U.S. CFTC Withdraws Swap Execution Facility Registration Advisory Effective Immediately

On March 13, 2025, the Division of Market Oversight (DMO) of the Commodity Futures Trading Commission (CFTC) issued CFTC Letter No. 25-05 (the Withdrawal Letter), withdrawing, effective immediately, DMO’s highly controversial CFTC Letter No. 21-19 titled “Staff Advisory on Swap Execution Facility Registration Requirement” (the Advisory).¹

The Withdrawal Letter restores the regulatory framework that existed prior to the Advisory with respect to swap execution facility (SEF) registration and is a welcome development for certain market participants, including, in particular, commodity trading advisors (CTAs) and introducing brokers (IBs) that facilitate the execution of swaps on behalf of their clients.

Key Takeaways

• DMO has withdrawn its highly controversial Advisory, which some have criticized for the uncertainty and confusion it created in the market.

• The withdrawal is effective immediately and restores the regulatory framework that existed prior to the Advisory with respect to SEF registration, including the bounds of the guidance included in the 2013 adopting release accompanying the CFTC’s final SEF rules.²

• Whether an entity operating in the swaps markets is required to register as a SEF will continue to require a facts and circumstances analysis (but such analysis will no longer be burdened by the prior Advisory).

Background

The SEF Definition

Section 1a(50) of the Commodity Exchange Act (CEA) defines a SEF as

a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce, including any trading facility, that — (A) Facilitates the execution of swaps between persons; and (B) is not a designated contract market.

The portion of the SEF statutory definition that states “in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system” is commonly referred to as the “multiple-to-multiple” requirement.

The Advisory

In September 2021, DMO issued the Advisory, intending to “clarify”³ certain trading activities that may trigger the SEF registration requirement set forth in the CEA and CFTC regulations. The Advisory highlighted scenarios where entities may be required to register as SEFs, including

• facilities offering one-to-many or bilateral communications, including (i) platforms that enable market participants to communicate bids and offers to other market participants through a one-to-one online “chat” function and (ii) one-to-many platforms that enable a single requestor to initiate a one-to-many communication by submitting a request for quote to multiple participants

• facilities that facilitate the trading and execution only of swaps not subject to the trade execution requirement in CEA Section 2(h)(8)

• facilities offering nonelectronic means for the execution of swaps

• entities currently registered with the CFTC in some other capacity (e.g., as a CTA or IB) if operating a “facility” that falls within the SEF definition

ARM Enforcement Action

The CFTC relied on the Advisory to enforce its view of the SEF definition in a September 2022 enforcement action against Asset Risk Management, LLC (ARM).⁴

ARM was a CFTC-registered CTA engaged in the business of advising oil and natural gas producers with respect to the mitigation of commodity price risks. From time to time, as part of its advisory business, ARM assisted its clients with the facilitation and execution of swap transactions through (i) obtaining requests for swap pricing from clients, (ii) transmitting those requests to one or more swap counterparties, and (iii) where authorized, approving or rejecting counterparty pricing based on the client’s preapproved threshold, including by communicating “done” via chat or email, thus executing the swaps.

Based on these facts, the CFTC, citing to the Advisory, found that ARM operated an unregistered SEF by providing its “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” (emphasis added).

CMS Enforcement Action

Causing further uncertainty in the market, in August 2024, the CFTC settled charges against Cost Management Solutions, LLC (CMS), finding that it acted as an unregistered IB but not as an unregistered SEF.⁵

CMS was a Texas-based corporation that — unlike ARM — was not registered with the CFTC in any capacity. During the relevant period, CMS facilitated over-the-counter swaps and options in energy commodities between its customers and potential counterparties. CMS’s customers were primarily propane retailers and distributors interested in hedging risk. In a typical transaction, CMS, at a client’s request, contacted two to three potential counterparties for a quote. CMS negotiated on behalf of its client with the counterparties. If the client determined that the quote was acceptable, CMS executed the swap agreement or option transaction on behalf of the client.

Despite the fact that CMS was engaged in swap facilitation activities similar to those described in the ARM order, the CFTC did not find that CMS was also acting as an unregistered SEF, perhaps signaling the CFTC’s departure from the Advisory.

