[Federal Register Volume 83, Number 231 (Friday, November 30, 2018)]
[Proposed Rules]
[Pages 61946-62149]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-24642]



[[Page 61945]]

Vol. 83

Friday,

No. 231

November 30, 2018

Part III





 Commodity Futures Trading Commission





-----------------------------------------------------------------------





17 CFR Parts 9, 36, et al.





Swap Execution Facilities and Trade Execution Requirement; Proposed 
Rule

  Federal Register / Vol. 83, No. 231 / Friday, November 30, 2018 / 
Proposed Rules  

[[Page 61946]]


-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 9, 36, 37, 38, 39, and 43

RIN 3038-AE25


Swap Execution Facilities and Trade Execution Requirement

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is proposing amendments to regulations relating to the trade 
execution requirement under the Commodity Exchange Act (``CEA'' or 
``Act'') and amendments to existing regulations relating to swap 
execution facilities (``SEFs'') and designated contract markets 
(``DCMs''). Among other amendments, the proposed rules apply the SEF 
registration requirement to certain swaps broking entities and 
aggregators of single-dealer platforms; broaden the scope of the trade 
execution requirement to include all swaps subject to the clearing 
requirement under the Act that a SEF or a DCM lists for trading; allow 
SEFs to offer flexible execution methods for all swaps that they list 
for trading; amend straight-through processing requirements; and amend 
the block trade definition. The proposed rules, which also include non-
substantive amendments and various conforming changes to other 
Commission regulations, reflect the Commission's enhanced knowledge and 
experience with swaps trading characteristics and would further the 
Dodd-Frank Act's statutory goals for SEFs, i.e., promote more SEF 
trading and pre-trade price transparency in the swaps market. Further, 
the proposed rules are intended to strengthen the existing swaps 
regulatory framework by reducing unnecessary complexity, costs, and 
other burdens that impede SEF development, innovation, and growth.

DATES: Comments must be received on or before February 13, 2019.

ADDRESSES: You may submit comments, identified by ``Swap Execution 
Facilities and Trade Execution Requirement'' and RIN 3038-AE25, by any 
of the following methods:
     CFTC Comments Portal: https://comments.cftc.gov. Select 
the ``Submit Comments'' link for this rulemaking and follow the 
instructions on the Public Comment Form.
     Mail: Send to Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW, Washington, DC 20581.
     Hand Delivery/Courier: Follow the same instructions as for 
Mail, above.
    Please submit your comments using only one of these methods. To 
avoid possible delays with mail or in-person deliveries, submissions 
through the CFTC Comments Portal are encouraged.
    All comments must be submitted in English, or if not, be 
accompanied by an English translation. Comments will be posted as 
received to https://comments.cftc.gov. You should submit only 
information that you wish to make available publicly. If you wish the 
Commission to consider information that you believe is exempt from 
disclosure under the Freedom of Information Act (``FOIA''), a petition 
for confidential treatment of the exempt information may be submitted 
according to the procedures established under Sec.  145.9 of the 
Commission's regulations.\1\
---------------------------------------------------------------------------

    \1\ 17 CFR 145.9.
---------------------------------------------------------------------------

    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all 
submissions from https://comments.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the FOIA.

FOR FURTHER INFORMATION CONTACT: Nhan Nguyen, Special Counsel, (202) 
418-5932, [email protected]; Roger Smith, Special Counsel, (202) 418-
5344, [email protected]; or David Van Wagner, Chief Counsel, (202) 418-
5481, [email protected], Division of Market Oversight; Michael 
Penick, Senior Economist, (202) 418-5279, [email protected], Office of 
the Chief Economist, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background and Introduction
    A. Statutory Background: The Dodd-Frank Act
    B. Regulatory History: The Part 37 Rules
    1. Challenges of Existing Regulatory Approach
    a. Lack of MAT Determinations
    b. Swaps Market Characteristics
    c. Operational Complexities and Costs
    C. Proposed Approach
    D. Summary of Proposed Revisions
    E. Consultation With Other U.S. Financial Regulators
II. Part 9--Rules Relating To Review of Exchange Disciplinary, 
Access Denial or Other Adverse Actions
III. Part 36--Trade Execution Requirement
IV. Part 37--Subpart A: General Provisions
    A. Sec.  37.1--Scope
    B. Sec.  37.2--Applicable Provisions and Definitions
    1. Sec.  37.2(a)--Applicable Provisions
    2. Sec.  37.2(b)--Definition of ``Market Participant''
    a. Applicability of Sec.  37.404(b) to Market Participants
    b. SEF Jurisdiction Over Clients of Market Participants
    C. Sec.  37.3--Requirements and Procedures for Registration
    1. Sec.  37.3(a)--Requirements for Registration
    a. Footnote 88
    b. Single-Dealer Aggregator Platforms
    c. Swaps Broking Entities, Including Interdealer Brokers
    (1) Structure and Operations of Swaps Broking Entities, 
Including Interdealer Brokers
    (2) SEF Registration Requirement for Swaps Broking Entities, 
Including Interdealer Brokers
    d. Foreign Swaps Broking Entities and Other Foreign Multilateral 
Swaps Trading Facilities
    (1) Proposed Delay of SEF Registration Requirement
    (2) Proposed Conditions for Delay of SEF Registration 
Requirement
    2. Sec.  37.3(a)(2) Through (3)--Minimum Trading Functionality 
and Order Book Definition
    3. Sec.  37.3(b)--Procedures for Registration
    a. Elimination of Temporary Registration
    b. Sec.  37.3(b)(1)--Application for Registration
    (1) Form SEF Exhibits--Business Organization
    (2) Form SEF Exhibits--Financial Information
    (3) Form SEF Exhibits--Compliance
    (4) Form SEF Exhibits--Operational Capability
    (5) Other Form SEF Amendments
    (6) Request for Legal Entity Identifier
    c. Sec.  37.2(b)(2)--Request for Confidential Treatment
    d. Sec.  37.3(b)(3)--Amendment of Application for Registration
    e. Sec.  37.3(b)(4)--Effect of Incomplete Application
    f. Sec.  37.3(b)(5)--Commission Review Period
    g. Sec.  37.3(b)(6)--Commission Determination
    4. Sec.  37.3(c)--Amendment to an Order of Registration
    5. Sec.  37.3(d)--Reinstatement of Dormant Registration
    6. Sec.  37.3(e)--Request for Transfer of Registration
    7. Sec.  37.3(f)--Request for Withdrawal of Application for 
Registration
    8. Sec.  37.3(g)--Request for Vacation of Registration
    9. Sec.  37.3(h)--Delegation of Authority
    D. Sec.  37.4--Procedures for Implementing Rules
    E. Sec.  37.5--Provision of Information Relating to a Swap 
Execution Facility

[[Page 61947]]

    1. Sec.  37.5(a)--Request for Information
    2. Sec.  37.5(b)--Demonstration of Compliance
    3. Sec.  37.5(c)--Equity Interest Transfer
    4. Sec.  37.5(d)--Delegation of Authority
    F. Sec.  37.6--Enforceability
    1. Sec.  37.6(a)--Enforceability of Transactions
    2. Sec.  37.6(b)--Swap Documentation
    a. Sec.  37.6(b)(1)--Legally Binding Documentation
    b. Sec.  37.6(b)(2)--Requirements for Swap Documentation
    G. Sec.  37.7--Prohibited Use of Data Collected for Regulatory 
Purposes
    H. Sec.  37.8--Boards of Trade Operating Both a Designated 
Contract Market and a Swap Execution Facility
    I. Sec.  37.9--Methods of Execution for Required and Permitted 
Transactions; Sec.  37.10--Process for a Swap Execution Facility To 
Make a Swap Available to Trade; Sec.  37.12--Trade Execution 
Compliance Schedule; Sec.  38.11--Trade Execution Compliance 
Schedule; Sec.  38.12--Process for a Designated Contract Market To 
Make a Swap Available to Trade
    1. Trade Execution Requirement and MAT Process
    2. Execution Method Requirements
    3. Implementation of Existing Requirements
    4. Proposed Approach
    a. Sec.  36.1(a)--Trade Execution Requirement
    b. Elimination of Required Execution Methods
V. Part 37--Subpart B: Core Principle 1 (Compliance With Core 
Principles)
VI. Part 37 Regulations Related to SEF Execution Methods--Subpart C: 
Core Principle 2 (Compliance With Rules)
    A. Sec.  37.201--Requirements for Swap Execution Facility 
Execution Methods
    1. Sec.  37.201(a)--Required Swap Execution Facility Rules
    a. Sec.  37.201(a)(1)--Trading and Execution Protocols and 
Procedures
    b. Sec.  37.201(a)(2)--Discretion
    c. Sec.  37.201(a)(3)--Market Pricing Information
    2. Sec.  37.203(a)--Pre-Arranged Trading Prohibition; Sec.  
37.9(b)--Time Delay Requirement
    a. Sec.  37.201(b)--Pre-Execution Communications
    (1) Exception for Swaps Not Subject to the Trade Execution 
Requirement
    (2) Sec.  37.201(b)(1)--Exception for Package Transactions
    3. Sec.  37.201(c)--SEF Trading Specialists
    a. Sec.  37.201(c)(1)--Definition of ``SEF Trading Specialist''
    b. Sec.  37.201(c)(2)--Fitness
    c. Sec.  37.201(c)(3)--Proficiency Requirements
    d. Sec.  37.201(c)(4)--Ethics Training
    (1) Guidance to Core Principle 2 in Appendix B--Ethics Training
    e. Sec.  37.201(c)(5)--Standards of Conduct
    f. Sec.  37.201(c)(6)--Duty To Supervise
    g. Sec.  37.201(c)(7)--Additional Sources for Compliance
VII. Additional Part 37 Regulations--Subpart C: Core Principle 2 
(Compliance With Rules)
    A. Sec.  37.202--Access Requirements
    1. Sec.  37.202(a)--Impartial Access to Markets, Market 
Services, and Execution Methods
    a. Sec.  37.202(a)(1)--Impartial Access Criteria
    (1) Application of Impartial Access Requirement
    (i) Eligibility and Onboarding Criteria
    (ii) Access to Execution Methods
    (iii) Use of Discretion
    b. Sec.  37.202(a)(2)--Fees
    2. Sec.  37.202(b)--Limitations on Access
    3. Sec.  37.202(c)--Eligibility
    4. Sec.  37.202(d)--Jurisdiction
    B. Sec.  37.203--Rule Enforcement Program
    1. Sec.  37.203(a)--Abusive Trading Practices Prohibited
    2. Sec.  37.203(b)--Authority To Collect Information
    3. Sec.  37.203(c)--Compliance Staff and Resources
    4. Sec.  37.203(d)--Automated Trade Surveillance System
    5. Sec.  37.203(e)--Error Trade Policy
    a. Error Trades--Swaps Submitted for Clearing
    b. Current SEF Error Trade Policies
    c. Sec.  37.203(e)--Error Trade Policy
    6. Sec.  37.203(f)--Investigations
    7. Sec.  37.203(g)--Additional Sources for Compliance
    C. Sec.  37.204--Regulatory Services Provided by a Third Party
    1. Sec.  37.204(a)--Use of Regulatory Service Provider Permitted
    2. Sec.  37.204(b)--Duty To Supervise Regulatory Service 
Provider
    3. Sec.  37.204(c)--Delegation of Authority
    D. Sec.  37.205--Audit Trail
    1. Sec.  37.205(a)--Audit Trail Required
    2. Sec.  37.205(b)--Elements of an Acceptable Audit Trail 
Program
    a. Sec.  37.205(b)(1)--Original Source Documents; Sec.  
37.205(b)(2)--Transaction History Database; Sec.  37.205(b)(3)--
Electronic Analysis Capability
    3. Sec.  37.205(c)--Audit Trail Reconstruction
    E. Sec.  37.206--Disciplinary Procedures and Sanctions
    1. Sec.  37.206(a)--Enforcement Staff
    2. Sec.  37.206(b)--Disciplinary Program
    3. Sec.  37.206(c)--Hearings
    4. Sec.  37.206(d)--Decisions
    5. Sec.  37.206(e)--Disciplinary Sanctions
    6. Sec.  37.206(f)--Warning Letters
    7. Sec.  37.206(g)--Additional Sources for Compliance
    F. Part 9--Rules Relating To Review of Exchange Disciplinary, 
Access Denial or Other Adverse Actions
VIII. Part 37--Subpart D: Core Principle 3 (Swaps Not Readily 
Susceptible to Manipulation)
    A. Sec.  37.301--General Requirements
    1. Appendix C--Demonstration of Compliance That a Swap Contract 
Is Not Readily Susceptible to Manipulation
IX. Part 37--Subpart E: Core Principle 4 (Monitoring of Trading and 
Trade Processing)
    A. Sec.  37.401--General Requirements
    B. Sec.  37.402--Additional Requirements for Physical-Delivery 
Swaps
    C. Sec.  37.403--Additional Requirements for Cash-Settled Swaps
    D. Sec.  37.404--Ability To Obtain Information
    E. Sec.  37.405--Risk Controls for Trading
    F. Sec.  37.406--Trade Reconstruction
    G. Sec.  37.407--Regulatory Service Provider; Sec.  37.408--
Additional Sources for Compliance
X. Part 37--Subpart F: Core Principle 5 (Ability To Obtain 
Information)
    A. Sec.  37.501--Establish and Enforce Rules
    B. Sec.  37.502--Provide Information to the Commission
    C. Sec.  37.503--Information-Sharing
    D. Sec.  37.504--Prohibited Use of Data Collected for Regulatory 
Purposes
XI. Part 37--Subpart G: Core Principle 6 (Position Limits or 
Accountability)
    A. Sec.  37.601--Additional Sources for Compliance; Guidance to 
Core Principle 6 in Appendix B
XII. Part 37--Subpart H: Core Principle 7 (Financial Integrity of 
Transactions); Sec.  39.12--Participant and Product Eligibility
    A. Sec.  37.701--Required Clearing
    B. Sec.  37.702--General Financial Integrity
    1. Sec.  37.702(a)--Minimum Financial Standards
    2. Sec.  37.702(b) and Sec.  39.12(b)(7)--Time Frame for 
Clearing
    a. ``Prompt and Efficient'' Standard and AQATP Standard
    b. Proposed Approach to Straight-Through Processing
    (1) Sec.  37.702(b)(1) and Sec.  39.12(b)(7)(i)(A)--``Prompt, 
Efficient, and Accurate'' Standard
    (2) Sec.  39.12(b)(7)(ii)--AQATP Standard for Registered DCOs
    (3) Sec.  37.702(b)(2) Through (3)--Pre-Execution Credit 
Screening
    3. Applicability of Sec.  37.702(b) to SEFs That Do Not 
Facilitate Clearing
    C. Sec.  37.703--Monitoring for Financial Soundness
XIII. Part 37--Subpart I: Core Principle 8 (Emergency Authority)
    A. Sec.  37.801--Additional Sources for Compliance
XIV. Part 37--Subpart J: Core Principle 9 (Timely Publication of 
Trading Information)
XV. Part 37--Subpart K: Core Principle 10 (Recordkeeping and 
Reporting)
XVI. Part 37--Subpart L: Core Principle 11 (Antitrust 
Considerations)
XVII. Part 37--Subpart M: Core Principle 12 (Conflicts of Interest)
XVIII. Part 37--Subpart N: Core Principle 13 (Financial Resources)
    A. Sec.  37.1301--General Requirements
    1. Sec.  37.1301(a)
    2. Sec.  37.1301(b)
    3. Sec.  37.1301(c)
    B. Sec.  37.1302--Types of Financial Resources
    C. Sec.  37.1303--Liquidity of Financial Resources
    D. Sec.  37.1304--Computation of Costs To Meet Financial 
Resources Requirement
    1. Acceptable Practices to Core Principle 13 in Appendix B
    E. Sec.  37.1305--Valuation of Financial Resources
    F. Sec.  37.1306--Reporting to the Commission
    1. Sec.  37.1306(a)
    2. Sec.  37.1306(b)
    3. Sec.  37.1306(c)
    4. Sec.  37.1306(d)
    5. Sec.  37.1306(e)

[[Page 61948]]

    G. Sec.  37.1307--Delegation of Authority
XIX. Part 37--Subpart O: Core Principle 14 (System Safeguards)
    A. Sec.  37.1401(c)
    B. Sec.  37.1401(g)--Program of Risk Analysis and Oversight 
Technology Questionnaire
    C. Sec.  37.1401(j)
XX. Part 37--Subpart P: Core Principle 15 (Designation of Chief 
Compliance Officer)
    A. Sec.  37.1501--Chief Compliance Officer
    1. Sec.  37.1501(a)--Definitions
    2. Sec.  37.1501(b)--Chief Compliance Officer
    a. Acceptable Practices to Core Principle 15 in Appendix B
    3. Sec.  37.1501(c)--Duties of Chief Compliance Officer
    4. Sec.  37.1501(d)--Preparation of Annual Compliance Report
    5. Sec.  37.1501(e)--Submission of Annual Compliance Report and 
Related Matters
    6. Sec.  37.1501(f)--Recordkeeping
    7. Sec.  37.1501(g)--Delegation of Authority
XXI. Part 36--Trade Execution Requirement
    A. Sec.  36.1--Trade Execution Requirement
    1. Sec.  36.1(a)--Trade Execution Requirement
    2. Sec.  36.1(b)--Exemption for Certain Swaps Listed Only by 
Exempt SEFs
    a. Discussion of CEA Section 4(c) Enumerated Factors
    3. Sec.  36.1(c)--Exemption for Swap Transactions Excepted or 
Exempted From the Clearing Requirement Under Part 50
    a. Discussion of CEA Section 4(c) Enumerated Factors
    4. Sec.  36.1(d)--Exemption for Swaps Executed With Bond 
Issuance
    a. Discussion of CEA Section 4(c) Enumerated Factors
    5. Sec.  36.1(e)--Exemption for Swaps Executed Between 
Affiliates That Elect To Clear
    a. Discussion of CEA Section 4(c) Enumerated Factors
    B. Sec.  36.2--Registry of Registered Entities Listing Swaps 
Subject to the Trade Execution Requirement; Appendix A to Part 36--
Form TER
    C. Sec.  36.3--Trade Execution Requirement Compliance Schedule
    1. Sec.  36.3(c)(1)--Category 1 Entities
    2. Sec.  36.3(c)(2)--Category 2 Entities
    3. Sec.  36.3(c)(3)--Other Counterparties
    4. Sec.  36.3(e)--Future Compliance Schedules
XXII. Part 43--Sec.  43.2--Definition of ``Block Trade''
    A. Sec.  43.2--Definition--Block Trade; Sec.  37.203(a)--
Elimination of Block Trade Exception to Pre-Arranged Trading
XXIII. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    1. Information Provided by Reporting Entities/Persons
    a. Sec.  37.3(a)--Requirements for Registration
    b. Sec.  37.3(b)--Procedures for Registration
    c. Sec.  37.3(c)--Amendment to an Order of Registration
    d. Sec.  37.5(c)--Provision of Information Relating to a Swap 
Execution Facility
    e. Sec.  37.6(b)(1)--Legally Binding Documentation
    f. Sec.  37.203(d)--Automated Trade Surveillance System
    g. Sec.  37.203(e)--Error Trade Policy
    h. Sec.  37.205(a)--Audit Trail Required
    i. Sec.  37.205(b)--Elements of an Acceptable Audit Trail 
Program
    j. Sec.  37.205(c)--Audit Trail Reconstruction
    k. Sec. Sec.  37.206(b)-(d)--Disciplinary Program
    l. Sec.  37.401--General Requirements for Monitoring of Trading 
and Trade Processing
    m. Sec.  37.1301(b)--General Requirements for Financial 
Resources
    n. Sec.  37.1306--Financial Reporting to the Commission
    o. Sec.  37.1401(g)--Program of Risk Analysis and Oversight 
Technology Questionnaire
    p. Sec.  37.1501(d)--Preparation of Annual Compliance Report
    q. Part 36--Trade Execution Requirement
    2. Information Collection Comments
    C. Cost-Benefit Considerations
    1. Introduction
    2. Baseline
    3. SEF Registration
    a. Overview
    (1) Application of SEF Registration Requirement
    (2) SEF Registration Process and Related Forms
    b. Benefits
    (1) Application of SEF Registration Requirement
    (2) SEF Registration Process and Related Forms
    c. Costs
    (1) Application of SEF Registration Requirement
    (2) SEF Registration Process and Related Forms
    d. Section 15(a) Factors
    (1) Protection of Market Participants and the Public
    (2) Efficiency, Competitiveness, and Financial Integrity of 
Markets
    (3) Price Discovery
    (4) Sound Risk Management Practices
    (5) Other Public Interest Considerations
    4. Market Structure and Trade Execution
    a. Overview
    (1) Elimination of Minimum Trading Functionality and Execution 
Method Requirements
    (2) Trade Execution Requirement and Elimination of MAT Process
    (3) Pre-Execution Communications and Block Trades
    (4) Impartial Access
    b. Benefits
    (1) Elimination of Minimum Trading Functionality and Execution 
Method Requirements
    (2) Trade Execution Requirement and Elimination of MAT Process
    (3) Pre-Execution Communications and Block Trades
    (4) Impartial Access
    c. Costs
    (1) Elimination of Minimum Trading Functionality and Execution 
Method Requirements
    (2) Trade Execution Requirement and Elimination of MAT Process
    (3) Pre-Execution Communications and Block Trades
    (4) Impartial Access
    d. Section 15(a) Factors
    (1) Protection of Market Participants and the Public
    (2) Efficiency, Competitiveness, and Financial Integrity of 
Markets
    (3) Price Discovery
    (4) Sound Risk Management Practices
    (5) Other Public Interest Considerations
    5. Compliance and SRO Responsibilities
    a. Overview
    (1) SEF Trading Specialists
    (2) Rule Compliance and Enforcement
    (i) Definition of ``Market Participant''
    (ii) Audit Trail and Surveillance Program
    (iii) Compliance and Disciplinary Programs
    (iv) Regulatory Service Provider
    (3) Error Trade Policy
    (4) Chief Compliance Officer
    (5) Recordkeeping, Reporting, and Information-Sharing
    (i) Equity Interest Transfer
    (ii) Confirmation and Trade Evidence Record
    (iii) Information-Sharing
    (6) System Safeguards
    b. Benefits
    (1) SEF Trading Specialists
    (2) Rule Compliance and Enforcement
    (i) Definition of ``Market Participant''
    (ii) Audit Trail and Surveillance Program
    (iii) Compliance and Disciplinary Programs
    (iv) Regulatory Service Provider
    (3) Error Trade Policy
    (4) Chief Compliance Officer
    (5) Recordkeeping, Reporting, and Information-Sharing
    (i) Equity Interest Transfer
    (ii) Confirmation and Trade Evidence Record
    (iii) Information-Sharing
    (6) System Safeguards
    c. Costs
    (1) SEF Trading Specialists
    (2) Rule Compliance and Enforcement
    (i) Definition of ``Market Participant''
    (ii) Audit Trail and Surveillance Program
    (iii) Compliance and Disciplinary Programs
    (iv) Regulatory Service Provider
    (3) Error Trade Policy
    (4) Chief Compliance Officer
    (5) Recordkeeping, Reporting, and Information-Sharing
    (i) Equity Interest Transfer
    (ii) Confirmation and Trade Evidence Record
    (iii) Information-Sharing
    (6) System Safeguards
    d. Section 15(a) Factors
    (1) Protection of Market Participants and the Public
    (2) Efficiency, Competitiveness, and Financial Integrity of 
Markets
    (3) Price Discovery
    (4) Sound Risk Management Practices
    (5) Other Public Interest Considerations
    6. Design and Monitoring of Swaps
    a. Overview
    (1) Swaps Not Readily Susceptible to Manipulation
    (2) Monitoring of Trading and Trade Processing
    b. Benefits
    (1) Swaps Not Readily Susceptible to Manipulation
    (2) Monitoring of Trading and Trade Processing
    c. Costs
    (1) Swaps Not Readily Susceptible to Manipulation

[[Page 61949]]

    (2) Monitoring of Trading and Trade Processing
    d. Section 15(a) Factors
    (1) Protection of Market Participants and the Public
    (2) Efficiency, Competitiveness, and Financial Integrity of 
Markets
    (3) Price Discovery
    (4) Sound Risk Management Practices
    (5) Other Public Interest Considerations
    7. Financial Integrity of Transactions
    a. Overview
    b. Benefits
    c. Costs
    d. Section 15(a) Factors
    (1) Protection of Market Participants and the Public
    (2) Efficiency, Competitiveness, and Financial Integrity of 
Markets
    (3) Price Discovery
    (4) Sound Risk Management Practices
    (5) Other Public Interest Considerations
    8. Financial Resources
    a. Overview
    b. Benefits
    c. Costs
    d. Section 15(a) Factors
    (1) Protection of Market Participants and the Public
    (2) Efficiency, Competitiveness, and Financial Integrity of 
Markets
    (3) Price Discovery
    (4) Sound Risk Management Practices
    (5) Other Public Interest Considerations
    D. Antitrust Considerations

I. Background and Introduction

A. Statutory Background: The Dodd-Frank Act

    Title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (``Dodd-Frank Act'') \2\ amended the Commodity Exchange 
Act (``CEA'' or ``Act'') \3\ to establish a comprehensive new swaps 
regulatory framework that includes the registration and the oversight 
of swap execution facilities (``SEFs'').\4\ As amended, CEA section 
1a(50) defines a SEF as a trading system or platform that allows 
multiple participants to execute or trade swaps with multiple 
participants through any means of interstate commerce.\5\ CEA section 
5h(a)(1) establishes the SEF registration requirement, which requires 
an entity to register as a SEF prior to operating a facility for the 
trading or processing of swaps.\6\ CEA section 5h(f) requires 
registered SEFs to comply with fifteen core principles.\7\ Further, the 
trade execution requirement in CEA section 2(h)(8) provides that swap 
transactions that are subject to the clearing requirement in CEA 
section 2(h)(1)(A) \8\ must be executed on a DCM, SEF, or a SEF that is 
exempt from registration pursuant to CEA section 5h(g) (``Exempt 
SEF''),\9\ unless no DCM or SEF \10\ ``makes the swap available to 
trade'' or the related transaction is subject to a clearing requirement 
exception pursuant to CEA section 2(h)(7).
---------------------------------------------------------------------------

