“On July 21, 2010, President Obama signed into law the Dodd-Frank Act. The legislation was enacted to reduce risk, increase transparency, and promote market integrity within the financial system by, among other things, providing for the registration and comprehensive regulation of swap dealers and major swap participants….” (CFTC 17 CFR Part 37)
i. Compliance with core principles
SEFs must operate in compliance with the core principles (outlined below).
ii. Compliance with rules
A SEF must establish a number of rules governing swap trading, have the resources necessary to enforce those rules, and discipline swap participants in violation of the rules. (details)
iii. Swaps not readily susceptible to manipulations
SEFs must only permit trading in swaps which are not easily susceptible to manipulation by calculating their own reference price or using a reliable third-party index.
iv. Monitoring of trading and trade Processing
SEFs are responsible for monitoring swap trades to prevent price manipulation, distortion, and disruptions through the use of real-time monitoring, trade reconstruction, and impartial disciplinary practices. (details)
v. Ability to obtain information
An SEF must establish and enforce rules allowing it to obtain any and all necessary (including non-routine) information, be able to hand that information over to the CFTC upon request, and have the capacity to carry out information-sharing agreements as the CFTC requires.
vi. Position limits or accountability
To reduce the risk of market manipulation, SEFs shall impose position limits or position accountability as it deems necessary. The limits shall be no higher than the Commission’s own limits.
vii. Financial integrity of transactions
SEFs must establish and enforce rules to ensure the financial integrity of their transactions. (details)
iix. Emergency authority
SEFs shall create emergency procedures to be exercised in conjunction with the CFTC, including the authority to liquidate or transfer open positions and suspend or curtail trading.
ix. Timely publication of trading information
SEFs must have the ability to capture information on price, trading volume and other data and make it available in a timely manner.
x. Recordkeeping and reporting
SEFs must maintain all business records, including audit trails, for at least 5 years, and report this information to the CFTC and the SEC as required.
xi. Antitrust consideration
SEFs shall not unreasonably restrict free trade or impose any significant anti-competitive burdens on trades.
xii. Conflicts of interest
SEFs should create rules and procedures to minimize conflicts of interest in its decision-making process, and establish a protocol to deal with any conflicts which do arise.
xiiv. Financial resources
SEFs must have adequate resources to carry out their duties for a one-year period, calculated on a rolling basis. (details)
xiv. System safeguards
SEFs must create a procedure to analyze, identify, and minimize sources of risk, using appropriate procedures and automated systems. They must also create emergency back-up procedures and systems. (details)
xv. Designation of Chief Compliance Officer
An SEF’s board of directors must appoint a Chief Compliance Officer to administer SEF policy and report to the board and to the CFTC. (details)