to register as a SEF.  In that case, as alleged, the CTA “often recommended that clients execute swap transactions” on natural gas, natural gas liquids, or crude oil, marketing its services through face-to-face meetings with clients as well as introductions to counterparties ready to transact in such transactions.  In a typical transaction, as described in the settlement order, a client would request swap pricing from the CTA, which would then submit that pricing request to counterparties with which the client had swaps documentation in place.  In some such cases, the CTA would place the request to a specifically identified counterparty; in others, to multiple such counterparties.  In some cases, the CTA was authorized to approve or reject a bid or offer in response to the request, and the swap would be executed.  In others, the CTA would arrange for a negotiation to be concluded face-to-face between the parties.  Notably, the period during which the CTA was engaged in this activity without registering allegedly included the year following staff’s release of the 2021 advisory. 

Perhaps more notably, in July this year the CFTC granted, again, for the first time, SEF registration to a CTA, AEGIS, engaged in activity squarely within scope of Letter 21-19's “reminder.”  AEGIS has been admirably forthcoming about the process by which they arrived at this juncture (starting with the bluntly stated query, prominent on their website: Why did AEGIS register as a SEF?; and the answer, no less bluntly stated: The CFTC said we had to).  As AEGIS tells it, they engaged CFTC staff in extensive advocacy and consultation, determined at first to persuade staff that they were not engaged in registrable activity. 

AEGIS argued that their business model (i) did not include “multiple-to-multiple” execution functionality and (ii) did not involve the operation of a “trading platform” as such – execution took place, at the time, solely through electronic means of communication, bilaterally between market participants.  These conversations clearly informed the guidance in Letter 21-19:

“On several occasions, DMO staff reviewed facilities enabling market participants to communicate bids and offers to other market participants through a “chat” function.  Although each bid or offer was communicated on a one-to-one basis, DMO staff determined some of these facilities satisfied the multiple-to-multiple prong because multiple market participants were able to initiate a one-to-one communication and the participant could choose to send the communication to one or more market participants. Thus, the platforms enabled multiple market participants to accept bids and offers from multiple market participants. The determining factor of the multiple-to-multiple prong depends not on whether communications are bilateral or multilateral, but instead on whether more than one participant has the ability to execute or trade swaps by accepting bids and offers from more than one participant.”

AEGIS’s swaps facilitation (now SEF) business focused, and still focuses, on bilateral swaps, not intended for clearing, primarily for end-users and dealers looking to hedge exposure in the commodities markets.  As a result their rulebook reads quite differently from others in the industry.  All AEGIS swaps are (indeed, under AEGIS SEF Rules, are required to be) bilateral uncleared transactions between participants that are fully disclosed to each other, between which swaps documentation has been executed and made available to the SEF.   (CFTC Rule 37.6(b) contemplates that such documentation is actually submitted to the SEF; CFTC staff has issued no less than four no-action letters deferring that requirement – to the consternation of Commissioners Mersinger and Pham, both of whom issued statements accompanying the AEGIS order of registration urging the Commission to “fix the unworkable rule”).      

The CFTC’s recent enforcement action is here.  CFTC Letter 21-19 is here.  The AEGIS order of registration and accompanying statements are available here.  And the AEGIS website, well worth a visit, is here.