    \2\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, tit. VII, 124 Stat. 1376 (2010) (codified 
as amended in various sections of 7 U.S.C.), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/file/2013-12242a.pdf.
    \3\ 7 U.S.C. 1 et seq.
    \4\ 7 U.S.C. 7b-3 (adding a new CEA section 5h to establish a 
registration requirement and regulatory regime for SEFs).
    \5\ As amended by the Dodd-Frank Act, CEA section 1a(50) 
specifically defines a ``swap execution facility'' 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 
facilitates the execution of swaps between persons; and is not a 
designated contract market. 7 U.S.C. 1a(50).
    \6\ CEA section 5h(a)(1) states that no person may operate a 
facility for the trading or processing of swaps unless the facility 
is registered as a SEF or as a DCM under section 5h. 7 U.S.C. 7b-
3(a)(1).
    \7\ 7 U.S.C. 7b-3(f).
    \8\ Section 723(a)(3) of the Dodd-Frank Act added a new CEA 
section 2(h) to establish the clearing requirement for swaps. 7 
U.S.C. 2(h). CEA section 2(h)(1)(A) provides that it is unlawful for 
any person to engage in a swap unless that person submits such swap 
for clearing to a derivatives clearing organization that is 
registered under the Act or a derivatives clearing organization that 
is exempt from registration under this Act if the swap is required 
to be cleared. 7 U.S.C. 2(h)(1)(A). CEA section 2(h)(2) specifies 
the process for the Commission to review and determine whether a 
swap, group, category, type or class of swap should be subject to 
the clearing requirement. 7 U.S.C. 2(h)(2). The Commission further 
implemented the clearing determination process under part 50, which 
also specifies the swaps that are currently subject to the 
requirement. 17 CFR part 50.
    \9\ The Commission notes that CEA section 2(h)(8)(A)(ii) 
contains a typographical error that specifies CEA section 5h(f), 
rather than CEA section 5h(g), as the provision that allows the 
Commission to exempt a SEF from registration. Where appropriate, the 
Commission corrects this reference in the discussion herein.
    \10\ CEA sections 2(h)(8)(A)(i)-(ii) provide that with respect 
to transactions involving swaps subject to the clearing requirement, 
counterparties shall execute the transaction on a board of trade 
designated as a contract market under section 5; or execute the 
transaction on a swap execution facility registered under 5h or a 
swap execution facility that is exempt from registration under 
section 5h(g) of the Act. Given this reference in CEA section 
2(h)(8)(A)(ii), the Commission accordingly interprets ``swap 
execution facility'' in CEA section 2(h)(8)(B) to include a swap 
execution facility that is exempt from registration pursuant to CEA 
section 5h(g).
---------------------------------------------------------------------------

B. Regulatory History: The Part 37 Rules

    Pursuant to its discretionary rulemaking authority in CEA sections 
5h(f)(1) and 8a(5), the Commission identified the relevant areas in 
which the statutory SEF framework would benefit from additional rules 
or regulations.\11\ Accordingly, the Commission adopted the part 37 
rules to implement a regulatory framework for SEFs and for the trading 
and execution of swaps \12\ on such facilities.\13\ Among other 
provisions, subpart A to part 37 applies the SEF registration 
requirement to facilities that meet the statutory SEF definition; 
specifies a minimum trading functionality that a SEF must offer to 
participants for all listed swaps, i.e., an ``Order Book''; \14\ and 
specifies the process for a SEF to make a swap ``available to trade'' 
(``MAT''), i.e., required to be executed on a SEF or DCM pursuant to 
the trade execution requirement.\15\ Subpart A also defines swaps 
subject to the trade execution requirement as ``Required Transactions'' 
and requires a SEF to offer either (i) an Order Book or (ii) a request-
for-quote system that sends a request-for-quote to no less than three 
unaffiliated market participants and operates in conjunction with an 
Order Book (``RFQ System'') for the execution of these 
transactions.\16\ Swaps that are not subject to the trade execution 
requirement are defined as ``Permitted Transactions,'' for which a SEF 
may offer any execution method and for which market participants may 
voluntarily trade on a SEF.\17\ The Commission's regulations specify 
additional requirements that correspond to the use of an Order Book or 
RFQ System to execute Required Transactions.\18\ Subparts B through O

[[Page 61950]]

set forth regulations that further implement each of the fifteen SEF 
core principles in CEA section 5h(f). Appendix B provides further 
guidance and acceptable practices associated with the SEF core 
principles.\19\
---------------------------------------------------------------------------

    \11\ To implement the SEF core principles, Core Principle 1 
provides that the Commission may, in its discretion, determine by 
rule or regulation the manner in which SEFs comply with the core 
principles. 7 U.S.C. 7b-3(f)(1)(B).
    \12\ The Commission notes that, unless otherwise stated, the 
terms ``trades,'' ``transactions,'' and ``swaps'' are used 
interchangeably in the discussion herein.
    \13\ Core Principles and Other Requirements for Swap Execution 
Facilities, 78 FR 33476 (Jun. 4, 2013) (``SEF Core Principles Final 
Rule''); Process for a Designated Contract Market or Swap Execution 
Facility To Make a Swap Available to Trade, Swap Transaction 
Compliance and Implementation Schedule, and Trade Execution 
Requirement Under the Commodity Exchange Act, 78 FR 33606 (Jun. 4, 
2013) (``MAT Final Rule'').
    \14\ 17 CFR 37.3(a)(2). An Order Book is defined as (i) an 
``electronic trading facility,'' as that term is defined in CEA 
section 1a(16); (ii) a ``trading facility,'' as that term is defined 
in CEA section 1a(51); or (iii) a trading system or platform in 
which all market participants have the ability to enter multiple 
bids and offers, observe or receive bids and offers entered by other 
market participants, and transact on such bids and offers. 17 CFR 
37.3(a)(3).
    \15\ 17 CFR 37.10. Given that swaps subject to the trade 
execution requirement may also be executed on a DCM, the Commission 
adopted the same process for a registered DCM to make a swap 
``available to trade'' in part 38. 17 CFR 38.12. Accordingly, 
discussion in this notice with respect to the application of the 
trade execution requirement or the MAT process to SEFs should be 
interpreted to also apply to DCMs.
    \16\ 17 CFR 37.9(a). With the exception of block trades, as 
defined under Sec.  43.2, Required Transactions must be executed on 
a SEF's Order Book or RFQ System. 17 CFR 37.9(a)(2)(i).
    \17\ 17 CFR 37.9(c).
    \18\ See infra notes 85 (15-second time delay for the entry of 
pre-arranged or pre-negotiated transactions to an Order Book) and 
242 (additional requirements for RFQ Systems) and accompanying 
discussion.
    \19\ 17 CFR part 37 app. B.
---------------------------------------------------------------------------

    These rules reflect a more limited and prescriptive regulatory 
approach to implementing the statutory provisions and promoting the 
statutory goals of section 5h of the Act, i.e., promoting the trading 
of swaps on SEFs and promoting pre-trade price transparency in the 
swaps market.\20\ In particular, the Commission focused on achieving 
pre-trade price transparency by mandating a minimum trading 
functionality requirement for all swaps listed on a SEF and two 
specific, limited execution methods for Required Transactions. The 
Commission adopted the Order Book requirement both as a minimum trading 
functionality for SEF registration and as an execution method for 
Required Transactions.\21\ To provide some execution flexibility for 
Required Transactions,\22\ the Commission also allowed SEFs to offer an 
RFQ System, as described above.\23\ To further the goal of pre-trade 
price transparency with respect to trading via an RFQ System, however, 
the Commission required that an RFQ must be submitted to three 
unaffiliated market participants and that a requester receive 
applicable firm bids and offers from the Order Book in addition to any 
RFQ responses.\24\ Recognizing that only certain swaps are well-suited 
to be traded and executed through an Order Book or RFQ System, the 
Commission interpreted the trade execution requirement in CEA section 
2(h)(8), in particular the phrase ``makes the swap available to 
trade,'' to have a scope of application that is consistent with the use 
of these methods. Accordingly, the Commission interpreted the phrase, 
which the Act does not otherwise define, to implement a voluntary MAT 
process for determining the swaps that must be executed on a SEF; this 
process primarily focuses on whether a swap has ``sufficient trading 
liquidity'' to be executed via an Order Book or RFQ System.\25\
---------------------------------------------------------------------------

    \20\ 7 U.S.C. 7b-3(e) (specifying the rule of construction for 
CEA section 5h).
    \21\ 17 CFR 37.3(a)(2) (minimum trading functionality 
requirement); 17 CFR 37.9(a)(2)(i)(A) (Required Transactions 
requirement).
    \22\ SEF Core Principles Final Rule at 33564-65.
    \23\ 17 CFR 37.9(a)(3).
    \24\ SEF Core Principles Final Rule at 33497, 33499.
    \25\ MAT Final Rule at 33609 (noting that a MAT determination 
may focus on whether a swap is sufficiently liquid to be subject to 
the trade execution requirement).
---------------------------------------------------------------------------

    The Commission noted that the prescribed trading methods, such as 
the Order Book, are consistent with the SEF definition in CEA section 
1a(50) of the Act as they allow multiple market participants to post 
bids or offers and accept bids and offers that are transparent to 
multiple market participants.\26\ The Commission stated that the RFQ 
System is consistent with the SEF definition because it requires market 
participants to be able to access multiple market participants, but not 
necessarily the entire market.\27\ Further, in response to commenters' 
feedback that the Commission's approach is inconsistent with the Act, 
the Commission stated that the limited execution methods for Required 
Transactions are consistent with the phrase ``through any means of 
interstate commerce'' in the SEF definition because a SEF ``may for 
purposes of execution and communication use `any means of interstate 
commerce,' including, but not limited to, the mail, internet, email, 
and telephone, provided that the chosen execution method satisfies the 
requirements . . . for Order Books or . . . for [RFQ Systems].'' \28\ 
The Commission also noted that a SEF may provide any method of 
execution for Permitted Transactions as further justification for its 
approach under the Act.\29\
---------------------------------------------------------------------------

    \26\ SEF Core Principles Final Rule at 33501.
    \27\ Id. at 33496.
    \28\ Id. at 33501.
    \29\ Id. at 33484.
---------------------------------------------------------------------------

    In adopting a regulatory framework that would effectuate the 
statutory SEF provisions and goals, the Commission relied in part upon 
its experience with the futures market, including DCM oversight and DCM 
core principles implementation.\30\ While the Commission did provide 
flexibility for certain swap requirements relative to the DCM 
rules,\31\ the Commission sought, where possible, to harmonize SEF 
regulations with DCM regulations based on the similarities in the 
statutory core principles between SEFs and DCMs, and the ability of 
both types of entities to offer swaps for trading and execution.\32\
---------------------------------------------------------------------------

    \30\ Id. at 33477.
    \31\ For example, the RFQ System requirement for Required 
Transactions on SEFs is less restrictive than the RFQ-to-all 
approach that is used by some DCMs. The Commission decided that the 
former approach was more appropriate for SEFs due to the less 
standardized nature of the swaps market. SEF Core Principles Final 
Rule at 33497 n.270.
    \32\ Id. at 33478, 33553 (noting the similarities between the 
statutory requirements for SEFs and DCMs).
---------------------------------------------------------------------------

1. Challenges of Existing Regulatory Approach
    The Commission's existing regulatory approach has transitioned some 
degree of swaps trading and market participants to SEFs, but has also 
created several challenges for swaps trading on SEFs, as described 
below.
a. Lack of MAT Determinations
    The voluntary, SEF-driven MAT determination process has resulted in 
a limited set of products that are required to be executed on SEFs. 
Since 2014, SEFs have submitted a limited number of swaps, relative to 
the scope of swaps subject to the clearing requirement, as ``available 
to trade'' to the Commission.\33\ The swaps that SEFs have submitted--
``on-the-run'' index credit default swaps (``CDS'') and fixed-to-
floating interest rate swaps (``IRS'') in benchmark tenors--are 
generally the most standardized and liquid swaps contracts.\34\ Beyond 
this initial set of MAT determinations, the Commission has not received 
any filings for additional swaps despite the subsequent expansion of 
the clearing requirement.\35\

[[Page 61951]]

The lack of additional determinations is partly attributable to market 
participants' concerns over the Commission's required methods of 
execution for Required Transactions.\36\ Based on those concerns, SEFs 
have not pursued making additional swaps subject to the trade execution 
requirement. This lack of additional submissions has effectively 
limited the number of swaps that must be executed on SEFs which has 
limited the amount of trading and liquidity formation occurring on 
SEFs.
---------------------------------------------------------------------------

    \33\ For a list of MAT determinations that have been submitted 
to the Commission, see CFTC, Industry Oversight, Industry Filings, 
Swaps Made Available to Trade Determination, https://sirt.cftc.gov/sirt/sirt.aspx?Topic=%20SwapsMadeAvailableToTradeDetermination. For 
a current list of swaps that have been made ``available to trade'' 
and are subject to the trade execution requirement, see CFTC, 
Industry Oversight, Industry Filings, Swaps Made Available to Trade, 
https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/file/swapsmadeavailablechart.pdf. For a list of swaps 
subject to the clearing requirement, see 17 CFR 50.4; see also CFTC, 
Industry Oversight, Industry Filings, Swaps Subject to Clearing 
Requirement, https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/clearingrequirementcharts9-16.pdf.
    \34\ See, e.g., Bloomberg SEF, Submission No. 2013-R-9, 
Bloomberg SEF LLC--Made Available to Trade (``MAT'') Submission of 
Certain Credit Default Swaps (``CDS'') and Interest Rate Swaps 
(``IRS'') pursuant to [CFTC] Regulation 40.6 at 3 (Dec. 5, 2013) 
(stating that its MAT determination consists of only the most 
standardized and liquid swaps, which represent a majority of market 
traded volume), https://www.cftc.gov/sites/default/files/stellent/groups/public/@otherif/documents/ifdocs/bsefmatdetermltr120513.pdf; 
``TW SEF,TW SEF LLC--Clarification and Amendment to Self-
Certification for Swaps to be Made Available to Trade'' at 8 (Nov. 
29, 2013) (stating that its MAT determinations with respect to IRS 
represent the ``standard benchmarks, which are the most standard, 
liquid, and transparent of the IRS market, and trade with market-
accepted, standard, plain vanilla dates), https://www.cftc.gov/sites/default/files/stellent/groups/public/@otherif/documents/ifdocs/twsefamendmatltr112913.pdf.
    \35\ In 2016, the Commission expanded the clearing requirement 
for IRS in the four classes (fixed-to-floating swaps, basis swaps, 
forward rate agreements, overnight index swaps) to additional 
currencies. CFTC, Press Releases, Release No. 7457-16, CFTC Expands 
Interest Rate Swap Clearing Requirement, https://www.cftc.gov/PressRoom/PressReleases/pr7457-16 (Sept. 28, 2016). See also 
Clearing Requirement Determination Under Section 2(h) of the 
Commodity Exchange Act for Interest Rate Swaps, 81 FR 71202 (Oct. 
14, 2016) (``Second Clearing Determination Final Rule'').
    \36\ See CFTC Public Roundtable: The Made Available to Trade 
Process, 151-152, 192-193 (July 15, 2015), https://www.cftc.gov/idc/groups/public/%40newsroom/documents/file/transcript071515.pdf 
(``2015 MAT Roundtable'') (discussing the prescriptive nature of the 
required methods of execution and noting the relationship to the MAT 
determination process).
---------------------------------------------------------------------------

b. Swaps Market Characteristics
    Over the course of the part 37 implementation process, the 
Commission has gained greater familiarity with the swaps markets, in 
particular the nature of the products and how market participants trade 
and execute those products. Based on what it has learned, the 
Commission believes that the existing regulatory framework has 
contributed to the limited amount of swaps that are subject to the 
trade execution requirement, and therefore, the limited scope of swaps 
trading that occurs on SEFs.
    Swaps consist of many highly variable terms and conditions beyond 
price and size that can be negotiated and tailored to suit a market 
participant's specific and unique needs. While some swaps are 
relatively standardized, others are customized and consist of 
innumerable permutations, making them generally less standardized and 
more bespoke than futures contracts. Given the ability to customize 
swaps to address specific and often large risks that cannot be offset 
through more standardized instruments, the swaps market is generally 
comprised of a relatively concentrated number of sophisticated market 
participants in contrast to the futures market. In this regard, the 
Commission notes that CEA section 2(e) limits swaps trading on SEFs to 
``eligible contract participants'' (``ECPs''), as defined by CEA 
section 1a(18).\37\ These swaps market characteristics contribute to 
varying liquidity profiles for swaps that range from relatively 
illiquid to episodic to relatively liquid.
---------------------------------------------------------------------------

    \37\ 7 U.S.C. 2(e); 7 U.S.C. 1a(18).
---------------------------------------------------------------------------

    Historically, these particular characteristics have contributed to 
the use of a variety of execution methods--electronic, voice-based, or 
a hybrid of both (``voice-assisted'')--by market participants. 
Utilizing one execution method or another depends on considerations 
such as the type of swap, transaction size, complexity, the swap's 
liquidity at a given time, the number of potential liquidity providers, 
and the associated desire to minimize potential information leakage and 
front-running risks. For swaps with standard tenors that are relatively 
liquid, market participants may utilize a method of trading and 
execution, such as an electronic order book platform, that disseminates 
trading interests to all other market participants on the platform. 
Trading and execution in less standardized products, however, generally 
occur on systems or platforms that are more discreet in disseminating 
trading interests, such as auction platforms. The Commission's existing 
approach to required execution methods, as described above, creates a 
tension with swaps market characteristics that necessitate flexible 
execution methods. This tension has otherwise hindered the expansion of 
the trade execution requirement.
c. Operational Complexities and Costs
    The Commission has learned that its approach to other part 37 rules 
may have imposed certain burdens on SEFs, including operating 
complexities and costs that have impeded development, innovation, and 
growth in the swaps market. SEFs have indicated that they are unable to 
comply with some of these requirements because they are impractical or 
unachievable due to technology limitations or incompatible with 
existing market practices. For example, as discussed further below, 
SEFs have informed the Commission that the confirmation requirement for 
uncleared swaps under Sec.  37.6(b) and the electronic analysis 
capability requirements with respect to audit trail data for voice 
orders under Sec.  37.205 have been operationally difficult and 
impractical to implement.\38\ Even where SEFs have been able to comply 
with some of the requirements, they have asserted that the compliance 
costs are high and compliance is unnecessary in helping them satisfy 
their self-regulatory obligations and the SEF core principles. For 
example, SEFs have noted the high costs of the financial resources 
requirements imposed by the Core Principle 13 regulations.\39\ SEFs and 
market participants have attributed the limited development, 
innovation, and growth of SEFs to these ongoing burdens.
---------------------------------------------------------------------------

    \38\ See infra Section IV.F.--Sec.  37.6--Enforceability 
(discussion of SEF confirmation requirements); Section VII.D.--Sec.  
37.205--Audit Trail (discussion of SEF audit trail requirements).
    \39\ See Letter from Wholesale Markets Brokers' Association, 
Americas (``WMBAA''), Swap Execution Facility Regulations, Made 
Available to Trade Determinations, and Swap Trading Requirements at 
5 (Mar. 11, 2016) (``2016 WMBAA Letter''); see also CFTC Letter No. 
17-25, Division of Market Oversight Guidance on Calculating 
Projected Operating Costs By Designated Contract Markets and Swap 
Execution Facilities (Apr. 28, 2017) (``CFTC Letter No. 17-25'').
---------------------------------------------------------------------------

    As a result of these burdens, the Commission believes that a 
significant amount of swaps liquidity formation activity occurs away 
from registered SEFs in a manner similar to the pre-Dodd-Frank Act 
swaps trading environment. These examples include (i) entities that 
aggregate single-dealer platforms to allow market participants to 
obtain indicative or firm pricing and execute swaps with multiple 
single-dealer liquidity providers away from SEFs; and (ii) swaps 
broking entities, including interdealer brokers \40\ that facilitate 
swaps trading between multiple market participants through non-
registered voice or electronic platforms. While some of these 
interdealer brokers are affiliated with registered SEFs, the Commission 
understands that they have nevertheless maintained a bifurcated 
operating structure under which a SEF primarily executes and processes 
orders that have already been negotiated or arranged on an affiliated 
broker platform, in effect limiting a SEF's role to a swaps transaction 
booking and processing engine.\41\ By operating in this manner, the 
Commission believes that many entities have been able to avoid the 
burdens arising from SEF registration and compliance under part 37.
---------------------------------------------------------------------------

    \40\ The Commission believes that most of these swaps broking 
entities are currently registered with the Commission as introducing 
brokers (``IBs''). See infra note 340 and accompanying discussion.
    \41\ The Commission notes that these swaps broking entities and 
their affiliated SEFs primarily operate as part the ``dealer-to-
dealer'' segment of the swaps market, which primarily facilitates 
swaps trading between swap dealers. See infra Section 
VII.A.1.a.(1)(i).--Eligibility and Onboarding Criteria (discussion 
of impartial access requirements).
---------------------------------------------------------------------------

    When necessary or appropriate to mitigate these burdens in the 
course of implementing part 37, Commission staff has issued various 
guidance and time-limited no-action relief to SEFs and market 
participants. The no-action relief has afforded additional time for 
compliance with certain part 37 regulations and related procedures or 
has provided an opportunity to

[[Page 61952]]

determine whether a longer-term regulatory solution--such as those 
proposed in this notice--is warranted.\42\ Where compliance could not 
be achieved or impractical compliance burdens arose from the existing 
part 37 rules, SEFs may have been impeded from pursuing beneficial 
market initiatives, such as developing new trading systems and 
protocols to attract greater swaps liquidity. The Commission believes 
that it is appropriate to address these issues as part of the changes 
to the existing regulations proposed in this notice.
---------------------------------------------------------------------------

    \42\ See infra notes 223 (no-action relief from existing Sec.  
37.6(b) confirmation requirements for uncleared swap transactions 
executed on a SEF), 433 (no-action relief from existing Sec.  37.9 
and Sec.  37.203(a) with respect to the correction of error trades 
on SEFs), 474 (no-action relief from existing Sec.  37.205(a) with 
respect to capturing of trade allocation information in a SEF 
transaction history database), 822 (no-action relief from existing 
Sec.  37.1501(f) with respect to SEF annual compliance report filing 
requirements), 898 (no-action relief from certain ``block trade'' 
definitional requirements under existing Sec.  43.2) and 
accompanying discussion.
---------------------------------------------------------------------------

C. Proposed Approach

    Given the challenges described above and the Commission's enhanced 
knowledge and experience from implementing part 37, the Commission is 
proposing to strengthen its swaps trading regulatory framework, while 
still effectuating the statutory SEF provisions and better promoting 
the statutory SEF goals. The Commission's proposed approach also more 
appropriately accounts for swaps market characteristics and should 
reduce certain complexities and costs that have contributed to a 
significant amount of swaps liquidity formation occurring away from 
SEFs; limited the scope of swaps that are subject to the trade 
execution requirement; and impeded SEF development, innovation, and 
growth. In this regard, the Commission proposes a simple but 
comprehensive approach that provides SEFs with flexibility, where 
appropriate, to calibrate their trading and compliance functions based 
on their respective trading operations and markets. The Commission 
believes that this proposed approach will attract greater liquidity 
formation on SEFs.
    First, the Commission aims to effectuate the SEF registration 
requirement to ensure that multiple-to-multiple trading of swaps occurs 
on a SEF by requiring that swaps broking entities and certain single-
dealer aggregator platforms register as SEFs (emphasis added). In 
particular, consistent with the statutory SEF provisions and goals, 
this proposed rulemaking would apply the SEF registration requirement 
in CEA section 5h(a)(1) and Sec.  37.3(a) to swaps broking entities, 
including interdealer brokers, that are currently registered with the 
Commission as IBs, and their personnel currently facilitating swaps 
trading away from SEFs. Based on its experience and observation of 
market developments since the adoption of part 37, the Commission has 
witnessed the various ways in which swaps broking entities, including 
interdealer brokers, have structured themselves to facilitate swaps 
trading, and therefore liquidity formation, outside of the existing SEF 
regulatory framework.
    Second, the Commission aims to facilitate increased trading and 
liquidity on SEFs by proposing a revised interpretation of the trade 
execution requirement that is consistent with CEA section 2(h)(8). The 
Commission's proposed interpretation would apply the trade execution 
requirement to all swaps that are both subject to the clearing 
requirement under section 2(h)(1) of the Act and listed for trading on 
a SEF. As a result of this approach, the Commission would also withdraw 
the existing voluntary MAT process.
    The proposed expansion of the trade execution requirement is 
expected to capture a greater number of swaps with different liquidity 
profiles, thereby reinforcing the need to establish a more flexible 
regulatory approach to swaps trading and execution that would help 
foster customer choice, promote competition between and innovation by 
SEFs, and better account for fundamental swaps market characteristics. 
Accordingly, the Commission also proposes to allow a SEF to offer any 
method of execution for all swaps trading and execution, rather than 
only an Order Book or RFQ System.
    Rather than dictating certain execution methods for Required 
Transactions, the Commission's proposed flexible approach would enable 
SEFs to provide, and ultimately allow market participants to choose, 
execution methods that are appropriate for the liquidity and other 
characteristics of particular swaps. The Commission's approach should 
also promote pre-trade price transparency in the swaps market by 
allowing execution methods that maximize participation and concentrate 
liquidity during times of episodic liquidity. The Commission believes 
that providing flexibility in execution methods will allow the swaps 
market to continue to naturally evolve and allow SEFs to innovate and 
provide more efficient, transparent, and cost-effective means of 
trading and execution. The Commission also proposes to eliminate the 
minimum trading functionality requirement, which should reduce the 
costs incurred by SEFs to operate and maintain order books that have 
not attracted significant volumes. In lieu of specific execution method 
requirements, the Commission is proposing general disclosure-based 
trading and execution rules that would apply to any execution method 
offered by a SEF.
    In conjunction with allowing SEFs to offer more flexible execution 
methods, the Commission is proposing new rules for certain SEF 
personnel--``SEF trading specialists''--that constitute part of a SEF's 
trading system or platform. The proposed rules require SEFs to adopt 
minimum proficiency testing and ethics training requirements to ensure 
that their trading specialists possess and maintain an adequate level 
of technical knowledge and understand their ethical responsibilities in 
customer trading or execution and fostering liquidity formation. The 
proposed rules would also require SEFs to adopt trading conduct 
standards and a duty of supervision. With the ability to offer more 
flexible execution methods for all swaps, in particular those that 
involve discretion by trading specialists in handling trading or 
execution, the Commission believes that these proposed requirements are 
necessary to enhance professionalism in the swaps market and to promote 
market integrity and fairness. Further, the proposed requirements would 
mandate requisite levels of knowledge and competence that are 
commensurate to other similar requirements established for personnel in 
major trading markets, such as futures and equities.\43\
---------------------------------------------------------------------------

    \43\ See infra note 355.
---------------------------------------------------------------------------

    The Commission is also proposing a series of amendments to 
additional part 37 regulations that implement the SEF core principles. 
These proposed amendments would allow a SEF to better tailor its 
compliance and regulatory oversight programs to its trading operations 
and markets. The Commission believes that these proposed revisions are 
critical to the ability of SEFs to offer the diverse types of execution 
methods that would be available to them under this proposal. Further, 
the proposed rules would streamline and refine some of the existing 
prescriptive requirements applicable to SEFs to better reflect 
technological capabilities and existing market practices in the swaps 
market. The proposed rules would also seek to reduce unnecessary 
compliance costs while still maintaining robust

[[Page 61953]]

compliance programs and consistency with the SEF core principles. The 
ability to tailor compliance and oversight programs is consistent with 
the ``reasonable discretion'' that Core Principle 1 provides SEFs to 
comply with the core principles and mitigates compliance challenges 
that SEFs have encountered in implementing part 37.\44\
---------------------------------------------------------------------------

    \44\ Core Principle 1 states that, unless otherwise determined 
by the Commission by rule or regulation, a SEF shall have reasonable 
discretion in establishing the manner in which it complies with the 
SEF core principles.'' 7 U.S.C. 7b-3(f)(1)(B).
---------------------------------------------------------------------------

    With respect to existing staff guidance and staff no-action relief, 
the Commission would adopt or codify such guidance or relief where 
appropriate. Providing a simple, but more comprehensive regulatory 
approach would help mitigate barriers for market participants to trade 
and execute further on SEFs, which would in turn better promote the 
statutory SEF goals.
    Finally, the proposed rules include non-substantive amendments and 
various conforming changes to relevant provisions in the Commission's 
regulations.
    The Commission believes that the proposed revisions to the part 37 
framework are consistent with the statutory SEF provisions and should 
serve to advance swaps trading on SEFs. The proposed rules are designed 
to more appropriately account for swaps market characteristics, 
especially with respect to the use of a wider array of different 
execution methods to trade and execute a broad scope of swaps with 
varying liquidity characteristics. Accordingly, the proposed rules are 
expected to better promote the development, innovation, and growth of 
the swaps market, with the intent of attracting liquidity formation 
onto SEFs.

