Derivatives Transaction Execution Facilities

Derivatives transaction execution facilities (DTEFs) are trading facilities that limit access primarily to institutional or otherwise eligible traders and/or limit the products traded. DTEFs, therefore, are able to operate under a lower level of regulation than a designated contract market. Two types of DTEF markets are provided for by Section 5a of the Commodity Exchange Act (CEA), 7 USC 7a: regular DTEFs (or eligible participant DTEFs) and commercial DTEFs (or eligible commercial entity DTEFs).

Section 5a of the CEA, 7 USC 7a, and Part 37 of the CFTC’s regulations, 17 CFR Part 37, set forth the requirements and procedures governing both types of DTEFs.

All Registered DTEFs

All registered DTEFs must meet specified requirements set forth in Section 5a of the CEA and must adhere to nine core principles on an ongoing basis.

1. In general
2. Compliance with rules
3. Monitoring of trading
4. Disclosure of general information
5. Daily publication of trading information
6. Fitness standards
7. Conflicts of interest
8. Recordkeeping
9. Antitrust considerations

Boards of trade may petition the CFTC to determine whether a particular futures or option contract may be traded on a DTEF.

Derivatives Transaction Execution Facilities Registration

Any market that meets the criteria may operate as a DTEF by applying to be registered with the CFTC. Criteria, procedures and requirements for registration as a DTEF are set forth in Section 5a of the CEA, 7 USC § 7a, and Part 37 of the CFTC’s regulations. Appendices A and B provide specific information on these requirements and guidance to applicants seeking to become registered as a DTEF.

Regular Derivatives Transaction Execution Facilities

Regular DTEFs must limit the products that are traded on the exchange, but access is available to all eligible traders.

Participants eligible to trade on a regular DTEF are generally limited to institutional traders and non-institutional traders trading through certain highly capitalized futures commission merchants (FCMs). Specifically, to trade on a regular DTEF, a trader must be either:

An "eligible contract participant" (as defined in Section 1a(12) of the CEA, 7 USC 1a(12)), at the time the entity enters into the trade; or
A person (including non-institutional traders) that trades through an FCM that is:

registered with the Commission;
a member of a futures self-regulatory organization or, if the person trades only security futures products on the facility, a national securities association registered under Section 15A(a) of the Securities Exchange Act of 1934;
a clearing member of a derivatives clearing organization; and
has net capital of at least $20,000,000.

Products eligible for listing on a regular DTEF are specified in Section 5a of the CEA, 7 USC 7a, which provides that DTEFs may list contracts based on underlying products that:

have a nearly inexhaustible deliverable supply, have a deliverable supply that is sufficiently large that the contract is highly unlikely to be susceptible to the threat of manipulation; or have no cash market;
are security futures products and the registered DTEF is a national securities exchange registered under the Securities Exchange Act of 1934; or
are futures and option contracts on commodities that the Commission may determine, on a case-by-case basis, are highly unlikely to be susceptible to the threat of manipulation, based upon characteristics of the market and the trading facility on which the product would be traded.

The Commission has determined that those commodities described in the first bullet above would be defined as “excluded commodities” under Section 1a(13) of the CEA, 7 USC 1a(13). Section 1a(13) defines an “excluded commodity” to mean, among other things, an interest rate, exchange rate, currency, credit risk or measure, debt instrument, measure of inflation, or other macroeconomic index or measure.

Exempt commodities (generally metals, energy products, and other nonagricultural commodities) would be eligible to trade on a regular DTEF, only if the Commission were to make an individualized determination that the contract is highly unlikely to be susceptible to the threat of manipulation considering market characteristics, surveillance history, self-regulatory record, and capacity of the facility on which it trades. The Commission may make such a determination by rule, regulation or order, after notice and an opportunity for a hearing through submission of written data, views, and arguments. A registered DTEF may request that the Commission make such an individualized determination by filing with the Commission at its Washington, DC headquarters a petition that includes the information specified in CFTC Regulation 37.3(a)(6).

Commercial Derivatives Transaction Execution Facilities

Commercial DTEFs are available only to eligible commercial entities, as defined in Section 1a(11) of the CEA, 7 USC 1a(11), trading for their own accounts. The futures and option contracts eligible for trading on a commercial DTEF may be based on any commodity other than the enumerated agricultural commodities set forth in Section 1a(4) of the CEA.

Participants eligible to trade on a commercial DTEF include “eligible commercial entities,” as defined in Section 1a(11) of the CEA, 7 USC 1a(11), trading for their own accounts, as well as registered floor brokers or floor traders trading for their own accounts whose trading obligations are guaranteed by a registered futures commission merchant.

Products eligible for listing on a commercial DTEF include any commodity other than the enumerated agricultural commodities in Section 1a(4) of the CEA, 7 USC 1a(4), although the CFTC may make a future determination that these enumerated agricultural commodities may be traded on a commercial DTEF. Consistent with Section 5(e)(2) of the CEA, 7 USC 7(e)(2), the Commission would make any such determination in a rulemaking and, if appropriate, would establish conditions for such trading.

Derivatives Transaction Execution Facilities Identification of Participants

A registered DTEF is required to keep a record in permanent form, which shall show the true name, address, and principal occupation or business of any foreign trader executing transactions on the facility or exchange, as well as the name of any person guaranteeing such transactions or exercising any control over the trading of such foreign trader. This does not apply to a derivatives transactions execution facility to the extent transactions in futures or option contracts of foreign traders are executed through, and the resulting transactions are maintained in, accounts carried by a registered futures commission merchant or introducing broker subject to CFTC Regulation 1.37.

Derivatives Transaction Execution Facilities Special Call Provisions

Following registration, and on request by the Commission, under Section 5a of the CEA, 7 USC 7a, and CFTC Regulation 37.8, a registered DTEF shall provide to the Commission such information related to its business as a DTEF, including information relating to data entry and trade details, as the Commission may specify in the special call.

Derivatives Transaction Execution Facilities Identification of Persons Subject to Fitness Requirements

Upon request by the Commission, a registered DTEF must furnish to the Commission a current list of persons subject to fitness requirements in accordance with CFTC Regulation 37.7(e).

Last Updated: September 12, 2007