By: Turnkey Trading Partners

Turnkey has an increasing number of customers who specialize in providing traditional voice, block future, and swaps brokerage services. Generally speaking, brokers in this sector are successful when they develop a reputation for efficient, and timely execution and the best bid or ask available.  Recently a case was taken by the CFTC against such a broker for violating industry regulations. Turnkey believes this case is critical to highlight for our customers who offer voice or chat brokerage in swaps or other OTC brokered products.

Summary of CFTC Action

1. Who? Case against Asset Risk Management, LLC (ARM), a registered Commodity Trading Advisor headquartered in Houston, Texas

2. Why? failed to register as a swap execution facility (SEF) as required

    1. From September 2017, ARM operated an unregistered SEF that “provided clients the ability to execute swaps by accepting bids and offers made by multiple participants on a trading system or platform in various swap tenors and volumes.”
    2. Customers both communicated and executed these swaps, via phone, instant messaging, and email.
    3. Excerpted Directly: “During the relevant period, ARM often recommended that clients execute swap transactions in which the underlying commodity was natural gas, natural gas liquids, or crude oil. In a typical swap transaction, ARM received a request for swap pricing from a client and then submitted the pricing request (and sometimes other terms) to counterparties with whom the relevant client had an ISDA agreement. After potential swap counterparties responded to ARM with a proposed price, ARM, if authorized by the client, would approve or reject a price based on the client’s pre-approved threshold, including by communicating “done” via chat or email. ARM would then separately confirm the swap execution with the client. If ARM did not have authority to execute the swap on behalf of the client, ARM would typically join the client on a phone call with the relevant counterparty, during which ARM’s client would agree to the terms.”

3. Results? $200,000 civil monetary penalty; cease and desist from any further violations

4. Precedent and Regulation: In 2021, there was a CFTC staff advisory regarding certain trading activities that may trigger compliance with the SEF registration requirement. Brokers who execute block futures, swaps, or other similar OTC products by phone, chat, or email should be certain that they are not operating as an unregulated SEF by evaluating whether or not they are: a) facilitating trading or execution of swaps through one-to-many or bilateral communications; b) facilitating trading or execution of swaps not subject to the trade execution requirement in CEA section 2(h)(8); c) providing non-electronic means for the execution of swaps; or d) currently registered with the CFTC in some other capacity, such as a commodity trading advisor or an introducing broker, if its facility falls within the SEF definition. However, A determination of whether a particular facility is required to register depends on all of the relevant facts and circumstances of the facility’s operations.

If you are a voice, chat, email execution broker within the swaps space you should diligently evaluate your operations in light of this CFTC order. It is critical that you understand whether or not your firm would be classified as a so called “one to one”, “one to many”, or “many to many” broker with regard to how you’re facilitating the trading or execution of swaps. To learn more please review the CFTC advisory on this topic or contact Turnkey for a consultation today.