D. Summary of Proposed Revisions

    As a general overview of the major changes described in this 
notice, the Commission is proposing:

     Registration: A proposed interpretation to apply the 
statutory SEF registration requirement and the definition of ``swap 
execution facility'' in CEA sections 5h(a)(1) and 1a(50), 
respectively, to certain swaps broking entities, including 
interdealer brokers, as well as aggregators of single-dealer 
platforms. The proposed rules also include revisions to simplify the 
registration process by streamlining Form SEF.
     Trade Execution Requirement: A revised interpretation 
of the trade execution requirement in CEA section 2(h)(8) and new 
rules based upon that interpretation that (i) broaden the scope of 
the trade execution requirement; (ii) create a compliance schedule 
for the expanded requirement; and (iii) provide exemptions from the 
requirement for certain types of swap transactions pursuant to CEA 
section 4(c). Further, the Commission is proposing to require each 
SEF to submit a Form TER that specifies those swaps that it lists 
for trading that are subject to the clearing requirement.
     Execution Methods: New general, disclosure-based 
trading and execution rules under Core Principle 2 that apply to any 
execution method offered by a SEF. These proposed rules would 
replace the Sec.  37.3(a)(2) minimum trading functionality 
requirement and the execution methods prescribed under Sec.  37.9 
for Required Transactions, thereby allowing a SEF to offer flexible 
methods of execution for swaps subject to the trade execution 
requirement. Further, the Commission is also proposing to limit the 
scope of trading-related communications that SEF participants may 
conduct away from a SEF's trading system or platform.
     Proficiency: In conjunction with allowing SEFs to offer 
more flexible methods of execution for swaps subject to the trade 
execution requirement, the Commission is also proposing new rules 
under Core Principle 2 for SEF trading specialists. The proposed 
rules would benefit SEF participants by strengthening market 
integrity and fairness through requirements for SEFs to establish 
proficiency testing and ethics training, trading conduct standards, 
and a duty of supervision.
     Swap Documentation: Amendments to the existing Sec.  
37.6(b) confirmation requirement that would allow a SEF to provide a 
``trade evidence'' record for an uncleared swap that serves as 
evidence of a legally binding swap transaction, but may be 
supplemented by counterparties with additional terms based on 
previously negotiated underlying agreements.
     Impartial Access: Modifications to the existing 
impartial access rules under Sec.  37.202 that would allow a SEF to 
structure participation criteria and trading practices in a manner 
that aligns with the current swaps market structure.
     Self-Regulatory Oversight: Amendments to Sec. Sec.  
37.203-206 under Core Principle 2 that provide a SEF with the 
ability to, among other things, (i) tailor its rule enforcement 
program and disciplinary procedures and sanctions to the 
characteristics of its trading operations and market; (ii) develop 
an audit trail surveillance system that is appropriate to the types 
of available execution methods it offers; and (iii) choose other 
additional types of regulatory service providers to assist with 
fulfilling its oversight duties.
     Product Guidance: Additional guidance, pursuant to Core 
Principle 3, for a SEF to demonstrate that the swaps that it lists 
for trading are not readily susceptible to manipulation.
     Straight-Through Processing: Amendments and 
clarifications to the SEF straight-through processing requirements 
that better reflect existing swaps market practices.
     Financial Resources: Amendments to apply the existing 
Core Principle 13 financial resource requirements in a more 
practical manner to SEF operations. The proposed rule changes 
include amendments to the existing six-month liquidity requirement 
and the addition of new acceptable practices that provide further 
guidelines to SEFs for making a reasonable calculation of their 
projected operating costs.
     Chief Compliance Officer: Amendments to Core Principle 
15 regulations that streamline existing requirements for the chief 
compliance officer (``CCO'') position; allow SEF management to 
exercise discretion in CCO oversight; and simplify the preparation 
and submission of the required annual compliance report.

E. Consultation With Other U.S. Financial Regulators

    In developing these rules, the Commission has consulted with the 
Securities and Exchange Commission, pursuant to section 712(a)(1) of 
the Dodd-Frank Act.\45\
---------------------------------------------------------------------------

    \45\ Dodd-Frank Act, Public Law 111-203, tit. VII, Sec.  
712(a)(1), 124 Stat. 1376 (2010).
---------------------------------------------------------------------------

II. Part 9--Rules Relating To Review of Exchange Disciplinary, Access 
Denial or Other Adverse Actions

    The Commission is proposing non-substantive amendments to part 9 of 
the Commission's regulations that conform to proposed amendments to 
Sec.  37.206--Disciplinary procedures and sanctions. Accordingly, the 
Commission discusses those proposed amendments to part 9 in Section 
VII.F. of this notice in conjunction with its discussion of the 
proposed amendments to Sec.  37.206.

III. Part 36--Trade Execution Requirement

    The Commission is proposing new rules under part 36 of the 
Commission's regulations to implement a proposed revised interpretation 
of the trade execution requirement in CEA section 2(h)(8), which would 
broaden the scope of the requirement to include additional swaps. The 
Commission discusses the proposed implementing rules in Section 
IV.I.4.a. of this notice in conjunction with its discussion of (i) the 
proposed adoption of flexible means of execution and elimination of the 
minimum trading functionality under Sec.  37.3(a)(2); (ii) the 
prescribed execution methods under Sec.  37.9; and (iii) the MAT 
process (and corresponding trade execution compliance schedule) under 
Sec.  37.10, Sec.  37.12, and Sec. Sec.  38.11-12.\46\ Further, the 
Commission discusses the proposed Form TER submission, the proposed 
compliance schedule for the expanded requirement, and proposed 
exemptions from the requirement in Section XXI. of this notice.
---------------------------------------------------------------------------

    \46\ See infra Section IV.I.4.a.--Sec.  36.1(a)--Trade Execution 
Requirement.

---------------------------------------------------------------------------

[[Page 61954]]

IV. Part 37--Subpart A: General Provisions

A. Sec.  37.1--Scope

    Section 37.1 currently clarifies that part 37 applies to every SEF 
that is registered or is applying to become registered as a SEF with 
the Commission. Section 37.1 also clarifies that part 37's 
applicability does not affect the eligibility of a registered SEF or a 
SEF applicant to operate as either a DCM under part 38 of the 
Commission regulations or a swap data repository (``SDR'') under part 
49 of the Commission's regulations.
    The Commission proposes a non-substantive amendment to Sec.  37.1. 
The Commission has not identified any provisions in part 37 that would 
preclude a registered SEF from being eligible to operate as a DCM or an 
SDR; accordingly, the clarifying language may create unnecessary 
ambiguity. Therefore, the Commission proposes a non-substantive 
amendment to eliminate the existing language to avoid any potential 
confusion.

B. Sec.  37.2--Applicable Provisions and Definitions \47\
---------------------------------------------------------------------------

    \47\ The Commission proposes to retitle Sec.  37.2 to 
``Applicable provisions and definitions'' from ``Applicable 
provisions'' based on the proposed addition of Sec.  37.2(b) 
described below.
---------------------------------------------------------------------------

1. Sec.  37.2(a)--Applicable Provisions
    Section 37.2 states that a SEF must comply with part 37 and all 
other applicable Commission regulations, including any related 
definitions and cross-referenced sections. Section 37.2 also identifies 
certain specific pre-Dodd-Frank Act provisions whose applicability to 
SEFs may otherwise not be apparent--in particular, Sec.  1.60 and part 
9 of the Commission's regulations.\48\ The Commission proposes to adopt 
a non-substantive amendment to eliminate the reference to part 9; the 
Commission notes that it has since adopted amendments to part 9 to 
conform to the relevant part 37 regulations.\49\
---------------------------------------------------------------------------

    \48\ Section 1.60 sets forth requirements for futures commission 
merchants (``FCMs'') and DCMs to submit documents requested by the 
Commission that have been filed in any material legal proceeding in 
which the FCM or DCM is a party. 17 CFR 1.60. For a description of 
the Commission's part 9 regulations, see infra Section VII.F.--Part 
9--Rules Relating to Review of Exchange Disciplinary, Access Denial 
or Other Adverse Actions.
    \49\ Technical Amendments to Rules on Registration and Review of 
Exchange Disciplinary, Access Denial, or Other Adverse Actions, 83 
FR 1538 (Jan. 12, 2018). The Commission notes that it is also 
proposing additional amendments to part 9 in this notice that 
conform to the proposed amendments to the Core Principle 2 
regulations discussed herein. The Commission also proposes to 
renumber this provision to subsection (a) based on the proposed 
addition of Sec.  37.2(b) described below.
---------------------------------------------------------------------------

2. Sec.  37.2(b)--Definition of ``Market Participant''
    The Commission proposes a new provision under Sec.  37.2(b) to 
define ``market participant,'' as the term is currently used in part 
37, to clarify a SEF's jurisdiction over the various participants that 
may be involved in trading or executing swaps on its facility. In the 
preamble to the SEF Core Principles Final Rule, the Commission 
specified that a ``market participant'' includes any ``person that 
directly or indirectly effects transactions on the SEF. [The 
definition] includes persons with trading privileges on the SEF and 
persons whose trades are intermediated.'' \50\ This term applies to 
several part 37 rules and triggers certain obligations under the Core 
Principle 2 regulations, which set forth a SEF's self-regulatory 
responsibilities. For example, Sec.  37.206 requires a SEF to establish 
participation rules that broadly impose a SEF's disciplinary authority 
across different categories of participants, including market 
participants.\51\
---------------------------------------------------------------------------

    \50\ SEF Core Principles Final Rule at 33506. See also Division 
of Market Oversight Guidance on Swap Execution Facility Jurisdiction 
(Feb. 10, 2014) (``2014 Staff Jurisdiction Guidance'').
    \51\ 17 CFR 37.206.
---------------------------------------------------------------------------

    In practice, SEFs have created various participation categories, 
including ``direct access,'' ``direct market access,'' and ``sponsored 
access'' to describe how persons connect to their trading systems or 
platforms. For example, the Commission understands that ``direct 
access'' generally refers to participants who have been granted trading 
privileges by a SEF and utilize their own proprietary means, e.g., 
trading credentials and/or front-end interface, to participate directly 
on the SEF.\52\ In contrast, ``direct market access'' or ``sponsored 
access'' generally describe arrangements in which a person uses a SEF 
participant's means, including trading credentials and/or front-end 
systems, to participate directly on the SEF. For example, many SEFs 
allow persons to access their systems or platforms by using the 
credentials and/or front-end functionality provided by a SEF 
participant, such as a futures commission merchant (``FCM'') serving as 
a clearing member on the SEF or an IB.\53\ Finally, some persons may 
participate on a SEF via an agency execution model by directing an 
intermediary, e.g., an FCM or an IB, to submit orders or request quotes 
on their behalf.
---------------------------------------------------------------------------

    \52\ The Commission notes that ``direct access'' also refers to 
participants who may onboard and utilize a SEF's own front-end 
application to trade swaps on the SEF's systems or platforms.
    \53\ The Commission notes that some SEFs refer to such persons 
as ``customers'' of a SEF trading participant.
---------------------------------------------------------------------------

    Notwithstanding these categories, SEFs have generally relied on the 
existing description of ``market participant'' in the SEF Core 
Principles Final Rule preamble to establish jurisdiction over all of 
these participants that access the SEF and trade swaps on a direct or 
indirect basis. Given this established reliance and the continued use 
of this term under the proposed rules, the Commission seeks to codify 
the definition of ``market participant'' in part 37. The Commission 
proposes to define ``market participant'' as any person who accesses a 
SEF (i) through direct access provided by a SEF; (ii) through access or 
functionality provided by a third-party; or (iii) through directing an 
intermediary that accesses a SEF on behalf of such person to trade on 
its behalf. As a threshold matter, the Commission notes that since 
these persons are currently considered ``market participants,'' they 
are already subject to a SEF's jurisdiction. The Commission believes 
that persons accessing a SEF through the various means described above 
interact with other market participants on the SEF and have the ability 
to engage in abusive trading practices. Therefore, they should continue 
to be subject to a SEF's jurisdiction, including disciplinary 
procedures and recordkeeping obligations.\54\
---------------------------------------------------------------------------

    \54\ Although a person who directs an intermediary to trade on 
its behalf does not interact with other market participants in the 
same manner, the Commission believes that such a person could engage 
in abusive trading activity by using more than one intermediary to 
place orders that result in an abusive trading practice. For 
example, a person seeking to achieve a wash result could structure a 
transaction or a series of transactions through separate 
intermediaries, which may give the appearance of bona fide purchases 
and sales, but where the trades have been entered into without the 
intent to take a bona fide market position. While persons do not 
typically access a SEF in this manner, the Commission is mindful 
that the part 37 rules do not preclude this access method and notes 
that some SEFs currently facilitate agency-based trading. 
Accordingly, the Commission believes that a SEF must continue to 
have jurisdiction and disciplinary authority over these persons in 
order to effectively investigate misconduct and prosecute rule 
violations that occur on the SEF.
---------------------------------------------------------------------------

a. Applicability of Sec.  37.404(b) to Market Participants
    The Commission notes in particular that this proposed definition of 
``market participant'' would apply to the recordkeeping requirements 
under Sec.  37.404(b). Section 37.404(b) requires a SEF to adopt rules 
that require its market participants to keep records of their trading, 
including records of their activity in any index or instrument used as 
a reference price, the underlying

[[Page 61955]]

commodity, and related derivatives markets.\55\ Participants who trade 
on a SEF via direct access and participants who use the access or 
functionality of another participant to trade on a SEF have primary 
access to these types of records of their own trading. Further, the 
Commission believes persons who direct an intermediary to trade on 
their behalf are best situated to maintain the records required by 
Sec.  37.404(b). The Commission understands that such intermediaries 
would likely only have access to records of swaps activity occurring on 
the SEF, not necessarily activity by their customers in the index or 
instruments used as a reference price, the underlying commodity, and 
related derivatives markets. Consequently, the Commission believes that 
as ``market participants'' under the proposed definition, they should 
be subject to the recordkeeping requirements under Sec.  37.404(b).\56\
---------------------------------------------------------------------------

    \55\ 17 CFR 37.404(b).
    \56\ The Commission notes that the proposed ``market 
participant'' definition, or the discussion herein, does not alter 
any person's obligations under Sec.  1.35. 17 CFR 1.35.
---------------------------------------------------------------------------

b. SEF Jurisdiction Over Clients of Market Participants
    The proposed ``market participant'' definition would not capture 
clients of asset managers who, as market participants of a SEF, trade 
on a SEF on their clients' behalf.\57\ The Commission recognizes that 
based on general industry practice, these clients have given their 
respective asset managers broad discretion to execute transactions in 
various financial products in different markets, including swaps. When 
asset managers trade on a client's behalf based on that discretion, 
such trading typically occurs without specific knowledge by the client 
as to whether such transactions are occurring on a SEF or the identity 
of the SEFs involved. While the clients themselves ultimately are the 
named counterparties to any transactions executed on their behalf, the 
asset managers are the participants accessing the SEF, and as such, are 
subject to the ``market participant'' definition and the obligations 
thereunder, including the SEF's jurisdiction. The Commission notes that 
asset managers--not their clients--access the SEF and sign onboarding 
documentation subjecting them to the SEF's jurisdiction. Since clients 
of asset managers would not be captured under the proposed market 
participant definition, a SEF would not be required to subject these 
clients to jurisdiction under proposed Sec.  37.202(d).
---------------------------------------------------------------------------

    \57\ The Commission notes that in the SEF Core Principles Final 
Rule, one commenter expressed concern that the vague use of the term 
``market participant'' could potentially subject dealers' customers, 
and thus asset managers and their clients, to onerous requirements. 
SEF Core Principles Final Rule at 33506.
---------------------------------------------------------------------------

    Given that these clients give broad trading discretion to their 
asset managers, the Commission believes that requiring an asset manager 
who accesses and conducts actual trading on a SEF to submit to the 
SEF's jurisdiction is sufficient. This approach ensures that SEFs have 
the ability to take disciplinary action against the individual or 
entity--the asset manager--that could actually engage in potentially 
abusive trading practices on the SEF. The Commission notes that this 
logic would apply in other circumstances where a client gives broad 
trading discretion to another person to trade and execute swap 
transactions on the client's behalf. Therefore, these situations would 
not fall within the third prong of the ``market participant'' 
definition as described above because the client is not ``directing'' 
the intermediary to trade on its behalf.
    With respect to recordkeeping, the Commission understands that 
asset managers typically maintain records of swap transactions on SEFs 
to which their clients are named counterparties. Although asset 
managers would likely not have complete records of their clients' 
trading activity in the index or instruments used as a reference price, 
the underlying commodity, and related derivatives markets under Sec.  
37.404(b), the Commission does not believe that SEFs would need these 
client records for regulatory purposes to the extent that the client is 
not directing the asset manager to trade on its behalf, but rather 
allowing the asset manager to exercise discretion in trading swaps. 
Therefore, the potential risks of manipulation, price distortion, and 
disruptions of the delivery or cash settlement process, which a SEF is 
required to prevent through trade monitoring under Core Principle 4, 
may be less attributable to such clients. To the extent that such risks 
may exist, however, the Commission believes it is sufficient for SEFs 
to have access to records that relate to the asset manager, who is 
conducting the actual swaps trading activity.
Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.2(b). The Commission is particularly interested in the impact of the 
scope of the proposed ``market participant'' definition on various 
constituencies and, therefore, requests comment on the following 
questions:
    (1) Is the Commission's proposed definition of ``market 
participant'' clear and complete? Please comment on any aspect of the 
definition that you believe is not clear or adequately addressed.
    (2) Should the proposed definition of ``market participant'' 
distinguish between clients that give up complete trading discretion to 
an asset manager or another SEF participant and clients that do not so 
give up discretion or only give up partial discretion? If so, on what 
basis should the definition establish such a distinction?
    (3) Do customers currently access a SEF through an intermediary, 
e.g., an FCM or IB, and direct that intermediary to trade on their 
behalf through an agency-based approach? If this is not common, could 
this method of accessing a SEF become more common in the future? If so, 
under what circumstances would this occur? Is the third prong of the 
proposed ``market participant'' definition appropriate, which would 
include a person who directs an intermediary that accesses a SEF to 
trade on its behalf? If not, then why?
    (4) Are there any other methods that are either currently being 
used or could be used to access a SEF? Are there any other examples of 
how a person could access a SEF through access or functionality 
provided by a third party? What type of abusive trading practices, if 
any, could a customer attempt to conduct if the customer directs its 
trading through an intermediary such as an FCM or an IB? Please provide 
examples.
    (5) What type of abusive trading practices, if any, could a client 
of an asset manager conduct if the client gives up complete trading 
discretion to the asset manager? Please provide examples. If the client 
allows an asset manager to exercise discretion in trading swaps, what 
are the risks of manipulation, price distortion, and disruptions of the 
delivery or cash settlement process that may be attributable to the 
client?
    (6) Does a SEF's ability to monitor trading to prevent such risks 
require it to have access to client trading records that include 
activity in the index or instrument used as a reference price, the 
underlying commodity, and related derivatives markets? Are there any 
trading records that are currently created and maintained by clients of 
asset managers that would not also be retained by the asset managers? 
If so, please describe such records. Should SEFs receive such records 
for regulatory purposes?

[[Page 61956]]

C. Sec.  37.3--Requirements and Procedures for Registration

1. Sec.  37.3(a)--Requirements for Registration \58\
---------------------------------------------------------------------------

    \58\ The Commission proposes to renumber paragraph (a)(1) to 
subsection (a) based on the proposed elimination of the minimum 
trading functionality requirement under Sec.  37.3(a)(2) and the 
Order Book definition under Sec.  37.3(a)(3) described below.
---------------------------------------------------------------------------

    CEA section 5h(a)(1) establishes the SEF registration requirement 
and specifies that no person may operate a facility for the trading or 
processing of swaps unless the facility is registered as a SEF or as a 
DCM.\59\ In adopting the SEF Core Principles Final Rule, the Commission 
affirmed its view under existing Sec.  37.3(a)(1) that the broad 
registration requirement in CEA section 5h(a)(1) applies only to 
facilities that meet the SEF definition in CEA section 1a(50).\60\ In 
furtherance of CEA section 5h(a)(1), existing Sec.  37.3(a)(1) states 
that any person operating a facility that offers a trading system or 
platform in which more than one market participant has the ability to 
execute or trade swaps with more than one other market participant on 
the system or platform shall register the facility as a SEF or as a 
DCM.\61\ The Commission believed that this interpretation of the 
statutory SEF registration requirement would help further the statutory 
SEF goals of promoting swaps trading on SEFs and promoting pre-trade 
price transparency in the swaps market.\62\
---------------------------------------------------------------------------

    \59\ CEA section 5h(a)(1) states that no person may operate a 
facility for the trading or processing of swaps unless the facility 
is registered as a swap execution facility or as a designated 
contract market. 7 U.S.C. 7b-3(a)(1).
    \60\ SEF Core Principles Final Rule at 33481. The statutory SEF 
definition in CEA section 1a(50) provides that a SEF 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 in the facility or system, through any means 
of interstate commerce, including any trading facility, that 
facilitates the execution of swaps between persons; and is not a 
designated contract market. 7 U.S.C. 1a(50).
    \61\ 17 CFR 37.3(a)(1). In addition to SEFs, existing Sec.  
37.3(a)(1) also references registration as a DCM. While the trading 
of swaps may occur through either a SEF or a DCM, CEA section 2(e) 
limits the trading of swaps on SEFs to ECPs. Both ECPs and non-ECPs 
may trade swaps through a DCM. 7 U.S.C. 2(e).
    \62\ SEF Core Principles Final Rule at 33481.
---------------------------------------------------------------------------

    As discussed further below, the Commission is proposing to apply 
the SEF registration requirement to several types of entities. The 
Commission does not intend for the discussion in this notice to 
exhaustively address which entities must register as a SEF. Rather, a 
determination of whether an entity must register as a SEF pursuant to 
CEA section 5h(a)(1) would depend on an evaluation of the operations of 
the entity, in particular whether it meets the SEF definition under CEA 
section 1a(50).\63\
---------------------------------------------------------------------------

    \63\ The Commission notes that the preamble to the SEF Core 
Principles Final Rule addresses the applicability of the SEF 
registration requirement in CEA section 5h(a)(1) to several types of 
entities that facilitate swaps activity. SEF Core Principles Final 
Rule at 33479-84. The Commission maintains its approach to these 
types of entities with respect to the registration requirement, 
except as discussed herein. See infra Section IV.C.1.b.--Single-
Dealer Aggregator Platforms (addressing the SEF registration 
requirement with respect to single-dealer aggregator platforms).
---------------------------------------------------------------------------

a. Footnote 88
    As noted above, the Commission has stated that the SEF registration 
requirement in CEA section 5h(a)(1) \64\ only applies to facilities 
that meet the statutory SEF definition in CEA section 1a(50).\65\ In 
footnote 88 of the preamble to the SEF Core Principles Final Rule, the 
Commission specifically stated that the SEF registration requirement is 
not limited by the trade execution requirement in CEA section 2(h)(8), 
``such that only facilities trading swaps subject to the trade 
execution requirement would be required to register as a SEF.\66\ 
Therefore, a facility is required to register as a SEF if it operates 
in a manner that meets the statutory SEF definition even though it only 
executes or trades swaps that are not subject to the trade execution 
[requirement].'' \67\ The Commission adopted this approach despite 
several comments to the proposed part 37 regulations, stating that 
registration as a SEF should only be required if an entity both met the 
SEF definition and offered swaps subject to the trade execution 
requirement.\68\ The Commission stated that its approach to this issue 
is consistent with the statutory SEF registration requirement, the 
statutory SEF definition, and the trade execution requirement; the 
Commission also held that its approach promotes the statutory SEF 
goals.\69\
---------------------------------------------------------------------------

    \64\ 7 U.S.C. 5h(a)(1).
    \65\ 7 U.S.C. 1a(50).
    \66\ SEF Core Principles Final Rule at 33481 n.88.
    \67\ Id.
    \68\ Id. at 33479-80.
    \69\ Id. at 33481-82.
---------------------------------------------------------------------------

    The Commission proposes to codify this existing approach to the SEF 
registration requirement by amending Sec.  37.3(a)(1) to state that a 
person operating a facility that meets the statutory SEF definition 
must register as a SEF without regard to whether the swaps that it 
lists for trading are subject to the trade execution requirement. This 
proposed amendment is intended to clarify that the trade execution 
requirement is not a determinant of whether an entity must register as 
a SEF by codifying the requirement that an entity must register as a 
SEF if it permits trading or execution of any swap, including swaps 
that are not subject to the trade execution requirement, in a manner 
consistent with the statutory SEF definition, i.e., trading or 
execution on a ``multiple-to-multiple'' basis among market 
participants.
Request for Comment
    The Commission requests comment on all aspects of the proposed 
amendment to Sec.  37.3(a).
b. Single-Dealer Aggregator Platforms
    In the preamble to the SEF Core Principles Final Rule, the 
Commission evaluated the application of the statutory SEF registration 
requirement to various swaps market entities, including ``aggregation 
services or portals'' (``SEF Aggregator Portals'') and ``one-to-many 
systems or platforms'' (``Single-Dealer Platforms'').\70\ The 
Commission generally determined that SEF Aggregator Portals and Single-
Dealer Platforms do not meet the statutory SEF definition and therefore 
are not required to register as SEFs.\71\
---------------------------------------------------------------------------

    \70\ SEF Core Principles Final Rule at 33481-83.
    \71\ See id.
---------------------------------------------------------------------------

    As the Commission has gained greater knowledge and experience with 
the swaps market, however, it has become aware of a different type of a 
trading system or platform that implicates the SEF registration 
requirement--trading systems or platforms that aggregate Single-Dealer 
Platforms (``Single-Dealer Aggregator Platforms''). Specifically, a 
Single-Dealer Aggregator Platform typically operates a trading system 
or platform that aggregates multiple Single-Dealer Platforms and, thus, 
enables multiple dealer participants to provide executable bids and 
offers, often via two-way quotes, to multiple non-dealer participants 
on the system or platform. Those non-dealer participants are thus able 
to view, execute, or trade swaps posted to the Single-Dealer Aggregator 
Platform's system or platform from multiple dealer participants. These 
types of systems or platforms, however, have not registered their 
operations as SEFs.
    The Commission believes that the type of trading system or platform 
provided by Single-Dealer Aggregator Platforms should be subject to the 
SEF registration requirement because it meets the SEF definition in CEA 
section 1a(50) by allowing multiple participants to trade swaps by 
accepting bids and offers made by multiple participants in the facility 
or system.\72\
---------------------------------------------------------------------------

    \72\ 7 U.S.C. 1a(50).