Market Reaction to the Advisory and the ARM and CMS Enforcement Actions

The Advisory and subsequent ARM enforcement action raised questions about the meaning of a “trading system or platform” and required intermediaries facilitating the execution of swaps on behalf of their clients to reevaluate their business models in order to avoid noncompliance. This included IBs arranging swaps not subject to the trade execution requirement in CEA Section 2(h)(8) and CTAs providing transaction execution assistance. It also raised concerns for clients of these intermediaries regarding whether they might be viewed as doing business with unregistered SEFs.

The CFTC’s announcement of the CMS enforcement action resulted in further confusion, causing the market to question whether the CFTC was reversing its prior positions regarding the scope of the SEF registration requirement.

CFTC Letter No. 25-05 and Implications for Market Participants

Following a series of other recent actions⁶ from the CFTC under the leadership of Acting Chairman Caroline Pham focused on regulatory clarity⁷ and getting “back to the basics,”⁸ DMO — on March 13, 2025 — issued the Withdrawal Letter, which withdraws the Advisory in its entirety, effective immediately.

In the Withdrawal Letter, DMO states that the Advisory “created regulatory uncertainty regarding whether certain entities that operate in the swaps market are required to register as SEFs with respect to their particular functions within the swaps markets, as well as the specific attributes of their business models.”

The CFTC did not provide further guidance to replace the Advisory, signaling a return to the regulatory framework that existed prior to such Advisory. Market participants should be aware that the withdrawal of the Advisory does not eliminate the need for SEF registration where otherwise applicable. The withdrawal highlights the continued importance of a “facts and circumstances” analysis of an entity’s operations to determine whether SEF registration is required.

¹ Staff Advisory on Swap Execution Facility Registration Requirement, CFTC Letter No. 21-19, Division of Market Oversight, Commodity Futures Trading Commission (Sept. 29, 2021), available at https://www.cftc.gov/csl/21-19/download.
² See Swap Execution Facilities and Trade Execution Requirement, CFTC, Final Rule, 78 Fed. Reg. 33476 (Jun. 4, 2013), available at https://www.govinfo.gov/content/pkg/FR-2018-11-30/pdf/2018-24642.pdf.
³ CFTC Staff Issues Advisory to Clarify Activities that May Trigger the SEF Registration Requirement, Release Number 8436-21 (Sept. 29, 2021), available at https://www.cftc.gov/PressRoom/PressReleases/8436-21.
⁴ In the Matter of Asset Risk Management, LLC, CFTC No. 22-36 (Sep. 26, 2022), available at https://www.cftc.gov/media/7706/enfassetriskorder092622/download.
⁵ In the Matter of Cost Management Solutions, LLC, CFTC No. 24-09 (Aug. 12, 2024), available at https://www.cftc.gov/media/11071/enfcostmanagementsolutionsorder081224/download.
⁶ See, e.g., Acting Chairman Pham to Launch Public Roundtables on Innovation and Market Structure (Jan. 27, 2025), available at https://www.cftc.gov/PressRoom/PressReleases/9038-25 (press release announcing Acting Chairman Pham’s launch of a series of public roundtables on evolving trends and innovation in market structure); CFTC Division of Enforcement to Refocus on Fraud and Helping Victims, Stop Regulation by Enforcement (Feb. 4, 2025), available at https://www.cftc.gov/PressRoom/PressReleases/9044-25 (press release announcing a reorganization of the Division of Enforcement’s task forces to combat fraud and help victims while ending the practice of regulation by enforcement); CFTC Releases Enforcement Advisory on Self-Reporting, Cooperation, and Remediation (Feb. 25, 2025), available at https://www.cftc.gov/PressRoom/PressReleases/9054-25 (press release announcing the Division of Enforcement’s issuance of an advisory on how it will evaluate self-reporting, cooperation and remediation when considering enforcement actions and penalties).
⁷ See Keynote Address by Acting Chairman Caroline D. Pham, FIA BOCA50 (Mar. 11. 2025), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/opapham13.
⁸ See Acting Chairman Pham: Time For CFTC to Get Back to Basics (Jan. 21, 2025), available at https://www.cftc.gov/PressRoom/PressReleases/9036-25.