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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:
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.
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). For a long time, 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 instant messaging (ICE 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. Our position was 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"). The 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. Plug-In Integrated with Chat Functionality Memo.
8. Did the “plug-in” trigger SEF registration?
No. But it turns out the online CTA platform didn’t trigger it either. We had been looking at the issue incorrectly. While we were correctly registered as a CTA in our role advising customers on the appropriateness and structure of swaps, Staff at the CFTC was purely focused on our role in facilitating the negotiation of these swaps. Regardless of whether we facilitated these negotiations through chats, phone calls, emails, or an electronic marketplace, this facilitation activity requires SEF registration. The graphic below illustrates the decision paths we needed to pursue:
9. How did the CFTC explain the registration requirement to you?
CFTC Staff 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.”
This did not impact our ability to provide hedge advisory services to customers. It simply meant that we had to register as a SEF if we wanted to continue facilitating swap transactions on behalf of our customers.
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 us. We understand this language to apply to Dealers executing directly with customers.
11. What choice did that leave you?
a) Register as a SEF, or
b) Execute hedges on an existing SEF; or
c) Cease facilitating hedges on behalf of customers, or
d) Challenge the CFTC on its interpretation of its own rules.
The choice for us was simple. Our customers needed support, there was not a SEF that facilitated bilateral commodity swaps, 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 create a SEF?
We don't know. The 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 operates a SEF (as interpreted by the CFTC Staff), 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. In fact, a hedge advisor cannot be a SEF precisely to avoid conflicts. As such, we established two separate regulated entities. AEGIS CTA, LLC advises customers on their hedge programs. AEGIS SEF, LLC operates the regulated swap execution platform under a CFTC-approved Rulebook. Any CTA (including AEGIS CTA), can utilize AEGIS SEF to execute hedging transactions. Read more about the actions we have taken to avoid conflicts here.
15. Did you bring back the online CTA platform?
Yes. A much better version. Our approved hedging 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?
Nineteen (19) 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 for hedge advisors to execute hedges on AEGIS SEF?
Yes. Hedges can be executed through either the:
a. Request for Quote (RFQ) Function, or
18. How many hedges have been executed on AEGIS SEF?
Over 200,000 contracts representing over $12B of underlying value have been executed on AEGIS SEF through March 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 on behalf of DMO Staff; however, we have noticed that 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. Below are some questions to ask any hedge advisor proposing to manage your hedging program:
1. Can I see your hedging marketplace?
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.