---------------------------------------------------------------------------

[[Page 61957]]

    While a Single-Dealer Aggregator Platform has elements that 
resemble a Single-Dealer Platform, which is a type of entity that does 
not trigger the SEF registration requirement,\73\ the Commission 
believes that both types of platforms are distinguishable from one 
another. In the preamble to the SEF Core Principles Final Rule, the 
Commission characterized Single-Dealer Platforms as systems or 
platforms in which a single dealer serves as a single liquidity 
provider by exclusively providing all bids and offers against which its 
customers, i.e., participants, trade or execute swaps.\74\ Accordingly, 
the dealer serves as the counterparty to all swaps executed on its 
trading system or platform.\75\ Unlike the ``one-to-many'' nature of a 
Single-Dealer Platform, however, a Single-Dealer Aggregator Platform 
comports with the SEF definition in CEA section 1a(50) by providing a 
trading system or platform where multiple dealers send or stream bids 
and offers to multiple participants, thereby subjecting them to SEF 
registration.
---------------------------------------------------------------------------

    \73\ SEF Core Principles Final Rule at 33482.
    \74\ Id.
    \75\ See id.
---------------------------------------------------------------------------

    The Commission also believes that Single-Dealer Aggregator 
Platforms are distinguishable from SEF Aggregator Portals. SEF 
Aggregator Portals are services or portals that enable market 
participants to access multiple SEFs, each of which provides a trading 
system or platform that facilitates the trading or execution of swaps 
between multiple participants. In the preamble to the SEF Core 
Principles Final Rule, the Commission stated that a SEF Aggregator 
Portal does not meet the statutory SEF definition because it merely 
provides a portal through which its users may access multiple SEFs, 
rather than providing a venue for the trading or execution of 
swaps.\76\ A SEF Aggregator Portal does not provide a trading system or 
platform where multiple participants have the ability to execute or 
trade swaps with multiple participants within its facility; rather, the 
multiple-to-multiple participant execution or trading occurs on the SEF 
and not the SEF Aggregator Portal. A Single-Dealer Aggregator Platform, 
in contrast, acts as more than a mere portal because it provides a 
system or platform for multiple-to-multiple participant swaps trading 
or execution, thereby subjecting it to the SEF registration 
requirement.
---------------------------------------------------------------------------

    \76\ Although the Commission maintains that a SEF Aggregator 
Portal is generally not required to register as a SEF, such a system 
or platform may be subject to the Act and Commission regulations as 
an IB, as defined in CEA section 1a(31), given that its activity may 
constitute soliciting or accepting orders to be routed to SEFs. 7 
U.S.C. 1a(31).
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of the proposed 
application of the SEF registration requirement to Single-Dealer 
Aggregator Platforms. The Commission may consider alternatives to the 
proposed application of the registration requirement to Single-Dealer 
Aggregator Platforms and requests comment on the following questions:
    (7) Is the Commission's position that Single-Dealer Aggregator 
Platforms meet the SEF definition appropriate? Please explain.
    (8) Should the Commission apply the SEF registration requirement to 
any other type of entity or activity? If so, please describe the type 
of entity and/or activity at issue.
    (9) What factors, if any, would prevent a Single-Dealer Aggregator 
Platform from complying with the SEF registration requirement?
    (10) Is the Commission's existing position that SEF Aggregator 
Portals and Single-Dealer Platforms do not satisfy the statutory SEF 
definition appropriate? Please explain.
c. Swaps Broking Entities, Including Interdealer Brokers
    In the preamble to SEF Core Principles Final Rule, the Commission 
specified whether the SEF registration requirement would apply to 
several specific types of entities,\77\ but did not address whether the 
requirement would apply to swaps broking entities, i.e., interdealer 
brokers, most of whom are registered with the Commission as IBs and 
traditionally facilitate swaps trading in the over-the-counter 
(``OTC'') markets.\78\ As discussed below, the Commission believes that 
the activities of these entities--firms operating trading systems or 
platforms that facilitate swaps trading primarily between swap 
dealers--trigger the SEF registration requirement because they allow 
multiple participants to trade swaps with multiple participants in a 
manner consistent with the language of CEA sections 5h(a)(1) and 1a(50) 
(emphasis added). In light of existing market practices, the Commission 
believes that it is necessary to apply the SEF registration requirement 
to ensure that the multiple-to-multiple ``trading'' that occurs on such 
trading systems or platforms is subject to the Act and Commission's 
regulations as regulated SEFs. This application is consistent with 
Congressional intent, as evidenced by the statutory SEF registration 
requirement and SEF definition, and is further consistent with the 
statutory SEF goals.
---------------------------------------------------------------------------

    \77\ As noted in the preamble to the SEF Core Principles Final 
Rule, the Commission received comments characterizing the SEF 
registration requirement as ambiguous and requesting that the 
Commission provide clarification with respect to certain entities. 
SEF Core Principles Final Rule at 33479-81. In response, the 
Commission provided examples of how the SEF registration requirement 
would or would not apply to ``certain categories of better 
understood facilities.'' Id. at 33482-84. These categories included 
(i) one-to-many systems or platforms; (ii) blind auction systems or 
platforms; (iii) aggregation services or portals; (iv) services 
facilitating portfolio compression and risk mitigation transactions; 
and (v) swap processing services. The Commission, however, 
emphasized that these examples do not ``comprehensively'' address 
all entities that are subject to SEF registration and urged 
participants to seek clarification from the Commission as to how the 
registration requirement applied to their particular operations. Id. 
at 33482.
    \78\ ``Interdealer broker,'' as used in this notice, refers to 
an interdealer broker entity or operation in the aggregate and not 
to a particular individual, i.e., an associated person, who works as 
a broker within the entity or operation. The Commission, however, 
considers such individuals to constitute part of the interdealer 
broker's trading system or platform. See infra Section VI.A.1.--
Sec.  37.201(a)--Required Swap Execution Facility Rules (specifying 
proposed rules for SEF execution methods that apply to activities of 
SEF trading specialists who facilitate swaps trading or execution 
by, among other things, conducting broking-like functions).
---------------------------------------------------------------------------

    The Commission understands that the proposed interpretation may 
require certain non-domestic operations--in particular, foreign swaps 
broking entities, such as foreign interdealer broker operations--to 
seek SEF registration or an exemption from SEF registration pursuant to 
CEA section 5h(g), provided that they fall within the Commission's 
jurisdiction.\79\ Given the potentially complex issues that may arise 
for these entities from the Commission's proposed application of the 
SEF registration requirement, the Commission proposes below to delay 
the compliance date of the requirement with respect to such entities 
and their operations. This proposed delay would allow the Commission to 
further develop its cross-border regulatory regime, including the 
achievement of additional comparability determinations with foreign 
regulators regarding their respective regulatory frameworks for swap 
trading venues located within their respective jurisdictions, i.e., 
foreign multilateral swaps trading

[[Page 61958]]

facilities, which would include foreign swaps broking entities as 
described below. Such a determination would allow such operations to 
seek an exemption from SEF registration. A delay would also provide 
time to foreign swaps broking entities to determine an appropriate 
course of action for their respective operations.\80\
---------------------------------------------------------------------------

    \79\ Pursuant to CEA section 5h(g), the Commission may exempt a 
facility from SEF registration upon a finding that it is subject to 
``comparable, comprehensive supervision and regulation'' under the 
rules and regulations of the facility's home country. 7 U.S.C. 7b-
3(g). See infra Section IV.C.1.d.--Foreign Swaps Broking Entities 
and Other Foreign Multilateral Swaps Trading Facilities.
    \80\ The Commission notes that potential courses of action for 
such entities may include seeking SEF or DCM registration; 
reorganizing into an existing affiliated SEF; working with the 
appropriate regulator within their home country to seek an exemption 
from registration pursuant to CEA section 5h(g); or adjusting their 
activity to avoid the Commission's jurisdiction.
---------------------------------------------------------------------------

(1) Structure and Operations of Swaps Broking Entities, Including 
Interdealer Brokers
    Since adopting part 37, the Commission has developed a deeper 
understanding of the swaps market and has observed how swaps broking 
entities, including interdealer brokers, have structured themselves in 
relation to the current SEF regulatory framework. Interdealer broker 
trading systems or platforms facilitate swaps trading between multiple 
customers by negotiating or arranging swaps through voice-based or 
voice-assisted systems that combine voice functionalities with 
electronic systems such as order books. Swap dealers currently use 
these trading systems or platforms for several purposes, including 
obtaining market color or maintaining pre-trade anonymity in the course 
of trading. Specifically, an interdealer broker typically ``works'' 
customer orders by issuing RFQs-to-all among other customers and 
negotiating or arranging any resultant bids or offers. Once the 
interdealer broker arranges a reciprocating bid and reciprocating 
offer, it sets a price for a specific swap transaction for a particular 
product, which in many cases enables a subsequent ``trade work-up'' 
session.\81\ Finally, the interdealer broker will either facilitate the 
execution of the transaction(s) if the broker is part of a SEF's 
trading system or platform \82\ or will otherwise route the pre-
arranged transaction(s) to a SEF for execution if the broker is not a 
part of the registered SEF.
---------------------------------------------------------------------------

    \81\ For a description of a ``trade work-up'' session, see infra 
note 269.
    \82\ As discussed below, persons operating within these SEFs 
that facilitate swaps trading are commonly referred to as ``trading 
specialists'' or ``execution specialists.'' See infra Section 
VI.A.3.--Sec.  37.201(c)--SEF Trading Specialists.
---------------------------------------------------------------------------

    The Commission notes that interdealer brokers have adopted varying 
approaches to structuring themselves in relation to the SEF regulatory 
framework. Some interdealer brokers have registered components of their 
trading systems or platforms as SEFs. Other interdealer brokers have 
operated very similar trading systems or platforms outside of the 
structure of a SEF, often through registered IB entities, and have 
interacted with a SEF solely as participants of the SEF.\83\ As SEF 
participants, they submit transactions, which have already been 
arranged on those trading systems or platforms, to the SEF for 
execution. Notably, many interdealer brokers have maintained the latter 
approach by operating both a SEF platform and a non-SEF trading system 
or platform simultaneously, using the latter to facilitate the 
interaction of bids and offers and bringing the resulting arranged 
swaps to the SEF for execution.
---------------------------------------------------------------------------

    \83\ In becoming participants on a SEF, interdealer brokers 
typically meet the SEF's access criteria prior to onboarding, which 
provides them with trading privileges on the SEF. As SEF 
participants, they are subject to the SEF's jurisdiction, including 
all applicable disciplinary rules, similar to any other SEF 
participant. Where the SEF offers its participants the ability to 
submit pre-arranged or pre-negotiated transactions for execution, an 
interdealer broker SEF participant will route transactions it has 
arranged between its customers or clients, who are also SEF 
participants, for execution on the SEF.
---------------------------------------------------------------------------

    This bifurcated approach has existed despite the close similarities 
among interdealer broker trading systems or platforms, whether they are 
registered or not as SEFs--they offer trading systems or platforms that 
facilitate the trading of swaps between multiple participants. This 
approach, however, has been justified by the execution of the swap on a 
SEF; as noted, the interdealer brokers that conduct activity on non-SEF 
platforms ultimately route the pre-arranged transactions to a SEF where 
they are executed. This approach seems premised on the view that 
because the execution occurs on a registered SEF, the facilitating 
interdealer broker does not need to register as a SEF, notwithstanding 
its role in negotiating or arranging the transaction(s).
    To facilitate trading in Required Transactions outside the SEF, 
these interdealer broker trading systems or platforms typically operate 
outside of SEFs pursuant to the time delay requirement for Required 
Transactions under Sec.  37.9(b).\84\ Under Sec.  37.9(b), the 
Commission implemented a fifteen-second time-delay requirement for 
Required Transactions that are pre-arranged or pre-negotiated by a 
broker and submitted as cross trades for execution through the SEF's 
Order Book. This requirement allows a broker or dealer to execute a 
Required Transaction by trading against a customer's order or executing 
two customers' orders against each other through pre-negotiation or 
pre-arrangement, provided that one side of the transaction is exposed 
to the Order Book for fifteen seconds before the other side of the 
transaction is submitted for execution. The time delay is intended to 
provide other market participants with an opportunity to execute 
against the first order.\85\ In practice, however, the time delay 
requirement has enabled interdealer brokers to facilitate ``trading'' 
of swaps i.e., the negotiating or arranging of swaps transactions 
outside the SEF, through the interdealer brokers' multiple-to-multiple 
trading systems or platforms. Negotiating or arranging consists of 
facilitating the interaction of bids and offers.\86\ Once the 
transaction is pre-negotiated or pre-arranged through the interdealer 
broker's multiple-to-multiple trading system or platform, the 
interdealer broker routes the pre-arranged transaction to the SEF, 
where one side of the transaction is exposed for fifteen seconds on the 
Order Book prior to the entry of the other side for execution.
---------------------------------------------------------------------------

    \84\ 17 CFR 37.9(b).
    \85\ SEF Core Principles Final Rule at 33503. See infra note 322 
and accompanying discussion (describing the policy reason for the 
Sec.  37.9(b) time delay requirement).
    \86\ See infra Section VI.A.2.a.--Sec.  37.201(b)--Pre-Execution 
Communications (discussion of how pre-execution communications 
between market participants constitute ``trading'').
---------------------------------------------------------------------------

    For swaps that are not subject to the trade execution requirement, 
i.e., Permitted Transactions, SEFs have allowed their market 
participants to conduct trading via pre-execution communications away 
from their respective facilities and then submit the resulting 
transaction, with the price, terms, and conditions already agreed upon 
between the participants, to the SEF's trade capture functionality for 
execution.\87\ The Commission notes that several SEFs affiliated with 
interdealer brokers offer this type of functionality based in part on 
the execution flexibility allowed under Sec.  37.9(c)(2) for Permitted 
Transactions, i.e., a SEF may offer any method of execution for such 
swaps. Accordingly, interdealer brokers submit Permitted Transactions 
that have been negotiated or arranged through their trading systems or 
platforms to an affiliated SEF without being subject to any 
corresponding order exposure (e.g., a fifteen-second time-delay).\88\ 
Coupled

[[Page 61959]]

with the ability to submit Required Transactions in accordance with the 
time delay requirement, these arrangements essentially enable the 
operation of multiple-to-multiple trading systems or platforms for a 
broad range of swaps outside of the SEF regulatory framework.
---------------------------------------------------------------------------

    \87\ For further discussion of this execution method, see infra 
Section VI.A.2.--Sec.  37.203(a)--Pre-Arranged Trading Prohibition; 
Sec.  37.9--Time Delay Requirement.
    \88\ The Commission has also observed that other swaps broking 
entities that are not affiliated with a SEF similarly negotiate or 
arrange transactions away from a registered SEF and subsequently 
submit those transactions to a registered SEF for execution. These 
types of transactions, however, are less common and constitute a 
smaller portion of the overall volume of relevant transactions 
discussed herein.
---------------------------------------------------------------------------

(2) SEF Registration Requirement for Swaps Broking Entities, Including 
Interdealer Brokers
    Based on the statutory SEF registration requirement and SEF 
definition, the associated SEF goals, the Commission's experience and 
knowledge from implementing part 37, and its evaluation of trading 
practices that have developed under the current SEF regulatory 
framework with respect to swaps broking entities that include 
interdealer brokers, the Commission proposes that a trading system or 
platform operated by such an entity must register as a SEF pursuant to 
CEA section 5h(a)(1) and Sec.  37.3(a).\89\ The Commission believes 
that such trading systems or platforms conform to the statutory SEF 
definition because they allow multiple participants to trade swaps by 
accepting bids and offers made by multiple participants in that 
facility or system (emphasis added). As described above, these trading 
systems or platforms facilitate the negotiation or arrangement of swap 
transactions through the interaction of bids and offers. The Commission 
believes that this ``trading'' activity should occur within a SEF, 
regardless of whether the product is subject to the trade execution 
requirement.\90\ Accordingly, entities operating these types of trading 
systems or platforms should be subject to the SEF registration 
requirement.\91\
---------------------------------------------------------------------------

    \89\ Although the Commission's description of swaps broking 
entities above focuses on the dealer-to-dealer market, the 
Commission clarifies that any person operating a system or platform 
for multiple-to-multiple participant swaps trading as described 
herein must register as a SEF consistent with CEA section 5h(a)(1) 
and Sec.  37.3(a) (emphasis added).
    \90\ The Commission notes that this view is consistent with the 
proposed amendment to Sec.  37.3(a) to clarify that a person 
operating a facility that meets the statutory SEF definition must 
register as a SEF without regard to whether the swaps that it lists 
for trading are subject to the trade execution requirement. See 
supra Section IV.C.1.a.--Footnote 88. As part of the proposed 
elimination of the prescriptive execution methods under Sec.  37.9 
for Required Transactions, the Commission is proposing to eliminate 
the time delay requirement under Sec.  37.9(b). See infra Section 
VI.A.2.--Sec.  37.203(a)--Pre-Arranged Trading Prohibition; Sec.  
37.9(b)--Time Delay Requirement. Based on this proposed elimination 
and the adoption of a flexible approach to SEF execution methods, 
the Commission notes that rules permitting the pre-arrangement or 
pre-negotiation of a swap transaction subject to a time delay 
requirement would no longer be needed or allowed.
    \91\ In addition to negotiation or arrangement that occurs 
through a swaps broking entity, the Commission believes that 
negotiation or arrangement that occurs directly between participants 
should also occur within a SEF. The Commission is proposing to 
require SEFs to have rules that prohibit market participants from 
engaging in pre-execution communications, i.e., negotiation or 
arrangement of swaps, away from a SEF's trading system or platform, 
subject to certain exceptions. See infra Section VI.A.2.a.--Sec.  
37.201(b)--Pre-Execution Communications.
---------------------------------------------------------------------------

    In addition to the statutory basis for this application, the 
Commission's proposed approach would advance the Dodd-Frank goals of 
promoting swaps trading on SEFs and pre-trade price transparency.\92\ 
The Commission believes that the operation of multiple-to-multiple 
swaps trading systems or platforms by swaps broking entities, including 
interdealer brokers outside of SEFs has frustrated these statutory 
goals and moved liquidity formation away from SEFs. To promote both 
trading on SEFs and pre-trade price transparency, the Commission 
believes that the activities associated with swaps trading should occur 
on SEFs consistent with the SEF registration requirement. Allowing such 
activities to occur away from a SEF and submitting any resulting 
transactions to a SEF for execution effectively makes the SEF a trade-
booking or post-trade processing engine, which is inconsistent with the 
statutory language and goals of the CEA related to SEFs.
---------------------------------------------------------------------------

    \92\ 7 U.S.C. 7b-3(e).
---------------------------------------------------------------------------

    The Commission also believes that requiring these types of swaps 
broking entities to register as SEFs would help to consistently apply 
the SEF regulatory framework over a segment of swaps trading activity 
that is very similar to registered SEF activity. Interdealer brokers 
currently operate trading systems or platforms outside of the SEF 
regulatory framework, yet act as participants on SEFs, resulting in 
multiple-to-multiple trading that is opaque not only to the SEF where 
the negotiated or arranged trade is eventually routed to for execution, 
but also to the Commission and the general marketplace. Although many 
interdealer brokers are registered as IBs pursuant to CEA section 4f 
and are subject to the Commission's rules and regulations,\93\ the 
Commission believes that these requirements are neither intended nor 
sufficient for the regulation and oversight of such interdealer 
brokers' multiple-to-multiple trading activity. The Commission believes 
that Congress would not have created SEFs and added the word 
``trading'' in the statutory SEF registration requirement and SEF 
definition if it intended that an IB framework would be sufficient for 
swaps ``trading.'' Given that these interdealer brokers operate trading 
systems or platforms outside of the SEF regulatory framework that are 
very similar to the activity that occurs on trading systems or 
platforms that are located within interdealer brokers' registered 
affiliated SEFs,\94\ the Commission believes such activity would be 
more appropriately subject to a SEF-specific regulatory framework. This 
approach would achieve the policy goal of applying more consistent 
regulatory treatment to very similar swaps market activity.
---------------------------------------------------------------------------

    \93\ 7 U.S.C. 6f(a). Part 3 sets forth the registration and 
regulatory requirements for IBs, among other registered entities. 17 
CFR part 3. Among those requirements, IBs are required to register 
with the National Futures Association (``NFA'') and therefore are 
also subject to the NFA rules and regulations. 17 CFR 3.2. The 
Commission further notes that Sec.  155.4 sets forth trading 
standards for IBs. 17 CFR 155.4. For a description of additional IB-
related Commission requirements, see infra note 341.
    \94\ The Commission emphasizes that an interdealer broker that 
solely solicits or accepts individual or single bids or offers and 
introduces them to an exchange, such as a SEF, would not be required 
to register as a SEF because it would not be facilitating the 
``trading,'' i.e., negotiating or arranging of swaps between 
multiple market participants consistent with the SEF registration 
requirement. Such brokers would be able to continue to engage in 
such solicitation or acceptance in conformance with the IB 
definition. 7 U.S.C. 1a(31).
---------------------------------------------------------------------------

    Requiring interdealer brokers to either register as SEFs or carry 
out their multiple-to-multiple trading activities within a SEF would 
also enhance market integrity and monitoring because such activities 
would become subject to the SEF core principles and regulations, as 
well as direct regulatory oversight of a SEF in its capacity as a self-
regulatory organization (``SRO'').\95\ For example, Core Principle 2 
requires SEFs to establish and enforce trading, trade processing, and 
participation rules that will deter abuses and have the capacity to 
detect, investigate, and enforce those rules, including means to 
capture information that may be used in establishing whether rule 
violations have occurred.\96\ These requirements enable SEFs to more 
comprehensively monitor for, among other things, potential abusive 
trading practices such as fraud and manipulation.\97\ The

[[Page 61960]]

Commission notes that establishing SEF monitoring and surveillance 
requirements over activity in the interdealer broker market is 
especially beneficial based on the role of interdealer brokers in the 
manipulation of ISDAFIX, a benchmark for swap rates and spreads for 
IRS; and the London Interbank Offered Rate (``LIBOR''), an average 
benchmark for short-term interest rates used to determine floating 
rates for IRS.\98\
---------------------------------------------------------------------------

    \95\ 17 CFR 1.3 (definition of ``self-regulatory 
organization'').
    \96\ 7 U.S.C. 7b-3(f)(2)(B).
    \97\ Given that the interdealer brokers are participants of the 
SEFs to which they submit negotiated or arranged transactions for 
execution, the Commission notes that SEFs still have jurisdiction 
over that activity and could investigate suspected prohibited 
activity and issue sanctions where appropriate, pursuant to the 
SEF's self-regulatory obligations.
    \98\ See, e.g., Enforcement Order re: Soci[eacute]t[eacute] 
G[eacute]n[eacute]rale S.A. Attempted Manipulation and False 
Reporting of LIBOR and Euribor, CFTC Docket No. 18-14 (June 4, 
2018); see also Enforcement Order re: JP Morgan Chase Bank, N.A. 
Attempted Manipulation of U.S. Dollar ISDAFIX Benchmark, CFTC Docket 
No. 18-15 (June 18, 2018).
---------------------------------------------------------------------------

