On April 12, 2023, Tradeweb’s Swap Execution Facility, TW SEF LLC, filed a self-certification[1] for certain overnight index swaps (OIS)[2] referencing USD Secured Overnight Financing Rate (“SOFR”) or GBP Sterling Overnight Index Average (“SONIA”) to be “made available to trade” (“MAT”) on exchange.

If the CFTC approves (or declines to reject) Tradeweb’s MAT determination, effective June 1, 2023, certain OIS referencing SOFR and SONIA will be deemed “made available to trade” and, beginning on June 26, 2023 (i.e., the compliance date), will be required to be executed on a swap execution facility (“SEF”) or a designated contract market (“DCM”).

This would mark the first time in nearly a decade that the CFTC’s trade execution mandate has been expanded to cover additional products. 

Statutory and Regulatory Background

Section 2(h)(8) of the Commodity Exchange Act requires any swap subject to mandatory clearing to be executed on a SEF or DCM unless the swap is not made available to trade on any such exchange. 

Parts 37 and 38 of the CFTC regulations require a SEF or DCM that makes a swap available to trade to submit a determination to that effect to the CFTC pursuant to the procedures applicable to new rule submissions in Part 40 of the CFTC regulations. Under the self-certification process in CFTC regulation 40.5, the MAT determination is deemed approved 45 days after it is received by the CFTC unless the CFTC, by notice, rejects such determination or extends the review period.

Under the compliance scheduled in CFTC regulation 37.12, swaps covered by a MAT determination are subject to the trade execution requirement beginning 30 days after such determination is deemed approved.

Application to SOFR and SONIA Swaps

Last April, the CFTC issued rules amending the types of interest rate swaps (“IRS”) that are required to be submitted for clearing by: (a) phasing out the requirements to clear certain IRS referencing LIBOR and other interbank offered rates and (b) introducing, in their place new requirements to clear IRS referencing the relevant replacement risk-free rates, including certain OIS referencing SOFR and SONIA.[3] The clearing requirements for such SOFR and SONIA swaps went into effect last year.

Therefore, absent notice from the CFTC rejecting TW SEF’s MAT submission or extending its review period, the swaps covered by such submission[4] will be deemed “made available to trade” on June 1, 2023 (i.e., under the schedule proposed by TW SEF in its submission).

Under the compliance schedule in CFTC regulation 37.12, any covered swap entered into 30 days or more after the MAT determination is deemed approved (i.e., June 26, 2023) would be required to be executed on TW SEF (or any other SEF or DCM listing such swaps). To avoid any interruption to trading, market participants that intend to trade any such covered swaps on or after such date should take steps to be onboarded to TW SEF (or any other SEF or DCM offering such swaps) prior to such date. 

In addition, if TW SEF’s submission is deemed approved, TW SEF and any other SEF offering the covered swaps will be required to comply with the requirements applicable to so-called “Required Transactions” under Part 37 of the CFTC regulation—namely, ensuring that such swaps are executed via an Order Book or Request-for-Quote directed to at least three market participants.

FOOTNOTES

[1] TradeWeb’s submission is available here.

[2] Overnight index swaps (OIS) are interest rate swaps for which one leg of the swap is calculated using a fixed rate and the other leg is calculated using a floating rate based on a daily overnight rate (e.g., SOFR).

[3] For additional details on the amended clearing requirement, see our prior blog post, available here.

[4] The submission covers certain fixed-to-floating SOFR swaps with tenors of 2, 3, 4, 5, 6, 7, 10, 12, 15 and 30 years, and SONIA swaps with tenors of 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 12, 15, 20, 25 and 30 years (as further described on pg. 4 of TW SEF’s submission).