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AEGIS SEF: THE IMPORTANT QUESTIONS

In early 2019, as hedge advisors to hundreds of leading companies, we decided to build a hedging marketplace – because marketplaces are the best way to conduct real-time price discovery as outlined here:

Value of Marketplaces in Hedging

That decision took us on a journey we never expected – and today that hedging marketplace (known as AEGIS SEF) is thriving. We did not set out to be a swap execution facility (SEF). In fact, we never considered the possibility. We learned a lot and are sharing how we got here and our progress since launch.

Why? Because we know there is confusion in the marketplace and that confusion can lead some to guess, speculate, and/or spread misinformation. That isn’t necessary when the facts are available. So we are showing our work – complete with the documents we reviewed with the CFTC, rulebooks, key dates, etc.  
Organizations with exposure to volatile commodity prices now have access to a modern hedging marketplace. That is what matters. The information below can be a bit technical – and only exists as a reference when speaking with someone who claims to have insight into regulations or facts impacting AEGIS SEF. We hope it is helpful.

 

1. Is SEF registration something AEGIS wanted?
Absolutely not. Below you will see we spent significant time, effort, and money challenging the SEF registration requirement and (unsuccessfully) attempting to change the perspective of the Commodity Futures Trading Commission (CFTC). But courts have long given deference to regulators interpreting their own rules. As such, when the CFTC ultimately said we needed to register, we swallowed hard and moved forward.
2. How did the regulatory discussion begin?
Very innocently. We envisioned a hedging marketplace that would enable real-time price discovery and efficient post-trade execution that wasn’t possible through chat and phone-based swap negotiations (herein referred to as “online CTA platform”). In May 2019, outside counsel performed an analysis of the lawfulness of creating this online CTA platform.
3. Did the legal analysis comment on SEF registration?
Yes. While the opinion is subject to attorney/client privilege, it did raise the SEF registration question. However, we viewed the hedging transactions we facilitated as “one to many” rather than “multiple to multiple” because every transaction is between a single customer and multiple financial counterparties (Dealers). We took certain steps suggested in the legal opinion that (we believed) would allow us to operate without registering – and proceeded without speaking to the CFTC.
4. What led AEGIS to speak with the CFTC?
In January 2020, we introduced our online CTA platform to Dealers. Counsel at one Dealer advised the online CTA platform might be a SEF and suggested we speak with CFTC Staff. Our outside counsel approached the Division of Market Oversight (DMO) at the CFTC without disclosing AEGIS as the company (referring to AEGIS as "Firebird"). DMO could not provide definitive guidance given the informal nature of the inquiry but advised we were “asking the right questions.” 

5. Did you formally engage with the CFTC at that point?

Yes. After multiple discussions internally and with the CFTC over several weeks, we (still anonymously) submitted this SEF Inquiry to CFTC DMO Staff in late February 2020 - clearly positioned AGAINST SEF registration.

 

6. Did the CFTC agree with your position?
No. On February 27, 2020, having considered our conversations and memo, the CFTC concluded we were subject to SEF registration. In simple terms, we misunderstood the application of the "multiple to multiple" definition – and what constituted a trading facility.
7. Did AEGIS register based upon this decision?
No. We decided to abandon the online CTA platform. We considered limiting our technology to a “plug-in” that would publish and track transactions in “chats.” We (still anonymously) presented the following memo to the CFTC to assess if the plug-in would trigger SEF registration
8. Did the “plug-in” trigger SEF registration?
No. But it turns out the online CTA platform didn’t trigger it either. In fact, the technology had almost nothing to do with SEF registration. Chats, phone calls, emails, and electronic marketplace are all the same in the eyes of the CFTC. Our core business model was the issue.
 
More about how AEGIS SEF works:AEGIS Swap Execution Facility 

 

9. How did the CFTC determine your core business model is a SEF?

The CFTC wrote: “AEGIS CTA has represented it offers a [voice] RFQ system whereby each RFQ involves one customer using AEGIS CTA to seek quotes from one or more swap dealers, and multiple customers are able to utilize the RFQ system. Thus, DMO staff opined the AEGIS CTA [voice] RFQ system is “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” and meets the SEF definition. The SEF registration applies to all facilities meeting the SEF definition and listing swaps that are subject to CFTC jurisdiction, including commodity swaps such as oil and gas swaps [emphasis added].

In short, we a) have more than one customer and b) facilitate swaps with more than one Dealer. Even though hedges are negotiated on behalf of a single customer at a time - and regardless if it is done via voice, chat, or electronic platform – we were subject to the SEF registration requirement.