    Accordingly, the Commission proposes that swaps broking entities, 
including interdealer brokers, that offer a trading system or platform 
in which more than one market participant has the ability to trade any 
swap with more than one other market participant on the system or 
platform, shall register as a SEF or seek an exemption from 
registration pursuant to CEA section 5h(g) (emphasis added). Where an 
entity operates both a registered SEF and an affiliated swaps broking 
entity--such as an interdealer broker--that negotiates or arranges 
trades via a non-SEF trading system or platform and participates on the 
affiliated SEF as a market participant, the swaps broking entity could 
also comply with the SEF registration requirement by integrating its 
non-SEF trading system or platform into its affiliated SEF. The 
Commission believes that this proposed application of the SEF 
registration provision in CEA section 5h(a)(1), which the Commission 
continues to interpret in conjunction with the SEF definition in CEA 
section 1a(50), is consistent with the statute and helps further the 
statutory SEF goals provided in CEA section 5h.
    The Commission proposes to delay the application of the SEF 
registration requirement with respect to swaps broking entities, 
including interdealer brokers, for a period of six months, subject to 
certain conditions and starting from the compliance date of any final 
rule adopted from this proposed rulemaking. Swaps broking entities, 
including interdealer brokers, that meet the conditions set forth below 
would be able to continue to maintain their current practice of 
facilitating the negotiating or arranging of swaps transactions between 
multiple participants and routing those swaps transactions to SEFs for 
execution.\99\ Without the six-month delay period, the Commission 
believes that applying the SEF registration requirement to these 
entities would disrupt their operations and further fragment swaps 
liquidity.
---------------------------------------------------------------------------

    \99\ As discussed below, the Commission is proposing Sec.  
37.201(b) to prohibit the use of pre-execution communications by 
market participants away from a SEF's trading system or platform. 
See infra Section VI.A.2.a.--Sec.  37.201(b)--Pre-Execution 
Communications. The Commission notes that to the extent swaps 
broking entities, including interdealer brokers, engage in such 
communications in the course of negotiating or arranging 
transactions and submitting them to a SEF for execution, the 
prohibition--if adopted via a final rule--would not apply during the 
six-month period.
---------------------------------------------------------------------------

    As applied to swaps broking entities, including interdealer 
brokers--most of whom are registered with the Commission as IBs--the 
Commission proposes that the six-month delay from the SEF registration 
requirement would be subject to the following conditions:
    (i) All swap transactions that are traded on a swaps broking 
entity, including an interdealer broker, must be routed for execution 
to a SEF; and
    (ii) The swaps broking entity, including an interdealer broker, 
must provide electronically the following information with respect to 
itself to the Secretary of the Commission at [email protected] and 
the Commission's Division of Market Oversight (``Division'' or ``DMO'') 
at [email protected]: (i) Entity name as it appears in the 
entity's charter; (ii) name and address of the entity's ultimate parent 
company; (iii) any names under which the entity does business; (iv) 
address of principal executive office; (v) a contact person's name, 
address, phone number, and email address; (vi) asset classes and swap 
products for which the entity facilitates trading; and (vii) any 
registrations, authorizations, or licenses held.\100\
---------------------------------------------------------------------------

    \100\ The Commission anticipates that the effective date of any 
final rule would be established ninety days from the publication of 
the rule in the Federal Register. The Commission believes that the 
proposed ninety-day period would provide swaps broking entities, 
including interdealer brokers seeking to avail themselves of the 
six-month compliance date delay with a sufficient opportunity to 
compile and submit this information to the Commission.
---------------------------------------------------------------------------

    Upon a DMO determination that a swaps broking entity's notice is 
complete, the Commission proposes to post these notices on the 
Commission's website under the ``Industry Filings'' page. This proposed 
approach would effectively maintain the status quo for these swaps 
broking entities for the proposed six-month delay period.
    The Commission notes that the proposed six-month delay for swaps 
broking entities, including interdealer brokers, does not affect any 
other requirements under the CEA or the Commission's regulations. In 
particular, this delayed compliance date would not affect the 
application of CEA section 2(e) and its requirement that only ECPs be 
permitted to trade swaps on SEFs.\101\
---------------------------------------------------------------------------

    \101\ 7 U.S.C. 2(e). See supra note 61.
---------------------------------------------------------------------------

    As part of this proposed transition period, swaps broking entities, 
including interdealer brokers, would be able to route their 
transactions to a SEF for execution. Furthermore, during this period, 
counterparties subject to the trade execution requirement would be able 
to satisfy that requirement by trading via a swaps broking entity, 
including an interdealer broker, that routes the transactions to a SEF 
for execution.
Request for Comment
    The Commission requests comment on all aspects of the proposed 
application of the SEF registration requirement to swaps broking 
entities. The Commission may consider alternatives to the proposed 
application of the requirement and requests comment on the following 
questions:
    (11) Is the Commission's view that swap broking entities, including 
interdealer brokers, meet the SEF definition appropriate? Please 
explain why or why not. Is it clear what activity falls within the SEF 
registration requirement and SEF definition, including the meaning of 
``trading''? If not, please explain.
    (12) Should the Commission apply the SEF registration requirement 
to any other type of entity or activity?
    (13) What factors, if any, would prevent a swaps broking entity, 
including an interdealer broker, from complying with the SEF 
registration requirement or from seeking an exemption from registration 
pursuant to CEA section 5h(g)?
    (14) Is the proposed six-month delay period sufficient to allow 
swaps broking entities, including interdealer brokers, time to seek 
registration or alter their operations in compliance with the SEF 
registration requirements? Why or why not?
    (15) Should the Commission allow swaps broking entities, including 
interdealer brokers, to route swap transactions to exempt SEFs during 
this six-month delay period? Why or why not?
d. Foreign Swaps Broking Entities and Other Foreign Multilateral Swaps 
Trading Facilities
    As discussed above, the Commission has observed that swaps broking

[[Page 61961]]

entities, including interdealer brokers, have utilized various business 
structures to operate in a bifurcated manner, i.e., a SEF and a non-SEF 
trading system or platform. One common structure consists of an entity 
that serves as a parent to a registered SEF entity and several 
affiliated broker entities that negotiate or arrange trades and 
participate exclusively on the affiliated SEF as market participants. 
While many of those broker entities are domestically domiciled, a 
significant number of them are also located in numerous foreign 
jurisdictions.\102\ Similar to domestic swaps broking entities, these 
foreign swaps broking entities are not currently registered as SEFs, 
but are typically registered with the Commission as IBs.\103\ These 
entities often serve as hubs for liquidity within their particular 
jurisdiction during non-U.S. trading hours--operating trading systems 
or platforms that facilitate the negotiating or arranging of 
transactions for multiple U.S. persons with local customers and the 
routing of those transactions to an affiliated SEF for execution.\104\ 
These foreign swaps broking entities' trading systems or platforms are 
very similar to those operated by swaps broking entities within in the 
U.S., such that they provide more than one market participant with the 
ability to trade swaps with more than one other market participant 
(emphasis added). Therefore, the Commission proposes that these foreign 
swaps broking entities are ``foreign multilateral swaps trading 
facilities,'' which are foreign facilities that operate a trading 
system or platform where multiple participants have the ability to 
execute or trade swaps with multiple market participants.
---------------------------------------------------------------------------

    \102\ Based on discussions with market participants, the 
Commission is aware of foreign swaps broking entities that are 
interdealer brokers located in numerous foreign jurisdictions, 
including Australia, Brazil, Canada, Chile, Colombia, Hong Kong, 
Japan, Mexico, Singapore, and South Korea, that participate on SEFs. 
The Commission is also aware that interdealer brokers domiciled in 
the European Union (``EU'') operate as investment firms that operate 
Multilateral Trading Facilities (``MTFs'') and Organized Trading 
Facilities (``OTFs''). The Commission notes that it has exempted 
certain MTFs and OTFs located in the EU from registration as SEFs 
pursuant to CEA section 5h(g). See infra note 109 (describing 
December 2017 exemptive order issued by the Commission to certain 
MTFs and OTFs based on comparability determination).
    \103\ See supra note 93 (general description of Commission 
requirements with respect to IBs).
    \104\ For purposes of this discussion, the term ``U.S. person'' 
identifies those persons who, under the Commission's interpretation, 
could be expected to satisfy the jurisdictional nexus set forth in 
CEA section 2(i) based on their swap activities, either on an 
individual or aggregate basis. See Interpretive Guidance and Policy 
Statement Regarding Compliance With Certain Swap Regulations; Rule, 
78 FR 45292, 45301 (Jul. 26, 2013) (``2013 Cross-Border Guidance'').
---------------------------------------------------------------------------

    Consistent with the proposal regarding the SEF registration 
requirement above, such foreign multilateral swaps trading facilities, 
including foreign swaps broking entities, would be required to register 
as a SEF or seek an exemption from SEF registration if their activity 
falls within the jurisdictional reach of the Commission pursuant to CEA 
section 2(i). Pursuant to CEA section 2(i), activities outside of the 
U.S. are not subject to the swap provisions of the CEA, including any 
rules prescribed or regulations promulgated thereof, unless those 
activities either have a ``direct and significant connection'' with 
activities in, or effect on, commerce of the United States; or 
contravene any rule or regulation established to prevent evasion of a 
Dodd-Frank Act-enacted provision of the CEA.\105\ The Commission 
expects that it will clarify the cross-border jurisdictional reach of 
the SEF registration requirement in the future for foreign multilateral 
swaps trading facilities, including foreign swaps broking entities, 
pursuant to CEA section 2(i).\106\ To the extent that a foreign 
multilateral swaps trading facility's activities are determined to fall 
within the Commission's jurisdictional reach, the facility would be 
required to register as a SEF or seek an exemption from SEF 
registration.\107\
---------------------------------------------------------------------------

    \105\ 7 U.S.C. 2(i).
    \106\ In November 2013, DMO issued guidance regarding the 
application of the SEF registration requirement to foreign 
multilateral swaps trading facilities. Division of Market Oversight 
Guidance on Application of Certain Commission Regulations to Swap 
Execution Facilities (Nov. 15, 2013). The guidance specified that a 
foreign multilateral swaps trading platform that provides U.S. 
persons or persons located in the United States (including personnel 
and agents of non-U.S. persons located in the United States) 
(``U.S.-located persons'') with the ability to trade or execute 
swaps on or pursuant to the rules of the platform, either directly 
or indirectly through an intermediary, would be expected to register 
as a SEF or DCM. Id. at 2. The guidance listed two non-exhaustive 
factors to determine whether a foreign platform met this 
registration requirement: (i) Whether a foreign multilateral swaps 
trading facility directly solicits or markets its services to U.S. 
persons or U.S.-located persons; or (ii) whether a significant 
portion of the market participants who a foreign multilateral swaps 
trading facility permits to effect transactions are U.S. persons or 
U.S.-located persons. Id. at 2 n.8. The guidance further specified 
DMO's belief that U.S. persons and U.S.-located persons generally 
comprise those persons whose activities have the requisite ``direct 
and significant'' connection with activities in, or effect on, 
commerce of the United States within the meaning of CEA section 
2(i). Id. at 2. The guidance also stated DMO's view that a 
multilateral swaps trading facility's provision of the ability to 
trade or execute swaps on or through the platform to U.S. persons or 
U.S.-located persons may create the requisite connection under CEA 
section 2(i) for purposes of the SEF/DCM registration requirement. 
Id. Subsequently, the Commission learned that many foreign 
multilateral swaps trading facilities prohibited U.S. persons and 
U.S-located persons from accessing their facilities due to the 
uncertainty that the guidance created with respect to SEF 
registration. The Commission understands that these prohibitions 
reflect concerns that U.S. persons and U.S.-located persons 
accessing their facilities would trigger the SEF registration 
requirement. As noted above, the Commission expects to address the 
application of CEA section 2(i) to foreign multilateral swaps 
trading facilities, including foreign swaps broking entities, in the 
future.
    \107\ The Commission discusses further below the potential 
implications for foreign multilateral swaps trading facilities 
offering swaps that are subject to the trade execution requirement 
to applicable counterparties.
---------------------------------------------------------------------------

    Such facilities that do not wish to register as a SEF and prefer to 
comply with the regulatory requirements of their home country may seek 
an exemption from SEF registration pursuant to CEA section 5h(g) either 
directly or via the auspices of their home country regulator. Pursuant 
to CEA section 5h(g), the Commission may exempt facilities from SEF 
registration if the facility is subject to comparable, comprehensive 
supervision and regulation on a consolidated basis by the appropriate 
governmental authorities in the home country of the facility.\108\ 
Based on this provision, the Commission issued an order in December 
2017 that exempts certain MTFs and OTFs authorized within the EU from 
the SEF registration requirement based on a finding that their 
respective regulatory frameworks satisfy the standard for granting an 
exemption from the SEF registration requirement pursuant to CEA section 
5h(g).\109\ At this time, the Commission has neither adopted a formal 
regulatory framework for granting an exemption pursuant to this 
provision nor has it granted exemptive relief to facilities in other 
jurisdictions beyond the 2017 order to EU-based MTFs and OTFs.
---------------------------------------------------------------------------

    \108\ 7 U.S.C. 7b-3(g).
    \109\ Order Exempting MTFs and OTFs Authorized Within the EU 
from SEF Registration Requirement (Dec. 8, 2017) (``2017 MTF and OTF 
Exemptive Order''). The order established this finding with respect 
to EU-wide legal requirements--including, in particular, 
requirements under the EU's new Markets in Financial Instruments 
Regulation (``MiFIR''), the EU's amended Markets in Financial 
Instruments Directive (``MiFID II''), and the EU's Market Abuse 
Regulation--that establish regulatory frameworks for MTFs and OTFs. 
Pursuant to this finding, the Commission provided specific 
exemptions to several MTFs and OTFs. Id. at app. A.
---------------------------------------------------------------------------

(1) Proposed Delay of SEF Registration Requirement
    Given that the Commission intends to address the cross-border 
jurisdictional reach of the Commission's SEF registration requirement 
in the future, the Commission proposes to delay the compliance date of 
the registration

[[Page 61962]]

requirement only with respect to foreign swaps broking entities, 
including foreign interdealer brokers, that currently facilitate 
trading, i.e., negotiation or arrangement, of swaps transactions for 
U.S. persons (``Eligible Foreign Swaps Broking Entities'') for a period 
of two years, subject to certain conditions and starting from the 
effective date of any final rule adopted from this notice.
    The proposed delay period would not apply to foreign swaps broking 
entities that do not currently facilitate trading, i.e., negotiation or 
arrangement, of swaps transactions for U.S. persons, given that their 
operations would not be materially affected by the proposed application 
of the SEF registration requirement to swaps broking entities. Further, 
the proposed delay period would not apply to foreign multilateral swaps 
trading facilities, as described above, that are not foreign swaps 
broking entities. Such facilities are not subject to the Commission's 
proposed application of the SEF registration requirement, and 
therefore, are already required to register as a SEF pursuant to the 
SEF registration requirement or seek an exemption pursuant to CEA 
section 5h(g). Similarly, the Commission notes that MTFs and OTFs 
located in the EU may not rely on this delay and instead must seek an 
exemption from SEF registration pursuant to the terms of the 
Commission's 2017 exemptive order.\110\
---------------------------------------------------------------------------

    \110\ 2017 MTF and OTF Exemptive Order.
---------------------------------------------------------------------------

    Eligible Foreign Swaps Broking Entities that meet the conditions 
set forth below would be able to continue to maintain the current 
practice of facilitating the negotiation or arrangement of swaps 
transactions between multiple participants and routing those swaps 
transactions to SEFs or Exempt SEFs for execution.\111\ Without the 
two-year period, the Commission believes that applying the SEF 
registration requirement to these entities would disrupt their 
operations and fragment swaps liquidity.
---------------------------------------------------------------------------

    \111\ As discussed below, the Commission is proposing Sec.  
37.201(b) to prohibit the use of pre-execution communications by 
market participants away from a SEF's trading system or platform. 
See infra Section VI.A.2.a.--Sec.  37.201(b)--Pre-Execution 
Communications. The Commission notes that to the extent Eligible 
Foreign Swaps Broking Entities engage in such communications in the 
course of negotiating or arranging transactions and submitting them 
to a SEF for execution, the prohibition--if adopted via a final 
rule--would not apply during the two-year period.
---------------------------------------------------------------------------

    During this period, the Commission anticipates that it will address 
what constitutes a ``direct and significant connection with activities 
in, or effect on, commerce of the United States'' for foreign 
multilateral swaps trading facilities, including foreign swaps broking 
entities, under CEA section 2(i).\112\ The proposed delay would also 
provide the Commission with time to develop any threshold standards for 
the application of CEA section 2(i) to the SEF registration requirement 
in CEA section 5h(a)(1). While the Commission has yet to determine 
standards in this area, the Commission notes that any such standard 
could include a de minimis component, whereby the activity of U.S. 
persons below some defined quantitative threshold on a particular 
foreign multilateral swaps trading facility would not trigger a need 
for SEF registration.
---------------------------------------------------------------------------

    \112\ 7 U.S.C. 2(i).
---------------------------------------------------------------------------

    The Commission notes that counterparties that are required to 
comply with the trade execution requirement may only satisfy the 
requirement by executing a swap on a SEF, a DCM, or an Exempt SEF.\113\ 
Accordingly, any foreign multilateral swaps trading facility that seeks 
to offer such swaps to such counterparties for trading must be 
registered as a SEF or DCM or obtain an exemption from SEF registration 
pursuant to CEA section 5h(g), regardless of whether that trading 
system or platform meets the standards (or any future standards the 
Commission may develop) for CEA section 2(i), i.e., a ``direct and 
significant connection,'' to trigger SEF registration. As noted above, 
the proposed delay would not apply to these foreign multilateral swaps 
trading facilities. Similarly, upon the expiration of the proposed two-
year delay, any Eligible Foreign Swaps Broking Entity that seeks to 
offer such swaps to such counterparties for trading on its trading 
system or platform must be registered as a SEF or DCM or obtain an 
exemption from SEF registration pursuant to CEA section 5h(g).
---------------------------------------------------------------------------

    \113\ For a discussion of which counterparties must comply with 
the Category A Transaction-Level Requirements, including the trade 
execution requirement, see 2013 Cross-Border Guidance at 45350-59 
app. D.
---------------------------------------------------------------------------

    During this time, the Commission could formalize a regulatory 
framework for providing exemptions from the SEF registration 
requirement for foreign multilateral swaps trading facilities, 
including foreign swaps broking entities, that meet that CEA section 
2(i) standard. The proposed two-year delay not only could provide the 
Commission with sufficient time to formalize this framework, which 
would require standards and processes for evaluating exemption 
requests, but also give Eligible Foreign Swaps Broking Entities more 
time to determine their best course of action, i.e., seek SEF 
registration with the Commission or obtain a CEA section 5h(g) 
exemption from registration. Accordingly, the proposed delay would 
further provide the Commission and regulators in foreign jurisdictions 
with additional time to evaluate such registration applications or 
requests for exemption received from Eligible Foreign Swaps Broking 
Entities.
    With respect to exemptions, the Commission anticipates that most 
foreign swaps broking entities and other foreign multilateral swaps 
trading facilities would seek to comply with the rules and regulations 
of their home countries, and thus, seek an exemption from SEF 
registration. The Commission further anticipates that the issuance of 
such exemptions may take some time based upon the large number of 
jurisdictions in which these operations are currently located.\114\ 
Thus, the Commission believes that it would be beneficial to provide 
more time for evaluation of exemption requests because exempting such 
comparably-regulated foreign entities from SEF registration, similar to 
other deference initiatives, should generally reduce market 
fragmentation, regulatory arbitrage, and duplicative or conflicting 
regulatory requirements, while increasing the potential for harmonized 
regulatory standards on a global level. Further, the Commission 
anticipates that any future determination process for granting 
exemptions from SEF registration would ensure that foreign and domestic 
multilateral swaps trading facilities, which operate in a similar 
fashion to one another, are all held to comparable regulatory 
standards.
---------------------------------------------------------------------------

    \114\ See supra note 102 (listing the foreign jurisdictions 
where swaps broking entities operate).
---------------------------------------------------------------------------

    The Commission further believes that this proposal should create 
strong incentives for foreign jurisdictions to establish or bolster 
their own robust regulatory regimes for swaps trading. Such measures 
would also be consistent with the commitment made among the G-20 
countries in 2009 ``to take action at the national and international 
level to raise standards together so that our national authorities 
implement global standards consistently in a way that ensures a level 
playing field and avoids fragmentation of markets, protectionism, and 
regulatory arbitrage.'' \115\ To the extent that foreign swaps broking 
entities and other foreign multilateral swaps trading facilities 
operate in foreign jurisdictions that currently do not have or are not 
expected to have

[[Page 61963]]

comparable and comprehensive supervision and regulation, such 
facilities would be subject to the proposed SEF registration 
requirement if their operations create a ``direct and significant'' 
connection to activities in, or effect on, commerce of the United 
States under CEA section 2(i).
---------------------------------------------------------------------------

    \115\ Group of Twenty, ``G-20 Leaders' Statement: The Pittsburgh 
Summit 7 (Sept. 24-25, 2009), https://www.treasury.gov/resource-center/international/g7-g20/Documents/pittsburgh_summit_leaders_statement_250909.pdf.
---------------------------------------------------------------------------

(2) Proposed Conditions for Delay of SEF Registration Requirement
    As applied to Eligible Foreign Swaps Broking Entities--most of whom 
are registered with the Commission as IBs--the Commission proposes that 
the two-year delay from the SEF registration requirement be subject to 
the following conditions:
    (i) All swap transactions involving U.S. persons that are traded on 
an Eligible Foreign Swaps Broking Entity must be routed for execution 
to a SEF or an Exempt SEF; \116\ and
---------------------------------------------------------------------------

    \116\ For a current list of Exempt SEFs, see 2017 MTF and OTF 
Exemptive Order at app. A.
---------------------------------------------------------------------------

    (ii) The Eligible Foreign Swaps Broking Entities must provide the 
following information electronically to the Secretary of the Commission 
at [email protected] and DMO at [email protected]: (i) Entity 
name as it appears in the entity's charter; (ii) name and address of 
the entity's ultimate parent company; (iii) any names under which the 
entity does business; (iv) address of principal executive office; (v) a 
contact person's name, address, phone number, and email address; (vi) 
asset classes and swap products for which the entity facilitates 
trading; (vii) certification that the entity currently arranges or 
negotiates swap transactions for U.S. persons; (viii) the entity's home 
country regulator or regulators; and (ix) any registrations, 
authorizations, or licenses held by the entity in its home 
country.\117\
---------------------------------------------------------------------------

    \117\ The Commission anticipates that the effective date of any 
final rule would be established ninety days from the publication of 
the rule in the Federal Register. The Commission believes that a 
ninety-day effective date would provide Eligible Foreign Swaps 
Broking Entities seeking a two-year compliance date delay with 
sufficient opportunity to compile and submit the requisite 
information to the Commission.
---------------------------------------------------------------------------

    Upon a DMO determination that an Eligible Foreign Swaps Broking 
Entity's notice is complete, the Commission would post these notices on 
the Commission's website under the ``Industry Filings'' page. This 
proposed approach would effectively maintain the status quo for these 
Eligible Foreign Swaps Broking Entities during the two-year compliance 
date delay period. The Commission notes that the proposed two-year 
delay for Eligible Foreign Swaps Broking Entities does not affect any 
other requirements under the CEA or the Commission's regulations. In 
particular, this delayed compliance date would not affect the 
application of CEA section 2(e) and its limitation of SEF and Exempt 
SEF trading to ECPs.\118\
---------------------------------------------------------------------------

    \118\ 7 U.S.C. 2(e). See supra note 61.
---------------------------------------------------------------------------

    As part of this proposed transition period, Eligible Foreign Swaps 
Broking Entities would be able to route their transactions to either a 
SEF or an Exempt SEF for execution. Furthermore, during this two-year 
delay, counterparties subject to the trade execution requirement would 
be able to satisfy that requirement by trading via an Eligible Foreign 
Swaps Broking Entity that routes the transactions to either a SEF or an 
Exempt SEF for execution.
    In light of these considerations, the Commission notes that the 
issue of whether an Eligible Foreign Swaps Broking Entity routes a 
transaction to a SEF or an Exempt SEF during the proposed two-year time 
delay period would have practical implications for the counterparties 
involved in the transaction with respect to complying with Commission 
reporting and clearing requirements. For swap transactions that are 
routed to a SEF for execution, the SEF would be responsible for 
compliance with (i) the real-time reporting requirements under part 43 
of the Commission's regulations and (ii) the regulatory reporting 
requirements under part 45 of the Commission's regulations.\119\ 
Counterparties to a swap transaction that is routed to an Exempt SEF 
for execution would be responsible for the reporting requirements set 
forth in both part 43 and part 45, unless there is a substituted 
compliance determination by the Commission with respect to those 
requirements.\120\
---------------------------------------------------------------------------

    \119\ In connection with swap transactions executed on a SEF, 
the Commission notes that the part 45 regulations continue to apply 
to counterparties that are subject to such reporting requirements. 
17 CFR part 45.
    \120\ Exempt SEFs may report transactions on behalf of 
counterparties as a service provider; the counterparties, however, 
retain ultimate responsibility for reporting.
---------------------------------------------------------------------------

    Further, for swap transactions routed to a SEF that are intended to 
be cleared or subject to the clearing requirement, the SEF would be 
responsible for routing the swap transaction to a Commission-registered 
derivatives clearing organization (``DCO'') or a clearing organization 
that has been exempted from DCO registration by the Commission pursuant 
to CEA section 5b(h), i.e., Exempt DCO, for clearing.\121\ For swap 
transactions routed to an Exempt SEF for execution that are intended to 
be cleared or are subject to the clearing requirement, the Commission 
notes that the following clearing-related requirements would to apply 
to such swap transactions:
---------------------------------------------------------------------------

    \121\ See 17 CFR 37.700-702.
---------------------------------------------------------------------------

    (i) When a swap transaction executed by a U.S. person on such an 
Exempt SEF is a ``customer'' position subject to CEA section 4d, the 
transaction, if intended to be cleared, must be cleared through a 
Commission-registered FCM at a Commission-registered DCO;
    (ii) When a swap transaction executed by a U.S. person on such an 
Exempt SEF is a ``proprietary'' position under Commission regulation 
1.3(y), the transaction, if intended to be cleared, must be cleared 
either through a Commission-registered DCO or an Exempt DCO; and
    (iii) When a swap transaction is subject to the Commission's 
clearing requirement, the transaction must be cleared either through a 
Commission-registered DCO or an Exempt DCO, provided that consistent 
with (i) above, the transaction must be cleared through a Commission-
registered FCM at a Commission-registered DCO and cannot be cleared 
through an Exempt DCO if the transaction is a ``customer'' position 
subject to CEA section 4d.
Request for Comment
    The Commission requests comment on all aspects of its proposed 
approach to SEF registration for Eligible Foreign Swaps Broking 
Entities, in particular the proposed two-year delay in the compliance 
date of any final rule. The Commission may consider alternatives to the 
proposed two-year delay and requests comment on the following 
questions:
    (16) Is the delay of two years for Eligible Foreign Swaps Broking 
Entities an adequate delay? If not, then how long of a delay should the 
Commission consider and why?
    (17) Are there additional considerations that the Commission should 
take into account in establishing this delay?
    (18) Are there additional conditions that the Commission should 
consider imposing on Eligible Foreign Swaps Broking Entities during 
this delay period?
2. Sec. Sec.  37.3(a)(2)-(3)--Minimum Trading Functionality and Order 
Book Definition
    In developing the regulatory framework for SEFs, the Commission 
adopted a ``minimum trading functionality'' requirement under Sec.  
37.3(a)(2) that requires a SEF to maintain and offer an Order Book for 
all

