Thursday, July 2, 2009

Futures Regulatory Alert #2009 - 9
Documentary Obligations for EFS Transactions via the IDEX SwapDrop Platform

***Please show this to your firm’s Compliance Officer***

Why is NFX issuing this alert?

NASDAQ OMX Futures Exchange^SM (NFX^SM) would like to remind firms that wish to execute Exchange of Futures for Swaps (EFS) transactions in IDEX^TM Interest Rate Swap (IRS) Futures Contracts of their regulatory obligation to maintain appropriate documentation relating to each such transaction pursuant to the Commodity Futures Trading Commission (CFTC), NFX and International Derivatives Clearinghouse (IDCH) rules.

In December 2008, NFX listed IDEX IRS Futures Contract ("IDEX Contracts") cleared by IDCH and made available the IDEX SwapDrop Platform^TM to provide market participants with the ability to exchange privately negotiated over-the-counter (OTC) interest rate swap agreements for cleared IDEX Contracts at IDCH through an EFS mechanism. These IDEX Contracts are NFX-listed "futures contracts" subject to all related futures regulations including recordkeeping and documentation requirements promulgated by the CFTC under the Commodity Exchange Act (the "Act"), IDCH rules and NFX rules as they pertain to EFS transactions in IDEX Contracts.

Under NFX Rule F-8 and IDCH Rule 421, Members, Member Organizations, Authorized Participants and Customers are required to create and maintain documentation of EFS transactions reported through the IDEX SwapDrop Portal.

What compliance guidelines must be followed?

Acceptable documentation of the OTC swap component of the EFS transaction may include a Master Agreement and trade confirmation, or other customary OTC swap transaction documentation.

If parties do not enter the OTC swap components of the transactions into their accounting systems, the only documentation that may be available to the parties is the confirmation created by the parties or by the "Voice Broker" that facilitated the OTC swap transaction.

It is therefore important that parties to EFS transactions work with their Voice Brokers to ensure that any confirms they create address the documentation requirements of NFX and IDCH rules noted above.

Regardless of who prepares the trade confirmation, it is the responsibility of both transaction participants, to ensure that they comply with the standards of NFX and IDCH rules. Participants may ultimately choose to rely upon the documentation created by the Voice Brokers but, if this documentation is insufficient in satisfying the Rule requirements, the responsibility for that failure as well as any related regulatory consequence will be borne by the parties to the IDEX Contract EFS transaction.

Who should I contact for more information?

For additional information, contact Joseph P. Cusick, Chief Regulatory Officer, at + 1 215 496 1576.