 

10. Were you able to rely upon the exclusion from the SEF definition for a one-to-many platform where the sponsoring entity is the counterparty?
No. A hedge advisor is not "the counterparty to all swap contracts..." so this portion of the rule does not apply to hedge advisors. We understand this language to apply to Dealers executing directly with customers.
11. What choice did that leave you?
We could:
a) Register as a SEF, or
b) Cease facilitating hedges on behalf of customers, or
c) Challenge the CFTC on its interpretation of its own rules.
The choice for us was simple. Our customers needed support and we didn't care to engage in a protracted legal fight that we were unlikely to win.
We filed our SEF application on February 3, 2021

 

12. Are other similar hedge advisors required to register as SEFs?

We don't know. But recent CFTC actions and commentary seem to confirm what we learned: 
1. On September 29, 2021, the CFTC issued Staff Advisory Letter 21-19
2. On the same day, the CFTC took enforcement action against Symphony Communications
3. On September 26, 2022, the CFTC took enforcement action against Asset Risk Management

 

13. What happens if a hedge advisor falls within the definition of a SEF, but doesn't register? 
We don't know. Looking at the precedents set above, there is likely to be a fine and, most importantly, a cease-and-desist order preventing the hedge advisor from facilitating hedges for customers
14. Are there conflicts being a hedge advisor and a SEF? 
No. Per CFTC guidance, we established two separate regulated entities. AEGIS CTA, LLC recommends and facilitates hedges for customers (the hedge advisor). AEGIS SEF, LLC operates the regulated swap execution platform under a CFTC-approved Rulebook. Read more about the actions we have taken to avoid conflicts here.
15. Did you bring back the online CTA platform?
Yes. But a much better version. Our approved marketplace distributes trade information impartially, collects bids and offers simultaneously, performs surveillance, executes transactions, feeds downstream systems, creates auditable records, and enables insightful analytics. In short, we are able to perform real-time price discovery and efficiently execute.
16. How many Dealers are executing hedges on AEGIS SEF?
Sixteen (16) Dealers have signed definitive documentation to execute swaps on AEGIS SEF – including U.S. money center/regional banks, Canadian banks, and non-bank swap dealers. See our Feb 2023 press release for reference.

17. Is there more than one way to execute hedges on AEGIS SEF?

Yes. Hedges can be executed through either the:
a. Request for Quote (RFQ) Function, or
b. Offline Execution Functionality (OEF), or
c. Central Limit Order Book.
Multiple execution methods provide Dealers flexibility to engage on AEGIS SEF as they complete technology diligence. Each method is detailed in Sections 4.7, 4.8 and 4.8A beginning on Page 48 of our published Rulebook.

 

18. How many hedges have been executed on AEGIS SEF?
Over 120,000 contracts representing over $6.4B of underlying value have been executed on AEGIS SEF through February 2023. You can see AEGIS SEF’s momentum through our publicly reported volumes.
19. Are there fees to execute hedges on AEGIS SEF?
Yes. It is free for Participants and Dealers to participate; however, the winning Dealer in a transaction pays a small fee to cover technology and regulatory expenses (e.g., one-fortieth (1/40th) of a penny per MMBtu of natural gas. Learn more about SEF transaction fees here
20. Do some Dealers perform their own regulatory reporting?
Yes. AEGIS SEF reports for most Dealers; however, Dealers have the option to maintain reporting if they prefer to limit any internal process changes. Click on the Rulebook link above and review Section 4.18.4 beginning on Page 64 to learn more. See all compliance documents here
21. Has AEGIS reconfirmed the SEF registration requirement with the CFTC in light of ongoing “market confusion?”
Yes. Many times. Most recently, on March 2, 2023, we reviewed multiple swap facilitation scenarios with DMO Staff. The intent was to determine which, if any, of the scenarios would trigger the SEF registration requirement in the event AEGIS CTA were to alter its business model. We won’t speak for DMO Staff but note they have been very consistent in their interpretation – and other hedge advisors would be well-served to have a similar conversation. Here is the document we reviewed

 

22. Have other hedge advisors approached the CFTC?

We don’t know. But some questions to ask any hedge advisor proposing to manage your hedging program:
1.  Can I see your hedging marketplace?
2.  How do you perform real-time price discovery if you can’t collect quotes simultaneously?
3.  Do you have more than one customer?
4.  Do you work with more than one Dealer?
5.  Have you spoken with the CFTC to confirm if your business is not subject to SEF registration?
6.  Can I see that correspondence?
You need a hedge advisor that can negotiate with multiple Dealers simultaneously. And you need a hedge advisor that is executing hedges in compliance with regulations. 

 

At AEGIS, we are committed to

While others debate the SEF registration requirement, we stay focused on these commitments and ensure our customers have access to forward-thinking, impactful, and compliant capabilities. We have certainly been advised that this level of transparency is unprecedented – but you deserve the facts and “doing things others won’t” is core to our culture.  

Disclaimer: This communication is not required to be, and has not been, filed with the CFTC. The CFTC does not pass upon the adequacy or accuracy of this disclosure. Consequently, the CFTC has not reviewed or approved this communication.

 

Like more detail? 

Fortunately, the CFTC clarified SEF registration requirements in September 2021. The document to the right includes AEGIS notes alongside the actual CFTC Advisory 21-19

Hearing something different? 

In the end, the CFTC has the final say.
If you are receiving conflicting information, please contact the CFTC anonymously and simply describe the work your hedge advisor performs or proposes to perform.

 

For questions, please contact the CFTC directly by visiting www.cftc.gov or by calling 202-418-5000. A specific list can be found here
To reach the Division of Market Oversight, please refer to the contact information provided in Staff Advisory 21-19 to reach specific contacts. You can find that here

What could that conversation look like with the CFTC?

 

Regulatory compliance is a big deal. Take the time to be confident.

AEGIS SEF Overview

 

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