[[Page 61964]]

of the swaps that it lists for trading.\122\ An Order Book is defined 
under Sec.  37.3(a)(3) as (i) an electronic trading facility; \123\ 
(ii) a trading facility; \124\ or (iii) a trading system or platform in 
which all market participants in the trading system or platform have 
the ability to enter multiple bids and offers, observe or receive bids 
and offers entered by other market participants, and transact on such 
bids and offers.\125\ In the preamble to the SEF Core Principles Final 
Rule, the Commission acknowledged that the Order Book functionality 
does not have the requisite flexibility to serve as the ideal method of 
execution for a variety of swaps, in particular those that feature 
lower levels of liquidity.\126\ The Commission nevertheless believed 
that an Order Book could establish a base level of pre-trade price 
transparency to all market participants and, therefore, required that 
each SEF offer an Order Book for all swaps that it lists for trading, 
including both swaps subject to the trade execution requirement and 
swaps not subject to the trade execution requirement.\127\
---------------------------------------------------------------------------

    \122\ 17 CFR 37.3(a)(2).
    \123\ CEA section 1a(16) defines ``electronic trading facility'' 
as a trading facility that (i) operates by means of an electronic or 
telecommunications network; and (ii) maintains an automated audit 
trail of bids, offers, and the matching of orders or the execution 
of transactions on the facility. 7 U.S.C. 1a(16).
    \124\ CEA section 1a(51) defines ``trading facility'' as a 
person or group of persons that constitutes, maintains, or provides 
a physical or electronic facility or system in which multiple 
participants have the ability to execute or trade agreements, 
contracts, or transactions by accepting bids or offers made by other 
participants that are open to multiple participants in the facility 
or system; or through the interaction of multiple bids or multiple 
offers within a system with a pre-determined non-discretionary 
automated trade matching and execution algorithm. 7 U.S.C. 
1a(51)(A).
    \125\ 17 CFR 37.3(a)(3).
    \126\ SEF Core Principles Final Rule at 33564-65. In the 
preamble to the SEF Core Principles Final Rule, the Commission 
stated its anticipation that an Order Book would typically work well 
for liquid Required Transactions, i.e., transactions involving swaps 
that are subject to the trade execution requirement. For less liquid 
Required Transactions, however, it anticipated that RFQ systems 
would help facilitate trading.'' Id.
    \127\ SEF Core Principles Final Rule at 33564.
---------------------------------------------------------------------------

    The Commission has observed that market participants have rarely 
used Order Books to trade swaps on SEFs despite their availability for 
all swaps listed by SEFs. Depending on the product involved, for 
example, order book trading typically ranges between ``less than [one 
percent] to less than [three percent] of total CDS transactions'' on 
SEFs, while order book trading constitutes between ``less than [one 
percent] to approximately [twenty percent] of total IRS transactions. . 
. .'' \128\ The Commission believes that this low level of swaps 
trading on Order Books is attributable \129\ to an Order Book's 
inability to support the broad and diverse range of products traded in 
the swaps market that trade episodically, rather than on a continuous 
basis.\130\ Given the broad array of liquid and illiquid swaps listed 
on SEFs, mandating that a SEF offer an Order Book for all of these 
products has imposed significant operational and financial costs and 
burdens, particularly from a technological standpoint, with little 
benefit to most market participants who choose not to utilize 
them.\131\
---------------------------------------------------------------------------

    \128\ J. Christopher Giancarlo and Bruce Tuckman, Swaps 
Regulation Version 2.0: An Assessment of the Current Implementation 
of Reform and Proposals for Next Steps 49-50 (Apr. 26, 2018), 
available at https://www.cftc.gov/sites/default/files/2018-05/oce_chairman_swapregversion2whitepaper_042618.pdf.
    \129\ In addition to reasons stated above, the Commission 
acknowledges that the lack of swaps trading on SEF Order Books may 
also be attributed to other factors, such as concerns over ``name 
give-up'' practices and the current lack of certain trading 
features, such as the ability to calculate volume-weighted average 
pricing.
    \130\ In their study of the index CDS market, Pierre Collin-
Dufresne, Benjamin Junge, and Anders B. Trolle state that 
``[p]roponents of bringing all market participants onto one limit 
order book typically argue that it would (i) increase quote 
competition among dealers and (ii) allow clients to occasionally 
supply liquidity via limit orders thereby lowering overall 
transaction costs (although at the cost of execution risk). However, 
a limit order book arguably works best when trading is continuous 
and it is not necessarily optimal when trading is more episodic as 
is the case for index CDSs. For instance, Barclay, Hendershott, and 
Kotz (2006) document a precipitous drop in electronic trading (via 
limit order books) when Treasuries go off-the-run and trading 
volumes decline.'' Pierre Collin-Dufresne, Benjamin Junge, & Anders 
B. Trolle, Market Structure and Transaction Costs of Index CDSs 6 
n.10 (Swiss Fin. Inst. Res. Paper No. 18-40, 2017) (``2017 Collin-
Dufresne Research Paper''), citing Michael J. Barclay, Terrence 
Hendershott, & Kenneth Kotz, Automation Versus Intermediation: 
Evidence from Treasuries Going Off the Run, 61 J. Fin. 2395, 2395-
2414 (2006).
    \131\ The Commission understands that these costs include 
regularly occurring software updates to electronic order book 
systems and other ongoing technology-related maintenance.
---------------------------------------------------------------------------

    Therefore, based in part on its experience, the Commission proposes 
to eliminate the minimum trading functionality requirement and the 
regulatory Order Book definition. The Commission believes that 
eliminating the minimum trading functionality would help reduce 
operating costs for SEFs, as they would no longer be required to 
operate and maintain order book systems that are poorly suited for 
trading in less liquid swaps, and therefore, do not attract significant 
trading activity. Instead of employing resources to build and support a 
seldom-utilized trading system or platform, the proposed elimination 
provides a SEF with the flexibility to determine how to allocate its 
resources, particularly as it relates to developing methods of 
execution that are better suited to trading the products that it lists. 
As discussed below, other execution methods may be better suited to 
maximizing participation and concentrating liquidity formation on SEFs 
in episodically liquid swaps markets.\132\ Therefore, removing this 
requirement may spur development and innovation in execution methods. 
The Commission also believes that eliminating this requirement may 
encourage SEFs to list new and different types of swaps, given that 
they would no longer have to incur the costs of operating and 
supporting Order Books. The Commission notes, however, that a SEF would 
be free to continue to offer an order book if it so chooses.
---------------------------------------------------------------------------

    \132\ See infra Section IV.I.4.b.--Elimination of Required 
Execution Methods.
---------------------------------------------------------------------------

    The Commission adopted the minimum trading functionality 
requirement based in part on the goal of promoting pre-trade price 
transparency,\133\ but acknowledges that the CEA does not explicitly 
prescribe the Order Book as a SEF minimum trading functionality. 
Accordingly, with the elimination of this requirement under Sec.  
37.3(a)(2), the only trading functionality obligation that a SEF must 
comply with on an ongoing basis is based upon the CEA section 1a(50) 
definition of SEF.\134\ Therefore, the SEF must operate 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.\135\ To meet the SEF definition, a trading system or platform 
must provide multiple participants with the ability to accept bids and 
offers from other multiple participants within the facility or system. 
As long as multiple participants have the ability to accept bids and 
offers from other multiple participants within the facility or system, 
the facility or system will meet the SEF definition, regardless of how 
the multiple participants choose to interact with one another. Based on 
this more straightforward approach, the Commission expects that 
determining whether a particular system or platform

[[Page 61965]]

meets the SEF definition would generally be self-evident. Nevertheless, 
the Commission will continue to work with entities that seek 
interpretive guidance on the parameters of that definition.\136\
---------------------------------------------------------------------------

    \133\ 7 U.S.C. 7b-3(e).
    \134\ The Commission emphasizes that while the SEF definition in 
CEA section 1a(50) would serve as the baseline requirement for the 
type of trading systems or platforms that a SEF must maintain, it 
also provides the basic criterion to determine which types of 
trading systems or platforms are subject to the SEF registration 
requirement.
    \135\ 7 U.S.C. 1a(50).
    \136\ Based on the Commission's proposed elimination of the 
Order Book as a minimum trading functionality requirement, the 
Commission clarifies one particular issue regarding the scope of the 
CEA section 1a(50) SEF definition. In the preamble to the SEF Core 
Principles Final Rule, the Commission expressed doubt as to whether 
an RFQ-to-one system met the multiple participant aspect of the SEF 
definition. SEF Core Principles Final Rule at 33498, 33561, and 
33563. This view, articulated in the context of the Commission's 
discussion of RFQ Systems as a required method of execution, would 
suggest that an ``RFQ-to-one'' trading system or platform may, on 
its face, not meet the SEF definition. The Commission notes, 
however, that this view does not appropriately give meaning to the 
`ability' factor of the SEF definition. Therefore, the Commission 
seeks to clarify the application of the `ability' factor as it 
applies to RFQ-to-one transactions. The Commission believes that an 
entity that permits its market participants to use its RFQ-to-one 
functionality to issue concurrent or serial RFQs to multiple, 
different recipients would fit within the SEF definition, as it 
provides participants the ``ability'' to accept bids and offers from 
multiple participants within the trading system or platform.
---------------------------------------------------------------------------

3. Sec.  37.3(b)--Procedures for Registration \137\
---------------------------------------------------------------------------

    \137\ Based on the elimination of the temporary registration 
requirements, the Commission proposes to retitle Sec.  37.3(b) to 
``Procedures for registration'' from ``Procedures for full 
registration.'' The Commission also proposes to add a title to Sec.  
37.3(b)(1)--``Application for registration.''
---------------------------------------------------------------------------

a. Elimination of Temporary Registration
    To implement the SEF regulatory framework, the Commission 
established a temporary SEF registration regime to help minimize 
disruptions to incumbent platforms that had been operating prior to the 
adoption of part 37 and to allow new entities to compete with those 
incumbent platforms.\138\ Section 37.3(c) sets forth the process for 
SEF applicants to apply for temporary SEF registration prior to the 
Commission's review of an application for full SEF registration. The 
temporary registration process, however, has expired pursuant to a two-
year sunset provision established under Sec.  37.3(c)(5).\139\ Since 
the expiration of this process, the Commission has reviewed SEF 
applications pursuant to a 180-day Commission review period.\140\
---------------------------------------------------------------------------

    \138\ SEF Core Principles Final Rule at 33487.
    \139\ The Commission notes that the part 37 regulations became 
effective on August 5, 2013. Accordingly, the temporary registration 
provisions expired on August 5, 2015, subject to certain exceptions.
    \140\ 17 CFR 37.3(b)(5).
---------------------------------------------------------------------------

    Based on the expiration of the temporary registration regime, the 
Commission proposes to eliminate the provisions under existing Sec.  
37.3(c) and adopt various conforming changes to other provisions in 
proposed Sec.  37.3(b) and proposed Sec.  37.3(h), as discussed below.
b. Sec.  37.3(b)(1)--Application for Registration
    To request registration as a SEF, Sec.  37.3(b)(1)(i) requires an 
applicant to electronically file a complete Form SEF, as set forth in 
Appendix A to part 37, with the Commission.\141\ The Commission uses 
Form SEF, which is comprised of a series of different exhibits that 
require an applicant to provide details of its operations, to determine 
whether the applicant demonstrates compliance with the Act and 
applicable Commission's regulations.\142\ Applicants must also use Form 
SEF to amend a pending application or to seek an amended registration 
order.\143\ As part of the SEF registration process, an applicant must 
also request from the Commission a unique, extensible, alphanumeric 
identifier code for the purpose of identifying the SEF in connection 
with swap reporting requirements pursuant to part 45 of the 
Commission's regulations.\144\
---------------------------------------------------------------------------

    \141\ 17 CFR 37.3(b)(1)(i).
    \142\ The exhibits that comprise Form SEF concern the 
applicant's business organization (Exhibits A-H); financial 
information (Exhibits I-K); compliance (Exhibits L-U); and 
operational capability (Exhibit V). 17 CFR part 37 app. A.
    \143\ 17 CFR 37.3(b)(3); 17 CFR part 37 app. A.
    \144\ 17 CFR 37.3(b)(1)(iii).
---------------------------------------------------------------------------

    Based on its experience with the SEF registration process, the 
Commission believes that some of the information requested under Form 
SEF has proven to be unnecessary to determine an applicant's compliance 
with the Act and applicable Commission regulations. The Commission also 
recognizes that some of the exhibit requirements are unclear in the 
amount of information required to be provided, thereby causing 
inconsistency across applications in the information received to 
evaluate compliance. The proposed changes to the part 37 framework, as 
discussed further herein, would also necessitate certain Form SEF 
revisions. Therefore, the Commission is proposing several amendments to 
Form SEF that would consolidate or eliminate several of the existing 
exhibits and also request some additional information. Further, the 
Commission is proposing several amendments to the Form SEF 
instructions. The Commission intends for these proposed changes to 
establish a clearer and more streamlined application process that would 
still provide the Commission with sufficient and appropriate 
information to determine compliance with the Act and Commission 
regulations.
(1) Form SEF Exhibits--Business Organization
    The Commission proposes several amendments to the ``Business 
Organization'' exhibits--existing Exhibits A through H--of Form 
SEF.\145\
---------------------------------------------------------------------------

    \145\ The Commission is not proposing any substantive changes to 
Exhibit A, which requires an applicant to specify persons who own 
ten percent or more of the applicant's stock or otherwise may 
control or direct the applicant's management or policies; and 
Exhibit B, which requires an applicant to provide a list of present 
officers, directors and governors, or their equivalents. The 
Commission is proposing non-substantive amendments to Exhibit A to 
reorganize the existing requirements to paragraphs (a)-(b) and to 
revise the existing language accordingly.
---------------------------------------------------------------------------

    First, the Commission proposes to consolidate certain existing 
exhibits, in particular (i) existing Exhibit G, which requires an 
applicant to submit various governance documents, into existing Exhibit 
C, which requires information regarding the applicant's board of 
directors; \146\ and (ii) existing Exhibit F, which requires an 
analysis of the applicant's staffing, into existing Exhibit E, which 
requires a description of the personnel qualifications for each 
category of the applicant's professional employees.\147\ Under the 
consolidated new Exhibit E, the Commission proposes to require more 
specific detail about the applicant's personnel structure, including 
personnel seconded to the applicant. As proposed, Exhibit E would 
require information about the reporting lines among the applicant's 
personnel; estimates of the number of non-management and non-
supervisory employees; and a description of the duties, background, 
skills, and other qualifications for each officer, manager/supervisor, 
and any other category of non-management and non-supervisory employees. 
The Commission believes that amending Exhibit E to provide

[[Page 61966]]

greater specificity would promote consistency among applications and 
further assist in evaluating the applicant's compliance with the Act 
and the Commission's regulations, particularly with respect to self-
regulatory requirements.\148\
---------------------------------------------------------------------------

    \146\ Existing Exhibit C requires a narrative that describes the 
composition and fitness standards for the applicant's board of 
directors. Existing Exhibit G requires a copy of the applicant's 
constitution, articles of incorporation, articles of formation, or 
articles of association with all amendments thereto; partnership or 
limited liability agreements; existing by-laws, operating agreement, 
rules or instruments corresponding thereto; any governance fitness 
information not included in existing Exhibit C; and a certificate of 
good standing. As proposed, the existing Exhibit G requirements 
would be re-designated as paragraphs (a) and (c) of a consolidated 
new Exhibit C; existing Exhibit C would be re-designated as 
paragraph (b) within new Exhibit C.
    \147\ Existing Exhibit E requires a description of such 
employees employed by the applicant or a division, subdivision, or 
other separate entity within the applicant. Existing Exhibit F 
requires the analysis of staffing requirements that are necessary to 
operate the applicant as a SEF, including the staff names and 
qualifications.
    \148\ Based on the proposed consolidation of existing Exhibit F 
and existing Exhibit G, existing Exhibit H would be re-designated as 
a new Exhibit F with no additional substantive changes. This exhibit 
requires a brief description of any material pending legal 
proceeding(s), other than ordinary and routine litigation incidental 
to the business, to which the applicant or any of its affiliates is 
a party or to which any of its or their property is the subject.
---------------------------------------------------------------------------

    The Commission also proposes to narrow the scope of information 
required by existing Exhibit D, which requires a description of the 
applicant's organizational structure that includes a list and 
description of affiliates and relevant divisions, subdivisions, or 
other separate entities related to the applicant. As proposed, Exhibit 
D would require an applicant to describe the nature of the business of 
any affiliated entities which engage in financial services or market 
activities, including but not limited to, the trading, clearing, or 
reporting of swaps. The Commission believes that this amendment would 
more appropriately focus the required information on entities related 
to the applicant's swaps-trading business and minimize the submission 
of information that is not related. Further, the Commission proposes 
non-substantive amendments to the existing exhibit.
(2) Form SEF Exhibits--Financial Information
    The Commission proposes several amendments to the ``Financial 
Information'' exhibits--existing Exhibits I through K--of Form SEF.
    The Commission proposes to adopt several changes to existing 
Exhibit I.\149\ This exhibit requires applicants to submit financial 
information to demonstrate compliance with the financial resources 
requirements under Core Principle 13. Among other required information, 
paragraph (a) requires applicants to submit their most recent fiscal-
year financial statements \150\ and paragraph (b) requires a narrative 
of how the value of the applicant's financial resources is sufficient 
to cover operating costs of at least one year, on a rolling basis, of 
which six months' value of those resources are unencumbered and liquid. 
Paragraph (c) requires an applicant to submit copies of any agreements 
(i) establishing or amending a credit facility, (ii) insurance 
coverage, or (iii) other arrangement that demonstrate compliance with 
the liquidity requirement. Paragraph (d) requires an applicant to 
submit representations regarding sources and estimates for future 
ongoing operational resources.
---------------------------------------------------------------------------

    \149\ The Commission also proposes to re-designate existing 
Exhibit I as a new Exhibit G based on the proposed changes described 
above.
    \150\ The financial information currently required under 
paragraph (a) includes an applicant's balance sheet; income and 
expense statement; cash flow statement; and statement of sources and 
application revenues and all notes or schedules thereto.
---------------------------------------------------------------------------

    The Commission proposes to amend the requirements of paragraphs (a) 
through (c) to conform to the proposed amendments to the SEF financial 
resources requirements under Core Principle 13. In particular, the 
proposed required documentation would demonstrate an applicant's 
ability to maintain resources that exceed one year of operating costs 
and the existence of resources to meet the liquidity requirement.\151\ 
The Commission also proposes to eliminate paragraph (d) because the 
representation of an applicant's future ongoing operational resources 
is not necessary to determine compliance with Core Principle 13. 
Additionally, the Commission proposes to amend paragraph (a) to 
incorporate the existing Form SEF instruction for newly-formed 
applicants who cannot submit the requisite financial statements, but 
who alternatively seek to provide pro forma financial statements for a 
six-month period.
---------------------------------------------------------------------------

    \151\ See infra Section XVIII.--Part 37--Subpart N: Core 
Principle 13 (Financial Resources) for a description of the 
Commission's proposed changes to the Core Principle 13 regulations 
upon which new Exhibit G is based.
---------------------------------------------------------------------------

    The Commission also proposes to adopt several changes to Exhibit 
K.\152\ This exhibit requires an applicant to provide disclosures 
related to fees that it would impose upon participants. Paragraph (a) 
requires a complete list of all of the facility's dues, fees, and other 
charges for its services; paragraph (b) requires a description of the 
basis or methods used to determine those amounts; and paragraph (c) 
requires a description of any differences in charges between different 
customers or groups of customers for similar services. The Commission 
proposes to amend paragraph (a) to require applicants to identify any 
market maker programs, other incentive programs, or other discounts on 
dues, fees, or other charges to be imposed. Based on the Commission's 
experience, this information is beneficial in evaluating compliance 
with access requirements pursuant to Core Principle 2.\153\ Given the 
Commission's proposed revisions to the existing impartial access 
requirements--in particular, the elimination of the ``comparable fees'' 
requirement under existing Sec.  37.202(a)(3)--the Commission further 
proposes to eliminate the requirement for a description of fee 
differentials under paragraph (c). The Commission also proposes several 
streamlining changes to the existing language.
---------------------------------------------------------------------------

    \152\ The Commission also proposes to re-designate existing 
Exhibit K as a new Exhibit H based on the proposed changes described 
above.
    \153\ The Commission notes that proposed Sec.  37.202(a)(2) 
would require a SEF to establish and apply fee structures and fee 
practices to its market participants in a fair and non-
discriminatory manner. See infra Section VII.A.1.b.--Sec.  
37.202(a)(2)--Fees.
---------------------------------------------------------------------------

    In addition to the amendments to new Exhibit G (existing Exhibit I) 
and new Exhibit H (existing Exhibit K), the Commission proposes to 
eliminate existing Exhibit J, which requires an applicant to disclose 
the financial resources information for any SEF, DCM, or other swap 
trading platform affiliates. Based on its experience with Exhibit J, 
the Commission recognizes that this information related to an 
applicant's affiliates is not particularly useful in demonstrating an 
applicant's compliance with Core Principle 13 or the conflicts of 
interest requirements under Core Principle 12.
(3) Form SEF Exhibits--Compliance
    The Commission proposes several amendments to the ``Compliance'' 
exhibits--existing Exhibits L through U--of Form SEF.
    First, the Commission proposes to eliminate several exhibits 
including (i) existing Exhibit P, which requires the applicant to 
provide information on disciplinary and enforcement protocols, tools, 
and procedures that is generally duplicative to the details contained 
in an applicant's rulebook and compliance manual; \154\ (ii) existing 
Exhibit R, which requires a list of the applicant's prohibited trade 
practice violations that is duplicative to the rules that an applicant 
must include in its rulebook pursuant to Core Principle 2 requirements; 
\155\ and (iii) existing Exhibit U, which requires a list of items 
subject to a request for confidential

[[Page 61967]]

treatment under Sec.  145.9 of the Commission's regulations--as 
described further below, the Commission proposes to instead require 
SEFs to identify these documents within the Table of Contents to Form 
SEF.
---------------------------------------------------------------------------

    \154\ An applicant is currently required to submit a copy of its 
rules under existing Exhibit M and a copy of its compliance manual 
under existing Exhibit O, as currently designated. The Commission is 
maintaining those requirements under the proposed revisions to Form 
SEF as a new Exhibit J and a new Exhibit K, respectively. The 
Commission notes that it proposes to move ``arrangements for 
alternative dispute resolution'' under existing Exhibit P to a new 
Exhibit L described below. See infra note 159.
    \155\ Section 37.203 requires a SEF to establish and enforce 
trading rules that will deter abuses, including prohibitions on 
abusive trading practices in its markets. 17 CFR 37.203.
---------------------------------------------------------------------------

    Second, the Commission proposes to streamline the requirements of 
existing Exhibit L.\156\ This exhibit currently requires a narrative 
and documentation that describe the manner in which the applicant 
complies with each SEF core principle. This documentation includes a 
regulatory compliance chart that sets forth each core principle and 
cites the relevant rules, policies, and procedures that describe the 
manner in which the applicant is able to comply with each core 
principle. For issues that are novel or for which compliance with a 
core principle is not evident, this exhibit also requires an applicant 
to explain how that item and the application satisfy the SEF core 
principles. The Commission proposes to streamline this exhibit to 
require that the applicant only submit the regulatory compliance chart 
and an explanation of novel issues, as is currently required. Based on 
its experience, the Commission believes that the regulatory compliance 
chart with citations to relevant rules, policies, and procedures is 
sufficient to determine an applicant's compliance with the Act and the 
Commission's regulations. The Commission has found that the additional 
narrative and documentation that describe the manner in which the 
applicant complies with each SEF core principle creates unnecessary 
paperwork and does not further the Commission's review of an 
application in this regard. The Commission further proposes certain 
non-substantive amendments to the existing language of Exhibit L.
---------------------------------------------------------------------------

    \156\ The Commission also proposes to re-designate existing 
Exhibit L as a new Exhibit I based on the proposed changes described 
above.
---------------------------------------------------------------------------

    Third, the Commission proposes to simplify the requirements of 
existing Exhibit M.\157\ This exhibit currently requires a copy of the 
applicant's rules, and any technical manuals, other guides, or 
instruction for SEF users, including minimum financial standards for 
members or market participants. The Commission proposes to eliminate 
the existing requirement to cite position limits and aggregation 
standards in part 151 of the Commission's regulations and any position 
limit rules set by the facility. As discussed below with respect to 
Core Principle 6, the Commission intends to address the position limit 
issue in a separate rulemaking; \158\ the Commission also notes that 
this requirement is redundant to the applicant's requirement to submit 
a copy of its rules. Further, the Commission proposes several non-
substantive amendments to streamline Exhibit M's existing language.
---------------------------------------------------------------------------

    \157\ The Commission also proposes to re-designate existing 
Exhibit M as a new Exhibit J based on the proposed changes described 
above.
    \158\ See infra Section XI.--Part 37--Subpart G: Core Principle 
6 (Position Limits or Accountability).
---------------------------------------------------------------------------

