CFTC NEWS AND SPEECHES—CFTC issues No-Action letter on block and cap amendments - 20 October 2023
The Commission’s work on the issue of appropriate swap block thresholds is not done yet.
The Commodity Futures Trading Commission’s Division of Market Oversight (DMO) has issued a letter extending a no-action position taken in CFTC Letter No. 22-03, regarding the compliance dates for certain amendments, adopted in November 2020, to the CFTC’s swap data reporting rules concerning block trades and post-initial cap sizes.
The CFTC press release explains that the DMO will not recommend enforcement action against an entity “for failure to comply with the block and cap amendments before July 1, 2024, provided the entity complies with the CFTC’s block trade and cap size requirements that were in effect on January 1, 2021.”
CFTC Commissioners Summer K. Mersinger and Caroline D. Pham issued a joint statement in support of the staff no-action position in Letter No. 22-03, which extends the deadline for compliance with the Commission’s “swap block thresholds” from December 4, 2023 to July 1, 2024. According to the statement, swap data repositories and market participants established that the extension is appropriate “because of various operational and technological challenges, and resulting inefficiencies, due in part to other global reporting requirements that are happening around the same time.” The statement also cites “unprecedented market shocks, disruptions, and other dislocations in the past several years that have adversely impacted market conditions and liquidity.” Because of this, further study and consideration of changes to the swap block thresholds and their impact on financial stability and systemic risk is warranted, the Commissioners stated.
The Commissioners noted that there has never been a data-driven analysis to determine appropriate swap block thresholds in a considered manner and then explained how the Commission should move forward with respect to swap block thresholds. In particular, the Commissioners opined on the Commission’s increase in the notational percentage to 67 percent, explaining that this meant that fewer swaps would qualify as block trades but that the increase was arbitrary and not based on appropriate data analysis.
In 2020, the Commission adopted substantial rule amendments to improve swap data reporting which offered a perfect opportunity to analyze the data and address the 67 percent threshold, but the Commission “eschewed a data-driven analysis of appropriate swap block thresholds, and instead, simply retained the 67 percent calculation—which, pursuant to the staff’s extension letter, will take effect on July 1, 2024.”
Swap market participants have now been reporting transaction data since December 5, 2022, and in less than two months, there will be a year’s worth of reliable data the Commission can analyze to assess if the 67 percent calculation is justified or whether a lower, or higher percentage would be more appropriate, according to the Commissioners. Continuing, the joint statement explains that “market participants affected by the Commission’s swap block thresholds stand ready to assist with that analysis,” with a subcommittee of the CFTC’s Global Markets Advisory Committee (GMAC) having already made an initial presentation on this subject.
It is the Commissioners’ hope that the decision be informed by careful and comprehensive analysis of reliable data when it is available, but they are doubtful that the analysis can be completed by the July deadline. The Commissioners believe the deadline should be extended until December 4, 2024, because a full year of swap data under the improved reporting rules of 2023 will be available and the Commission can then evaluate the data for six months and have an additional six months to arrange compliance ahead of the December 4, 2024, go-live date.
In concluding, the Commissioners stated that the Commissions work on the issue is not done yet and they hope that the Commission will undertake a data-driven analysis which has not been done before and that the staff remain open-minded to a further extension beyond July 1, 2024, to allow for the analysis to be completed and allow the GMAC to finish its work and present the findings to the Commission.
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