United States: All Square: Amended CFTC “Block Trade” Definition Officially Effective

By: Cheryl L. Isaac and Michael G. Lee

On 25 May 2022, the U.S. Commodity Futures Trading Commission’s (CFTC) block trade no-action relief, provided in CFTC No-Action Letter (NAL) 20-35, expired. As of that day, all swap execution facilities (SEFs) are required to comply with the amended definition of “block trade” provided under CFTC Regulation 43.2.

“Block trades” are large, privately negotiated (either directly or through a broker) swap transactions that meet certain quantity thresholds. Block trades must qualify for execution apart from the SEF’s order book or trading platform in accordance with the relevant SEF’s rules, pursuant to CFTC Regulations.

Before 2014, CFTC Regulations required block trades to occur away from a SEF’s trading system. In 2014, the CFTC provided no-action relief for SEFs that had rules or procedures to facilitate the execution of block trades for swaps that were intended to be cleared (ITBC) through the SEF’s non-order book trading systems. Swaps are ITBC if they are “intended to be submitted for clearing contemporaneously with execution.” Accordingly, if a swap begins as an uncleared transaction and then is voluntarily submitted for clearing by the counterparties at a later time, the swap would not be considered an ITBC swap.

On 17 September 2020, the CFTC approved various amendments to Part 43 of the CFTC Regulations, including an update to the definition of “block trade.” The updated definition not only codified the 2014 no-action relief that allowed ITBC swap blocks, but it went further to also allow non-ITBC swap block trades to be executed on a SEF’s non-order book trading system. As of 25 May 2022, SEFs are now required to comply with the amended definition of block trade and should endeavor to update all regulatory and compliance materials, including the SEF’s rulebook, accordingly.

Nonsubstantive revisions to a SEF’s rulebook, such as removing references to NAL 20-35, may be made under CFTC Regulation 40.6(d). More substantive revisions would need to be self-certified under CFTC Regulation 40.6(a). Although there is an option to submit the rule for CFTC approval under CFTC Regulation 40.5, we do not anticipate that this option would be likely chosen by any SEF given the availability to self-certify under CFTC Regulation 40.6(a).

On 31 January 2022, the CFTC published NAL 22-03, granting relief from, in part, two CFTC Regulations that impact block trades: CFTC Regulation 43.4(h) (regarding post-initial cap sizes) and CFTC Regulation 43.6 (regarding minimum sizes, notices, eligible parties, and other regulatory requirements applicable to block trades). This relief is not impacted by the expiration of NAL 20-35 and is available until 25 May 2023, unless extended.

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