    Fourth, the Commission proposes to eliminate the requirements under 
existing Exhibit N. The exhibit currently requires an applicant to 
provide executed or executable copies of any agreements or contracts 
that facilitate the applicant's compliance with the SEF core 
principles, including third-party regulatory service provider or member 
or user agreements. To streamline Form SEF, the Commission would 
require instead that applicants submit these documents pursuant to 
other relevant exhibits, as described below.
    Fifth, the Commission proposes a new Exhibit L, which would 
continue to require an applicant to submit user agreements. As 
proposed, the new exhibit would specify that the required agreements 
would include, but not be limited to, on-boarding documentation, 
regulatory data use consent agreements, intermediary documentation, and 
arrangements for alternative dispute resolution.\159\ The new Exhibit L 
would also require a narrative of the legal, operational, and technical 
requirements for users to directly or indirectly access the SEF. This 
requirement reflects some documents that applicants have previously 
submitted under existing Exhibit N. The additional specificity, 
however, reflects the Commission's experience with different 
participant-related agreements that implicate (i) a SEF participant's 
ability to access the facility's trading system or platform pursuant to 
Core Principle 2; and (ii) the facility's use of a SEF participant's 
proprietary data or personal information under existing Sec.  
37.7.\160\
---------------------------------------------------------------------------

    \159\ The Commission notes that ``arrangements for alternative 
dispute resolution'' are included based on the requirements of 
existing Exhibit P, which the Commission proposes to eliminate from 
Form SEF. See supra note 154.
    \160\ The Commission notes that it proposes to move the language 
of existing Sec.  37.7, which generally prohibits a SEF from using a 
participant's proprietary data or personal information that it 
collects or receives for regulatory purposes for business or 
marketing purposes, to a new Sec.  37.504. See infra Section X.D.--
Sec.  37.504--Prohibited Use of Data Collected for Regulatory 
Purposes.
---------------------------------------------------------------------------

    Sixth, the Commission proposes a new Exhibit M to establish 
requirements related to an applicant's swaps reporting capabilities. 
The new Exhibit M would require the applicant to submit (i) a list of 
the SDRs to which the applicant will report swaps data, including the 
respective asset classes; \161\ (ii) an executed copy of all agreements 
between the applicant and those SDRs; and (iii) a representation from 
each of those SDRs stating that the applicant has satisfactorily 
completed all requirements, including all necessary testing, that 
enables the SDR to reliably accept data from the applicant. These 
requirements reflect some of the documents that the Commission has 
required applicants to submit under existing Exhibit N and would enable 
the Commission to determine the applicant's ability to comply with 
Sec.  37.901, which requires a SEF to report swap data pursuant to 
parts 43 and 45 of the Commission's regulations.\162\
---------------------------------------------------------------------------

    \161\ The Commission notes that the reference to a Commission-
registered SDR in Exhibit M also includes a provisionally-registered 
SDR.
    \162\ 17 CFR 37.901.
---------------------------------------------------------------------------

    Seventh, the Commission proposes a new Exhibit N to incorporate the 
requirements in existing Exhibit T related to an applicant's ability to 
submit swaps to a DCO for clearing. New Exhibit N would require the 
applicant to submit (i) a list of DCOs and exempt DCOs to which the 
applicant will submit swaps for clearing, including the respective 
asset classes; (ii) a representation that the clearing members of those 
DCOs and exempt DCOs will guarantee all trades submitted by the swap 
execution facility for clearing; (iii) an executed copy of the clearing 
agreement and any related documentation for each of those DCOs or 
exempt DCOs; and (iv) a representation from each of those DCOs or 
exempt DCOs stating that the applicant has satisfactorily completed all 
requirements, including all necessary testing, that enable its 
acceptance of swap transactions submitted by the applicant for 
clearing. These requirements reflect some of the documents that the 
Commission has required applicants to submit under existing Exhibit N 
and would enable the Commission to determine an applicant's ability to 
comply with proposed Sec.  37.702(b)(1) under Core Principle 7, which 
requires a SEF to coordinate with each DCO to facilitate ``prompt, 
efficient, and accurate'' processing and routing of transactions to the 
DCO for clearing.\163\
---------------------------------------------------------------------------

    \163\ For a discussion of the relevant proposed amendments to 
the Core Principle 7 regulations, see infra Section XII.B.--Sec.  
37.702--General Financial Integrity.
---------------------------------------------------------------------------

    Eighth, the Commission proposes a new Exhibit O to require an 
applicant to submit all other agreements or contracts that enable the 
applicant to comply with the applicable SEF core principles and are not 
already required to be submitted

[[Page 61968]]

under new Exhibits L, M, N, or Q.\164\ In conjunction with these other 
exhibits, new Exhibit O matches the scope of documents that an 
applicant is currently required to submit under existing Exhibit 
N.\165\
---------------------------------------------------------------------------

    \164\ Exhibit Q requires an applicant to complete and submit the 
Program of Risk Analysis and Oversight Technology Questionnaire. 
Among other things, the questionnaire requires an applicant to 
provide any agreements with third-party IT providers. See infra 
Section XIX.B.--Sec.  37.1401(g)--Program of Risk Analysis and 
Oversight Technology Questionnaire.
    \165\ Given this new proposed exhibit, the Commission proposes 
to re-designate existing Exhibit O as a new Exhibit K. The content 
of the exhibit would remain the same and require an applicant to 
submit a copy of a compliance manual and documents that describe how 
the applicant will conduct trade practice, market, and financial 
surveillance.
---------------------------------------------------------------------------

    Ninth, the Commission proposes to adopt several changes to existing 
Exhibit Q.\166\ This exhibit currently requires an applicant to provide 
an explanation of how its trading system(s) or platform(s) satisfy the 
Commission's rules, interpretations, and guidelines concerning SEF 
execution methods. Where applicable, paragraphs (a) and (b) of Exhibit 
Q specify that the explanation should include various details related 
to the minimum trade functionality requirement under Sec.  37.3(a)(2), 
i.e., an Order Book, and the prescribed execution methods for Required 
Transactions under Sec.  37.9, i.e., an Order Book or an RFQ System. As 
discussed below, the Commission is proposing to eliminate these 
requirements and to allow SEFs to offer flexible means of 
execution,\167\ subject to certain trading-related rules under proposed 
Sec.  37.201(a).\168\ Accordingly, the Commission proposes conforming 
changes to Exhibit Q. In addition to the explanation of the applicant's 
trading system(s) or platform(s), the Commission also proposes to 
require an applicant to provide screenshots of any of its trading 
system(s) or platform(s). Based on the Commission's experience, these 
screenshots provide a useful supplement to evaluate any explanation 
provided under this exhibit.
---------------------------------------------------------------------------

    \166\ The Commission also proposes to re-designate existing 
Exhibit Q as a new Exhibit P based on the proposed changes described 
above.
    \167\ See infra Section IV.I.--Sec.  37.9--Methods of Execution 
for Required and Permitted Transactions; Sec.  37.10--Process for a 
Swap Execution Facility to Make a Swap Available to Trade; Sec.  
37.12--Trade Execution Compliance Schedule; Sec.  38.11--Trade 
Execution Compliance Schedule; Sec.  38.12--Process for a Designated 
Contract Market to Make a Swap Available to Trade.
    \168\ Proposed Sec.  37.201(a) would require a SEF to establish 
rules that govern the operation of the SEF, including rules that 
specify (i) the protocols and procedures for trading and execution; 
(ii) the use of discretion in facilitating trading and execution; 
and (iii) the sources and methodology for generating any market 
pricing information. See infra Section VI.A.1.--Sec.  37.201(a)--
Required Swap Execution Facility Rules.
---------------------------------------------------------------------------

    Finally, the Commission proposes to consolidate existing Exhibit S, 
which currently requires a discussion of how the applicant will 
maintain trading data, into new Exhibit K (re-designated from existing 
Exhibit O). Exhibit K would require an applicant to submit a copy of 
its compliance manual and documents that describe how the applicant 
will conduct trade practice, market, and financial surveillance.
(4) Form SEF Exhibits--Operational Capability
    The Commission proposes to re-designate existing Exhibit V, which 
requires the applicant to provide information pertaining to its program 
of risk analysis and oversight via the Technology Questionnaire, as a 
new Exhibit Q and to adopt non-substantive amendments to the exhibit's 
existing language.\169\ Additionally, the Commission is making certain 
amendments to update the questionnaire, as described below.\170\
---------------------------------------------------------------------------

    \169\ As discussed below, the Commission is proposing Sec.  
37.1401(g) to require a SEF to annually prepare and submit an up-to-
date Technology Questionnaire to Commission staff. See infra Section 
XIX.B.--Sec.  37.1401(g)--Program of Risk Analysis and Oversight 
Technology Questionnaire.
    \170\ See infra Section XIX.B.--Sec.  37.1401(g)--Program of 
Risk Analysis and Oversight Technology Questionnaire.
---------------------------------------------------------------------------

(5) Other Form SEF Amendments
    In addition to the proposed amendments to the existing exhibits, 
the Commission is proposing several changes to the Form SEF 
instructions. Form SEF currently requires applicants to include a Table 
of Contents that lists each exhibit submitted as part of the 
application. In lieu of a separate list provided via existing Exhibit 
U, the Commission proposes to require that applicants designate, in the 
Table of Contents, the exhibits that are subject to a request for 
confidential treatment. The Commission also proposes to require that 
any such confidential treatment be reflected by some type of 
identifying number and code on the appropriate exhibit(s), similar to 
the approach followed for DCO applications and Form DCO.\171\ Further, 
the Commission proposes to eliminate the existing instruction for 
newly-formed applicants regarding pro forma financial statements, which 
the Commission proposes to incorporate in paragraph (a) of new Exhibit 
G.
---------------------------------------------------------------------------

    \171\ The Commission also proposes to specify in the Form SEF 
instructions that an applicant must file a confidentiality request 
in accordance with Sec.  145.9 of the Commission's regulations.
---------------------------------------------------------------------------

    The Commission also proposes two minor amendments related to the 
Form SEF cover sheet. First, to enable the Commission to evaluate a 
SEF's compliance with ongoing filing requirements more readily, the 
Commission proposes to require an applicant to specify its fiscal year-
end date.\172\ Second, the Commission proposes to eliminate the 
reference to the use of Form SEF to amend an existing order or 
registration, in conformance with the proposed amendment to Sec.  
37.3(b)(3) discussed further below.\173\
---------------------------------------------------------------------------

    \172\ The Commission notes that these ongoing filing 
requirements include (i) a fiscal year-end financial report that a 
SEF would be required to file within ninety days after the end of 
its fourth fiscal quarter under proposed Sec.  37.1306(d), see infra 
Section XVIII.F.4.--Sec.  37.1306(d); (ii) proposed Exhibit Q of 
Form SEF, i.e., the Program of Risk Analysis and Oversight 
Technology Questionnaire that a SEF would be required to file within 
ninety days after the end of its fiscal year under proposed Sec.  
37.1401(g), see infra Section XIX.B.--Sec.  37.1401(g)--Program of 
Risk Analysis and Oversight Technology Questionnaire; and (iii) an 
annual compliance report that a SEF would be required to file within 
ninety days after the end of its fiscal year under proposed Sec.  
37.1501(e)(2), see infra Section XX.A.5.--Sec.  37.1501(e)--
Submission of Annual Compliance Report and Related Matters.
    \173\ See infra Section IV.C.3.d.--Sec.  37.3(b)(3)--Amendment 
of Application for Registration.
---------------------------------------------------------------------------

(6) Request for Legal Entity Identifier
    The Commission proposes to eliminate the requirement that an 
applicant request a ``unique, extensible, alphanumeric code'' from the 
Commission under Sec.  37.3(b)(1)(iii) and to require instead that the 
applicant obtain a legal entity identifier (``LEI''). The Commission 
adopted part 37 prior to the establishment of the technical 
specification and governance mechanism for a global entity identifier. 
Since that adoption, a 20-digit alphanumeric LEI has been developed and 
adopted by many regulatory authorities in other jurisdictions, as well 
as the Commission, for use in identifying counterparties and other 
entities pursuant to various regulatory reporting requirements, 
including part 45 of the Commission's regulations.\174\
---------------------------------------------------------------------------

    \174\ The Commission notes that applicants may obtain an LEI 
from an LEI-issuing organization that has been accredited by the 
Global Legal Entity Identifier Foundation (``GLEIF''). GLEIF, About 
LEI--Get an LEI: Find LEI Issuing Organizations, https://www.gleif.org/en/about-lei/get-an-lei-find-lei-issuing-organizations.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comments on all aspects of the proposed 
amendments to Sec.  37.3(b)(1) and Appendix A to part 37.

[[Page 61969]]

c. Sec.  37.3(b)(2)--Request for Confidential Treatment
    The Commission is not proposing any amendments to Sec.  37.3(b)(2).
d. Sec.  37.3(b)(3)--Amendment of Application for Registration \175\
---------------------------------------------------------------------------

    \175\ The Commission proposes to retitle Sec.  37.3(b)(3) to 
``Amendment of application for registration'' from ``Amendment of 
application prior or subsequent to full registration'' based on the 
proposed changes described below.
---------------------------------------------------------------------------

    Section 37.3(b)(3) specifies that an applicant amending a pending 
application or requesting an amendment to a registration order must 
file an amended application with the Secretary of the Commission in the 
manner specified by the Commission. The Form SEF instructions 
correspond to this requirement and currently specify that requests for 
amending a registration order and any associated exhibits must be 
submitted via Form SEF. Section 37.3(b)(3) otherwise specifies that a 
SEF must file any amendment to its application subsequent to 
registration as a submission under part 40 of the Commission's 
regulations, or as specified by the Commission.\176\ In the preamble to 
SEF Core Principles Final Rule, the Commission also stated that if any 
information provided in a Form SEF is or becomes inaccurate for any 
reason, even after registration, the SEF ``must promptly make the 
appropriate corrections with the Commission.'' \177\
---------------------------------------------------------------------------

    \176\ 17 CFR 37.3(b)(3). Part 40 governs the submission of new 
products, rules and rule amendments for registered entities, 
including a process for the voluntary submission of rules for 
Commission review and approval under Sec.  40.5 and a process for 
the self-certification of rules under Sec.  40.6. 17 CFR 40.5-6.
    \177\ SEF Core Principles Final Rule at 33485.
---------------------------------------------------------------------------

    The Commission proposes to clarify and amend the requirements 
regarding post-registration amendments to both Form SEF exhibits and 
registration orders. First, the Commission proposes to amend Sec.  
37.3(b)(3) and Form SEF to eliminate the required use of Form SEF to 
request an amended order of registration from the Commission.\178\ 
Under current practice, SEFs file a request for an amended order with 
the Commission rather than submitting Form SEF. Commission staff 
typically will review the request, obtain additional information from 
the SEF where necessary, and subsequently recommend to the Commission 
whether to grant or deny the amended order. Given current practice, the 
Commission believes that an updated Form SEF is not needed to request 
an amended order of registration.
---------------------------------------------------------------------------

    \178\ See infra Section IV.C.4.--Sec.  37.3(c)--Amendment to an 
Order of Registration.
---------------------------------------------------------------------------

    Second, the Commission proposes to eliminate the existing language 
that specifies the use of part 40 to file application amendments 
subsequent to registration. The Commission emphasizes that not all of 
the information from the Form SEF exhibits need to be updated pursuant 
to part 40 subsequent to registration; certain part 37 provisions 
already require SEFs to update their information on an ongoing basis. 
For example, under Sec.  37.1306, a SEF is required to file updated 
financial reports, including fiscal year-end reports, which precludes 
the need to amend and file new Exhibit G (existing Exhibit I) through 
part 40. The Commission clarifies that part 40 only applies to 
information from application exhibits that constitute a ``rule,'' as 
defined under Sec.  40.1(i).\179\ Therefore, registered SEFs have 
already been submitting changes to these types of documentation 
pursuant to the part 40 rule filing procedures. Given that part 40 
defines ``rule,'' the existing language is not required to be included 
under proposed Sec.  37.3(b)(3). If certain information from the Form 
SEF exhibits are not required to be updated through other part 37 
provisions or part 40, then a SEF does not have to file those 
amendments subsequent to registration. The Commission notes, however, 
that it may otherwise request information related to a SEF's business 
pursuant to Sec.  37.5(a).\180\
---------------------------------------------------------------------------

    \179\ ``Rule'' is defined under Sec.  40.1(i) as any 
constitutional provision, article of incorporation, bylaw, rule, 
regulation, resolution, interpretation, stated policy, advisory, 
terms and conditions, trading protocol, agreement or instrument 
corresponding thereto, including those that authorize a response or 
establish standards for responding to a specific emergency, and any 
amendment or addition thereto or repeal thereof, made or issued by a 
registered entity or by the governing board thereof or any committee 
thereof, in whatever form adopted. 17 CFR 40.1(i). The Commission 
generally interprets the Sec.  40.1(i) rule definition broadly to 
encompass governance documentation (proposed Exhibit C); fees 
(proposed Exhibit H); rulebooks (proposed Exhibit J); compliance 
manuals (proposed Exhibit K); participant agreements (proposed 
Exhibit L); SDR-related agreements (proposed Exhibit M); clearing-
related agreements (proposed Exhibit N); other third-party 
agreements (proposed Exhibit O); and information related to 
execution methods (proposed Exhibit P).
    \180\ 17 CFR 37.5(a).
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comments on all aspects of the proposed 
amendments to Sec.  37.3(b)(3).
e. Sec.  37.3(b)(4)--Effect of Incomplete Application
    The Commission is not proposing any amendments to Sec.  37.3(b)(4).
f. Sec.  37.3(b)(5)--Commission Review Period
    Based on the elimination of the temporary registration regime under 
existing Sec.  37.3(c), the Commission proposes to amend the existing 
provision to eliminate related language and specify that the Commission 
reviews a SEF registration application pursuant to a 180-day timeframe 
and the procedures specified in CEA section 6(a).
g. Sec.  37.3(b)(6)--Commission Determination
    The Commission is not proposing any amendments to Sec.  37.3(b)(6).
4. Sec.  37.3(c)--Amendment to an Order of Registration
    Consistent with existing Commission practice and the proposal to 
eliminate the use of Form SEF to request an amended registration order, 
the Commission proposes a new Sec.  37.3(c)--``Amendment to an order of 
registration''--to establish a separate process for such requests.\181\ 
A SEF would be required to submit its request electronically in the 
form and manner specified by the Commission.\182\ Similar to the 
procedures set forth for the registration application process, a SEF 
would be required to provide the Commission with any additional 
information and documentation necessary to review a request. The 
Commission would issue an amended order if the SEF would continue to 
maintain compliance with the Act and the Commission's regulations after 
such amendment. Further, the Commission may also issue an amended order 
subject to conditions. The Commission also proposes to specify that it 
may decline to issue an amended order based upon a determination that 
the SEF would not continue to maintain compliance with the Act and the 
Commission's regulations upon such amendment.
---------------------------------------------------------------------------

    \181\ See supra Section IV.C.3.d.--Sec.  37.3(b)(3)--Amendment 
of Application for Registration.
    \182\ The Commission proposes to eliminate existing Sec.  
37.3(c), which establishes the temporary SEF registration process 
that is no longer available to applicants, as described above. See 
supra Section IV.C.3.a.--Elimination of Temporary Registration.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comments on all aspects of proposed Sec.  
37.3(c).
5. Sec.  37.3(d)--Reinstatement of Dormant Registration
    The Commission is not proposing any amendments to Sec.  37.3(d).

[[Page 61970]]

6. Sec.  37.3(e)--Request for Transfer of Registration
    Section 37.3(e) establishes requirements that a SEF must follow 
when seeking to transfer its registration from its current legal entity 
to a new legal entity as a result of a corporate change.\183\ Among 
these requirements, Sec.  37.3(e)(2) requires a SEF to file a transfer 
request no later than three months prior to the anticipated corporate 
change, or if not possible, as soon as it knows of the change.\184\ 
Section 37.3(e)(3) requires a transfer request to include certain 
information, such as the transferee's governing documents under Sec.  
37.3(e)(3)(iv).\185\ Under Sec.  37.3(e)(3)(vi), the request must also 
include certain representations from a transferee, including 
representations that it will (i) retain and assume, without limitation, 
all of the assets and liabilities of the transferor; (ii) assume 
responsibility for complying with the Act and the Commission's 
regulations; (iii) assume, maintain, and enforce all of the 
transferor's rules that are applicable to SEFs, including the 
transferor's rulebook and any amendments; (iv) comply with all self-
regulatory responsibilities, including maintaining and enforcing all 
self-regulatory programs; and (v) notify market participants of all 
changes to the rulebook prior to the transfer, as well as the transfer 
and issuance of a corresponding order by the Commission.\186\ Under 
Sec.  37.3(e)(3)(vii), the transfer request must also include a 
representation from the transferee that upon the transfer, it will 
assume responsibility for and maintain compliance with the SEF core 
principles for all swaps previously made available for trading through 
the transferor; and that none of the proposed rule changes will affect 
the rights and obligations of any market participant.\187\
---------------------------------------------------------------------------

    \183\ 17 CFR 37.3(e).
    \184\ 17 CFR 37.3(e)(2).
    \185\ 17 CFR 37.3(e)(3).
    \186\ 17 CFR 37.3(e)(3)(vi).
    \187\ 17 CFR 37.3(e)(3)(vii).
---------------------------------------------------------------------------

    The Commission proposes several non-substantive amendments to 
streamline the existing requirements under Sec.  37.3(e) for filing a 
transfer request. First, the Commission proposes to simplify the 
timeline for filing a request by requiring that a SEF file the request 
``as soon as practicable,'' rather than no later than three months 
prior to the anticipated corporate change or as soon as it knows of 
such a change, if less than three months prior to the change.\188\
---------------------------------------------------------------------------

    \188\ The Commission proposes to adopt this amendment under 
Sec.  37.3(e)(2).
---------------------------------------------------------------------------

    Second, with respect to the required information in a transfer 
request, the Commission also proposes to specifically reference other 
types of governing documents that would be adopted by transferees, such 
as a limited liability agreement or an operating agreement.\189\ This 
proposed change acknowledges that a transferee of a SEF's registration 
may be a non-corporate entity, such as a limited liability company or 
partnership.
---------------------------------------------------------------------------

    \189\ The Commission proposes to adopt this amendment under 
Sec.  37.3(e)(3)(iv). The Commission recognizes that different types 
of entities are established and governed by different types of 
documentation. For example, a corporation is formed based on 
articles of incorporation and operates pursuant to bylaws; a limited 
liability company is generally established pursuant to articles of 
organization and operates pursuant to an operating agreement; and a 
limited partnership is generally formed based on a limited 
partnership agreement. Based on the proposed amendments to Sec.  
37.3(e)(iv), the Commission also proposes to amend Sec.  
37.3(e)(3)(i) by changing the word ``agreement'' to 
``documentation.''
---------------------------------------------------------------------------

    Third, the Commission proposes to simplify a transferee's 
compliance-related representations under Sec.  37.3(e)(3)(vi). The 
Commission proposes to consolidate and eliminate unnecessary language; 
\190\ and eliminate the existing requirement that the transferee attest 
that it will assume, maintain, and enforce compliance with the SEF core 
principles, as well as maintain and enforce self-regulatory 
programs.\191\ The Commission notes that the language that it proposes 
to delete is otherwise duplicative to Sec.  37.3(e)(3)(vi)(B), which 
generally requires the transferee to represent that it will assume 
responsibility for compliance with all applicable provisions of the Act 
and the Commission's regulations. Further, the Commission proposes to 
eliminate the existing requirement under Sec.  37.3(e)(3)(vii)(A) that 
a transferee represent that it will continue to comply with the SEF 
core principles for all swaps made available for trading through the 
transferor. The Commission notes that all SEFs, whether or not a 
transferee, must comply with the Act and Commission regulations, 
including all requirements applicable to a SEF's listed swaps.
---------------------------------------------------------------------------

    \190\ The Commission proposes to consolidate existing clauses 
(B) and (D) into a new proposed clause (B).
    \191\ The Commission proposes to eliminate this requirement 
under existing clause (C) and renumber existing clause (E) as clause 
(C).
---------------------------------------------------------------------------

    Fourth, the Commission proposes to amend Sec.  37.3(e) to better 
reflect the practical realities of the transfer process. Rather than 
require a transferee to represent that it will retain and assume all 
the assets and liabilities of the transferor without limitation, the 
Commission proposes to instead require that the transferee state in the 
request when it would not do so.\192\ In addition, rather than require 
a transferee to represent that none of a transferee's proposed rule 
changes will affect the rights and obligations of any market 
participant, the Commission proposes instead to require that the 
transferee represent that it will notify market participants of changes 
that may affect their rights and obligations.\193\ These amendments 
would eliminate certain pre-emptive restrictions upon business-related 
changes associated with the transfer, but also allow the Commission to 
continue reviewing whether such changes may be inconsistent with the 
Act or the Commission's regulations.
---------------------------------------------------------------------------

    \192\ The Commission proposes to adopt this amendment under 
subparagraph (3)(vi)(A).
    \193\ The Commission proposes to amend the language of existing 
subparagraph (3)(vii)(B) and renumber the provision to subparagraph 
(3)(vii)(C) based on the proposed changes described above. The 
Commission notes that the transferee's notification obligations 
would not be limited to those that may affect a market participant's 
rights and obligations; the proposed rule would maintain the 
existing requirement that a transferee represent that it will notify 
market participants of all changes to the transferor's rulebook 
prior to the transfer.
---------------------------------------------------------------------------

7. Sec.  37.3(f)--Request for Withdrawal of Application for 
Registration
    The Commission is not proposing any amendments to Sec.  37.3(f).
8. Sec.  37.3(g)--Request for Vacation of Registration
    The Commission is not proposing any amendments to Sec.  37.3(g).
9. Sec.  37.3(h)--Delegation of Authority
    Given the deletion of the phrase relating to temporary registration 
in the existing paragraph, the Commission proposes a conforming non-
substantive amendment.

