Live from FIA L&C: Redefining the scope of a Trading Facility | Cadwalader, Wickersham & Taft LLP
This week, FIA L&C conference attendees gathered in Washington, DC, for the first time in three years to discuss several issues with significant potential impact on the markets. One of these challenges is the redefinition of the concept of trading systems for securities and derivatives. In 2021 and 2022, the Commodity Futures Trading Commission (“CFTC”) and the United States Securities and Exchange Commission (“SEC”) took several regulatory actions that will have significant implications for commodity traders as well as the fintech sector.
First, on September 29, 2021, the CFTC issued a notice in which it significantly expanded the contours of what has been established as a swap execution facility (“SEF”) since 2013. Specifically, the he CFTC Notice stated that an entity may need to register as an SEF when: (1) facilitates the trading or execution of swaps through one-to-many or two-way communications; (2) facilitate the trading or execution of swaps not subject to the trade execution requirement under CFTC rules; (3) provide non-electronic means for the execution of swaps; or (4) currently registered with the CFTC in another capacity, such as a commodity trading adviser or an introducing broker, if its establishment falls under the SEF definition.
Importantly, the advisory implies that platforms that only provide chat functionality without the multi-multi execution may still qualify as SEF. As a result, many platforms, such as emerging challenge facilities or traditional communication platforms, may be subject to registration and regulation.
Second, in similar actions, the SEC proposed the ATS rule on January 26, 2022, in which it proposed that platforms qualifying as communications protocol systems register as exchanges or broker-dealers. subject to the requirements of the ATS regulations. If this regulation becomes law, these regulations will significantly expand the definition of “exchange”. In addition, on April 6, 2022, the SEC proposed its Security-Based Swap Execution Facility (“SB SEF”) rulemaking in which it closely followed the provisions set forth by the CFTC regarding SEFs in its rules and notice.
In addition, the European Securities and Markets Authority (“ESMA”), the EU securities regulator, published a consultation paper (CP) on January 28 on what constitutes a multilateral system. also aimed at expanding the reach of regulated trading platforms.
These regulatory actions by the CFTC, SEC, and ESMA indicate that U.S. and global regulators are looking to bring more unregulated trading, reporting, and execution venues that trade derivatives into the regulatory fold. and securities. Establishing such broad and flexible parameters for what constitutes a regulated trading platform will particularly affect the fintech sector and defi platforms and those who trade on them.