D. Sec.  37.4--Procedures for Implementing Rules 194
---------------------------------------------------------------------------

    \194\ The Commission proposes to retitle Sec.  37.4 to 
``Procedures for implementing rules'' from ``Procedures for listing 
products and implementing rules'' based on the proposed changes 
described below.
---------------------------------------------------------------------------

    Section 37.4 currently sets forth rules related to the listing of 
swap products and the submission of rules on a pre- and post-
registration basis. Section 37.4(a) specifies that a SEF applicant may 
submit the terms and conditions of swaps that it intends to list for 
trading as part of its registration application.\195\ Section 37.4(b) 
specifies that any swap

[[Page 61971]]

terms and conditions or rules submitted as part of the SEF's 
application shall be considered for approval by the Commission at the 
time it issues the SEF's registration order.\196\ Section 37.4(c) 
specifies that after the Commission issues a registration order, the 
SEF shall submit any proposed swap terms and conditions, including 
amendments to such terms and conditions, proposed new rules, or 
proposed rule amendments, pursuant to part 40 of the Commission's 
regulations.\197\ Section 37.4(d) specifies that any swap terms and 
conditions or rules submitted as part of an application to reinstate a 
dormant SEF shall be considered for approval at the time that the 
Commission approves the dormant SEF's reinstatement of 
registration.\198\
---------------------------------------------------------------------------

    \195\ 17 CFR 37.4(a).
    \196\ 17 CFR 37.4(b).
    \197\ 17 CFR 37.4(c).
    \198\ 17 CFR 37.4(d).
---------------------------------------------------------------------------

    The Commission proposes to eliminate Sec.  37.4(a) and to adopt 
conforming amendments to Sec.  37.4(b) to establish that the 
Commission's process of reviewing the terms and conditions of a swap 
product that the applicant intends to list for trading upon 
registration is separate from the review process of a SEF's application 
for registration.\199\ As amended, Sec.  37.4(b) would specify that 
rules, except swap product terms and conditions, submitted by the SEF 
applicant as part of a registration application would be considered for 
approval at the time the Commission issues an order of registration. 
Upon obtaining an order of registration, a registered SEF may formally 
submit product terms and conditions under Sec.  40.2 or Sec.  40.3, 
which controls the submission of new product terms and conditions by 
registered entities.\200\ Given that the submission procedures for 
rules, including product terms and conditions, are established under 
part 40, the Commission also proposes to eliminate unnecessary language 
by deleting Sec.  37.4(c). The Commission believes that separating 
these two processes would promote efficiency for both Commission staff 
and SEF applicants. For example, a SEF applicant's registration order 
could otherwise be unnecessarily delayed or stayed if the SEF applicant 
submits for Commission approval, along with its application for 
registration, a novel or complex product that would require additional 
consideration or analysis by Commission staff.
---------------------------------------------------------------------------

    \199\ The Commission proposes to renumber subsection (b) to 
subsection (a) based on the proposed amendment as described above.
    \200\ 17 CFR part 40. Although an applicant may not submit swap 
product terms and conditions for approval as part of the 
registration process, the Commission notes that SEF applicants may 
informally discuss any proposed products with Commission staff for 
informal feedback as part of the registration process.
---------------------------------------------------------------------------

    To conform to the proposed approach for reviewing swap product 
terms and conditions from SEF applicants described above, the 
Commission also proposes to amend Sec.  37.4(d) to delete the reference 
to any ``swap terms and conditions'' submitted by a dormant SEF that is 
applying for reinstatement of registration.\201\ Accordingly, dormant 
SEFs would not be able to provide proposed swap product terms and 
conditions for approval as part of the dormant SEF registration 
reinstatement process. Upon obtaining a reinstatement of registration, 
a SEF may formally submit product terms and conditions under Sec.  40.2 
or Sec.  40.3, which controls the submission of new product terms and 
conditions by registered entities.
---------------------------------------------------------------------------

    \201\ The Commission proposes to renumber subsection (d) to 
subsection (b) based on the proposed amendments as described above.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comments on all aspects of the proposed 
amendments to Sec.  37.4.

E. Sec.  37.5--Provision of Information Relating to a Swap Execution 
Facility 202
---------------------------------------------------------------------------

    \202\ The Commission proposes to retitle Sec.  37.5 to 
``Provision of information relating to a swap execution facility'' 
from ``Information relating to swap execution facility compliance'' 
based on the proposed changes described below.
---------------------------------------------------------------------------

1. Sec.  37.5(a)--Request for Information
    The Commission is not proposing any amendments to Sec.  37.5(a).
2. Sec.  37.5(b)--Demonstration of Compliance
    The Commission is proposing certain non-substantive amendments to 
Sec.  37.5(b).
3. Sec.  37.5(c)--Equity Interest Transfer
    Section 37.5(c) sets forth notification requirements related to 
transfers of equity interest in a SEF. Section 37.5(c)(1) requires a 
SEF to notify the Commission if the SEF enters into a transaction 
involving the transfer of fifty percent or more of the equity interest 
in the SEF.\203\ Section 37.5(c)(2) requires the SEF to file the notice 
at the earliest possible time, but no later than the open of business 
ten business days following the date upon which the SEF enters into a 
firm obligation to transfer the equity interest.\204\ Upon such a 
notification, the Commission may request supporting documentation of 
the transaction.\205\ Where any aspect of the transfer constitutes a 
rule as defined under part 40, Sec.  37.5(c)(3) requires a SEF to 
comply with the requirements of CEA section 5c(c) and part 40.\206\
---------------------------------------------------------------------------

    \203\ 17 CFR 37.5(c)(1).
    \204\ 17 CFR 37.5(c)(2).
    \205\ 17 CFR 37.5(c)(1). In the SEF Core Principles Final Rule, 
the Commission specified the types of documentation to include, but 
not be limited to, (i) relevant agreement(s); (ii) associated 
changes to relevant corporate documents; (iii) a chart outlining any 
new ownership or corporate or organization structure, if available; 
and (iv) a brief description of the purpose and any impact of the 
equity interest transfer. SEF Core Principles Final Rule at 33490. 
The final rule also stated that a SEF must file a certification 
regarding its compliance with CEA section 5h and the Commission's 
regulations thereunder, as set forth in existing Sec.  37.5(c)(4). 
Id.
    \206\ 17 CFR 37.5(c)(3).
---------------------------------------------------------------------------

    The Commission has previously stated that in situations where such 
an equity transfer occurs, the Commission has an interest in reviewing 
and considering the implications of the changes in ownership.\207\ In 
particular, the Commission seeks to determine whether the change in 
ownership will adversely impact the operations of the SEF or the SEF's 
ability to comply with the core principles and the Commission's 
regulations thereunder.\208\ Further, the Commission intended for Sec.  
37.5(c) to enable Commission staff to consider whether any term or 
condition contained in an equity transfer agreement(s) is inconsistent 
with the self-regulatory responsibilities of a SEF or with any of the 
core principles.\209\
---------------------------------------------------------------------------

    \207\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR 1214, 1217 (Jan. 7, 2011) (``SEF Core Principles 
Proposed Rule'').
    \208\ Id.
    \209\ Id. In the SEF Core Principles Final Rule, the Commission 
raised the provision to 50 percent from 10 percent and maintained a 
similar policy rationale, SEF Core Principles Final Rule at 33490, 
i.e., to ``ensure that SEFs remain mindful of their self-regulatory 
responsibilities when negotiating the terms of significant equity 
interest transfers.'' SEF Core Principles Proposed Rule at 1217.
---------------------------------------------------------------------------

    The Commission proposes to amend Sec.  37.5(c)(1) to require a SEF 
to file a notice with the Commission in the event of any transaction 
that results in the transfer of direct or indirect ownership of fifty 
percent or more of the equity interest in the SEF. The Commission notes 
that indirect ownership may transpire, for example, through a 
transaction involving a direct or indirect parent company of the SEF. 
Section 37.5(c), however, only requires a SEF to file a notice where 
the SEF is a party to a transaction involving a transfer of direct 
ownership of fifty percent or more of the equity interest in the SEF, 
but not where the SEF is not a party to the transaction, or where the 
transaction results in a transfer of indirect ownership of the SEF. The 
Commission believes that such transfers implicate the same regulatory 
policies underlying the existing rule and therefore proposes

[[Page 61972]]

amendments to broaden the requirement. Based on the proposed changes 
described above, the Commission further proposes conforming non-
substantive amendments to Sec.  37.5(c)(2)--``Timing of 
notification''--and Sec.  37.5(c)(4)--``Certification.'' \210\
---------------------------------------------------------------------------

    \210\ The Commission also proposes to renumber paragraph (c)(4) 
to paragraph (c)(3) based on the proposed elimination of the 
existing language in paragraph (c)(3) described below.
---------------------------------------------------------------------------

    The Commission further proposes to streamline Sec.  37.5(c) by 
deleting Sec.  37.5(c)(3)--the Commission notes that part 40 already 
applies to SEFs with respect to rule filings, and therefore, a separate 
provision is not necessary to apply part 40 to SEFs.
Request for Comment
    The Commission requests comments on all aspects of the proposed 
amendments to Sec.  37.5(c).
4. Sec.  37.5(d)--Delegation of Authority
    The Commission is not proposing any amendments to Sec.  37.5(d).

F. Sec.  37.6--Enforceability

1. Sec.  37.6(a)--Enforceability of Transactions
    Section 37.6(a) is intended to provide market participants with 
legal certainty with respect to swap transactions on a SEF and 
generally clarifies that a swap transaction entered into on or pursuant 
to the rules of a SEF cannot be void, voidable, subject to recession, 
otherwise invalidated, or rendered unenforceable due to a violation by 
the SEF of the Act or applicable Commission regulations or any 
proceeding that alters or supplements a rule, term or condition that 
governs such swap or swap transaction.\211\
---------------------------------------------------------------------------

    \211\ 17 CFR 37.6(a).
---------------------------------------------------------------------------

    The Commission proposes non-substantive amendments to Sec.  
37.6(a).\212\ These amendments include (i) amending the phrase 
``entered into'' to ``executed'' to provide greater clarity; and (ii) 
eliminating the reference to swaps executed ``pursuant to the rules 
of'' a SEF, which conforms to the proposed amendment to the ``block 
trade'' definition under Sec.  43.2, discussed further below.\213\
---------------------------------------------------------------------------

    \212\ The Commission also proposes to add a new title to Sec.  
37.6(a)--``Enforceability of transactions.''
    \213\ See infra Section XXII.--Part 43--Sec.  43.2--Definition 
of ``Block Trade.''
---------------------------------------------------------------------------

2. Sec.  37.6(b)--Swap Documentation
    Section 37.6(b) requires a SEF to provide each counterparty to a 
transaction with a written ``confirmation'' that contains all of the 
terms of a swap transaction at the time of the swap's execution for 
both cleared and uncleared swap transactions, including (i) ``economic 
terms'' that are specific to a transaction, e.g., swap product, price, 
and notional amount; and (ii) non-specific ``relationship terms'' that 
generally govern all transactions between two counterparties, e.g., 
default provisions, margin requirements, and governing law.\214\ 
``Confirmation'' is defined under parts 43 and 45 of the Commission's 
regulations as the consummation (electronically or otherwise) of 
legally binding documentation that memorializes the agreement of the 
counterparties to all terms of the swap (emphasis added).\215\ The 
definition also states that a confirmation shall be in writing 
(electronic or otherwise) and legally supersede any previous agreement 
(electronic or otherwise) relating to the swap.\216\ The Commission 
adopted Sec.  37.6(b), in part, to facilitate this process for swaps 
transactions--both cleared and uncleared--executed on or pursuant to 
the rules of a SEF.\217\
---------------------------------------------------------------------------

    \214\ 17 CFR 37.6(b).
    \215\ 17 CFR 43.2; 17 CFR 45.1. See also 17 CFR 23.500 (similar 
definition of ``confirmation'' that applies to swap dealers 
(``SDs'') and major swap participants (``MSPs'')).
    \216\ 17 CFR 43.2; 17 CFR 45.1.
    \217\ SEF Core Principles Final Rule at 33491.
---------------------------------------------------------------------------

    For uncleared swap transactions, the Commission is aware that many 
relationship terms that may govern certain aspects of an uncleared swap 
transaction are often negotiated and executed between potential 
counterparties prior to execution.\218\ The Commission previously 
provided that SEFs may satisfy Sec.  37.6(b) for uncleared swap 
transactions by incorporating by reference the relevant terms set forth 
in such agreements, as long as those agreements have been submitted to 
the SEF prior to execution.\219\ As applied, Sec.  37.6(b) requires 
that the SEF obtain and incorporate this documentation into the issued 
confirmation, which is intended in part to provide SEF participants 
with legal certainty with respect to uncleared swap transactions.\220\
---------------------------------------------------------------------------

    \218\ SEF Core Principles Final Rule at 33491 n.195. Swap 
counterparties have typically relied on the use of industry-standard 
legal documentation, including master netting agreements, 
definitions, schedules, and confirmations, to document their swap 
trading relationships. This documentation, such as the ISDA Master 
Agreement and related Schedule and Credit Support Annex (``ISDA 
Agreements''), as well as related documentation specific to 
particular asset classes, offers a framework for documenting 
uncleared swap transactions between counterparties. See 
Confirmation, Portfolio Reconciliation, Portfolio Compression, and 
Swap Trading Relationship Documentation Requirements for Swap 
Dealers and Major Swap Participants, 77 FR 55904, 55906 (Sept. 11, 
2012). For uncleared swap transactions, Sec.  23.504(b) requires 
written documentation of all the terms governing the trading 
relationship between an SD or MSP and its counterparty. 17 CFR 
23.504(b).
    \219\ SEF Core Principles Final Rule at 33491 n.195.
    \220\ To ensure that the SEF confirmation provides legal 
certainty, the Commission stated that counterparties choosing to 
execute a swap transaction on or pursuant to the rules of a SEF must 
have all terms, including possible long-term credit support 
arrangements, agreed to no later than execution, such that the SEF 
can provide a written confirmation inclusive of those terms at the 
time of execution. SEF Core Principles Final Rule at 33491.
---------------------------------------------------------------------------

    This requirement, however, has created impractical burdens for 
SEFs. Based upon feedback from SEFs, the Commission understands that 
SEFs have encountered many issues in trying to comply with the 
requirement for uncleared swaps, including high financial, 
administrative, and logistical burdens to collect and maintain 
bilateral transaction agreements from many individual counterparties. 
SEFs have stated that they are unable to develop a cost-effective 
method to request, accept, and maintain a library of every previous 
agreement between counterparties.\221\ SEFs have also noted that the 
potential number of previous agreements is considerable, given that SEF 
counterparties enter into agreements with many other parties and have 
multiple agreements for different asset classes.\222\
---------------------------------------------------------------------------

    \221\ Many of these agreements are maintained in paper form or 
scanned PDF files that are difficult to quickly digitize in a cost-
effective manner. See WMBAA, Request for Extended Relief from 
Certain Requirements under Parts 37 and 45 Related to Confirmations 
and Recordkeeping for Swaps Not Required or Intended to be Cleared 
at 3 (Mar. 1, 2016). Further, some SEFs have cited the considerable 
resource cost of obtaining the number of different agreements that 
exist to accommodate the different parties and different asset 
classes. Id.
    \222\ Id.
---------------------------------------------------------------------------

    Commission staff has acknowledged these technological and 
operational challenges and has accordingly granted time-limited no-
action relief.\223\ Based on this relief, SEFs have incorporated

[[Page 61973]]

applicable relationship terms from previous agreements by reference in 
the confirmation without obtaining copies of these agreements prior to 
the execution of a swap.\224\ SEFs, however, still must memorialize the 
relationship terms contained in separate, previously-negotiated 
agreements that the SEF has not reviewed at the time of incorporation, 
and would likely not review post-execution. One industry participant, 
however, noted that a SEF would not be familiar with the terms of the 
agreements that it is required to incorporate by reference into a 
confirmation.\225\
---------------------------------------------------------------------------

    \223\ Commission staff provided initial no-action relief in 
2014. CFTC Letter No. 14-108, Re: Staff No-Action Position Regarding 
SEF Confirmations and Recordkeeping Requirements under Certain 
Provisions Included in Regulations 37.6(b) and 45.2 (Aug. 18, 2014). 
Commission staff has since extended this no-action relief on several 
occasions. See CFTC Letter No. 17-17, Re: Extension of No-Action 
Relief for Swap Execution Facility Confirmation and Recordkeeping 
Requirements under Commodity Futures Trading Commission Regulations 
37.6(b), 37.1000, 37.1001, 45.2, and 45.3(a) (Mar. 24, 2017); CFTC 
Letter No. 16-25, Re: Extension of No-Action Relief for Swap 
Execution Facility Confirmation and Recordkeeping Requirements under 
Commodity Futures Trading Commission Regulations 37.6(b), 37.1000, 
37.1001, 45.2, and 45.3(a) (Mar. 14, 2016); CFTC Letter 15-25, Re: 
Extension of No-Action Relief for SEF Confirmation and Recordkeeping 
Requirements under Commission Regulations 37.6(b), 37.1000, 37.1001, 
and 45.2, and Additional Relief for Confirmation Data Reporting 
Requirements under Commission Regulation 45.3(a) (Apr. 22, 2015).
    \224\ Id.
    \225\ See SIFMA Asset Management Group, Re: Straight-Through 
Processing, Swap Execution Facility Implementation and Relief 
Relating to the Aggregation Provision in Final Block Trade Rule at 6 
n.14 (Oct. 25, 2013) (stating that ``it is highly impractical for a 
SEF to familiarize itself with the often complex, bespoke master 
agreement and trade terms (and the various documents that may be 
incorporated by reference) in order to produce a customized, 
potentially complex confirmation on a trade by trade basis.'').
---------------------------------------------------------------------------

    Based on its experience with the part 37 implementation, the 
Commission acknowledges that cleared and uncleared swaps raise 
different issues with respect to confirmation requirements and the 
current SEF requirements create difficulties for the latter type of 
swap transaction. Therefore, the Commission is proposing a revised 
approach to Sec.  37.6(b) as described below.
a. Sec.  37.6(b)(1)--Legally Binding Documentation
    The Commission proposes Sec. Sec.  37.6(b)(1)(i)-(ii) to establish 
separate swap transaction documentation requirements for cleared and 
uncleared swaps. Proposed Sec.  37.6(b)(1)(i)(A) would apply the 
existing confirmation requirement--that a SEF must issue a written 
confirmation that includes all of the terms of the transaction--to 
cleared swap transactions. The Commission further proposes to define 
``confirmation document'' under Sec.  37.6(b)(1)(i)(B) as a legally 
binding written documentation that memorializes the agreement to all 
terms of a swap transaction and legally supersedes any previous 
agreement that relates to the swap transaction between the 
counterparties.
    With respect to uncleared swap transactions the Commission proposes 
a revised approach under Sec.  37.6(b)(1)(ii) that would require a SEF 
to provide the counterparties to an uncleared swap transaction with a 
``trade evidence record'' that memorializes the terms of the swap 
transaction agreed upon between the counterparties on the SEF. In 
contrast to a cleared swap confirmation, the trade evidence record 
would not be required to include all of the terms of the swap 
transaction, including relationship terms contained in underlying 
documentation between the counterparties. As defined under proposed 
Sec.  37.6(b)(1)(ii)(B), a trade evidence record means a legally 
binding written documentation that memorializes the terms of a swap 
transaction agreed upon by the counterparties and legally supersedes 
any conflicting term in any previous agreement that relates to the swap 
transaction between the counterparties. The Commission anticipates that 
these terms would include, at a minimum, the ``economic terms'' that 
are agreed upon between the counterparties to a specific SEF 
transaction, e.g., trade date, notional amount, settlement date, and 
price.
    The Commission believes that the proposed rule would provide SEFs 
with a simplified approach to comply with the legal documentation 
requirement, but also continue to promote the policy objective of Sec.  
37.6(b) by providing SEF participants with legal certainty with respect 
to both cleared and uncleared swap transactions. Further, the proposed 
approach accommodates existing counterparty trading practices for 
uncleared swaps, particularly the use of separate, previously-
negotiated underlying agreements to establish relationship terms that 
generally govern the trading relationship, as opposed to a specific 
transaction, between two counterparties. To the extent that such terms 
either are agreed upon between the counterparties in underlying 
documentation established away from the SEF and continue to govern the 
transaction post-execution or are not required to establish legal 
certainty for a specific transaction, a SEF would not be required to 
incorporate those terms into a trade evidence record. The proposed 
approach should address the challenges that have prevented SEFs from 
fully complying with Sec.  37.6(b) by reducing the administrative 
burdens for SEFs, who would not be required to obtain, incorporate, or 
reference those previous agreements, and for counterparties, who would 
not be required to submit all of their relevant documentation with 
other potential counterparties to the SEF.\226\
---------------------------------------------------------------------------

    \226\ The Commission acknowledges that the issuance of a trade 
evidence record would not alter the other obligations of a SEF or 
the counterparties under the CEA and the Commission's regulations. 
For example, a SEF would still be required to report all required 
swap creation data under Sec.  45.3(a), as applicable. 17 CFR 
45.3(a). Further, a counterparty that is a swap dealer or major swap 
participant would also still be required to transmit a confirmation 
pursuant to Sec.  23.501, as applicable. 17 CFR 23.501.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comments on all aspects of proposed Sec.  
37.6(b)(1). In particular, the Commission is particularly interested in 
the prescribed contents and legal import of a trade evidence record and 
requests comment on the following questions:
    (19) Should the Commission allow a SEF to issue a trade evidence 
record that does not include all the terms of a swap transaction agreed 
to on the SEF?
    (20) Should the Commission require a SEF to include a minimum set 
of terms in a trade evidence record, e.g., material economic terms? 
Should the Commission specify those terms in the proposed regulation?
    (21) Should the Commission require a SEF to include any of the 
``primary economic terms,'' as defined under Sec.  45.1, in a trade 
evidence record? If so, which terms should be included?
    (22) Should the Commission specify that a trade evidence record (i) 
serves as evidence of a legally binding agreement upon the 
counterparties; and (ii) legally supersedes any previous agreement, 
rather than any conflicting term in any previous agreement, as 
proposed? With respect to (i), are there terms that are generally 
contained within previously-negotiated, underlying agreements between 
the counterparties that are necessary to make a transaction legally 
binding, and therefore must be submitted to the SEF?
    (23) Should the Commission specify in its regulations that 
notwithstanding the trade evidence record requirement, a SEF is allowed 
to incorporate by reference underlying, previous agreements containing 
terms governing a swap transaction into any trade evidence record 
associated with the transaction?
    (24) Do proposed Sec. Sec.  37.6(b)(1)(i)-(ii) provide sufficient 
legal certainty with respect to any contradictory terms that may be 
contained within the previous agreements?
b. Sec.  37.6(b)(2)--Requirements for Swap Documentation
    Section 37.6(b) requires that the confirmation take place at the 
same time as execution, except for a limited exception for certain 
information for bunched orders.\227\ The Commission proposes Sec.  
37.6(b)(2)(i) to amend this requirement and instead require a SEF to 
provide a confirmation document or trade evidence record to the 
counterparties to a transaction ``as soon as technologically 
practicable'' after the

[[Page 61974]]

execution of the swap transaction on the SEF.\228\
---------------------------------------------------------------------------

    \227\ 17 CFR 37.6(b).
    \228\ The Commission notes that in the context of real-time 
public reporting, it has defined ``as soon as technologically 
practicable'' to mean as soon as possible, taking into consideration 
the prevalence, implementation and use of technology by comparable 
market participants. 17 CFR 43.2. The meaning of this term, as 
proposed in Sec.  37.6(b)(2)(i) herein, would be consistent with 
this definition.
---------------------------------------------------------------------------

    The Commission recognizes that a strict implementation of the 
existing requirement is not practical from a temporal standpoint, given 
that a SEF's issuance of a written confirmation document or trade 
evidence record would only occur upon execution by counterparties.\229\ 
Further, the required issuance of a written confirmation document or 
trade evidence record simultaneous with execution may become further 
impracticable for some SEFs from an operational and technological 
standpoint based on the different trading systems or platforms that 
SEFs may offer under a more flexible approach to execution methods 
proposed by the Commission.\230\ Therefore, proposed Sec.  
37.6(b)(2)(i) is intended to establish a more practical approach that 
accommodates different types of SEF operations. The Commission believes 
that the proposed standard--``as soon as technologically 
practicable''--would also continue to promote the Commission's goals of 
providing the swap counterparties with legal certainty in a prompt 
manner. Based on this proposed amendment to the existing language of 
Sec.  37.6(b), the Commission also proposes to renumber the existing 
requirement regarding bunched orders to proposed Sec.  37.6(b)(2)(ii) 
and adopt non-substantive amendments.
---------------------------------------------------------------------------

    \229\ The Commission notes that a public commenter previously 
cited execution and confirmation as two separate processes in the 
swap transaction process. SEF Core Principles Final Rule at 33491 
(comment from the Energy Working Group that execution and 
confirmation are ``distinct steps'' in the swap transaction 
process).
    \230\ See infra Section IV.I.--Sec.  37.9--Methods of Execution 
for Required and Permitted Transactions; Sec.  37.10--Process for a 
Swap Execution Facility to Make a Swap Available to Trade; Sec.  
37.12--Trade Execution Compliance Schedule; Sec.  38.11--Trade 
Execution Compliance Schedule; Sec.  38.12--Process for a Designated 
Contract Market to Make a Swap Available to Trade.
---------------------------------------------------------------------------

    As noted, Sec.  37.6(b) requires a SEF to provide the written 
confirmation of a transaction executed on or pursuant to the SEF's 
rules to ``each counterparty to [the] transaction.'' The Commission 
proposes to add Sec.  37.6(b)(2)(iii) to provide that a SEF may issue a 
confirmation document or trade evidence record to the intermediary 
trading on behalf of a counterparty, provided that the SEF establish 
and enforce rules to require any intermediary to transmit any such 
document or record to the counterparty as soon as technologically 
practicable. Based on industry practice, the Commission notes that to 
the extent that intermediaries, acting on behalf of swap participants, 
facilitate swap execution on a SEF, the SEF transmits the written 
confirmation to the intermediary and then requires the intermediary to 
forward the confirmation to its customer. The Commission understands 
that participants using intermediaries to trade on a SEF may not 
establish the appropriate connectivity necessary to receive written 
confirmations directly from the SEF. Requiring the intermediary to 
transmit the document or record as soon as technologically practicable 
would further accommodate current market practices, as discussed above.
Request for Comment
    The Commission requests comments on all aspects of proposed Sec.  
37.6(b)(2). In particular, the Commission requests comment on the 
following questions:
    (25) Is the Commission's proposal, to require a SEF to transmit 
confirmation documents or trade evidence records to counterparties ``as 
soon as technologically practicable'' after the execution of the swap 
transaction on the SEF an appropriate time frame? Should the Commission 
require that the SEF issue the confirmation document or trade evidence 
record within a specified time limit?
    (26) Is the Commission's proposal to require a SEF to establish and 
enforce rules that require an intermediary acting on behalf of a 
counterparty to transmit a confirmation document or trade evidence 
record to such counterparty ``as soon as technologically practicable'' 
an appropriate time frame? Should the Commission require that the SEF 
issue the confirmation document or trade evidence record within a 
specified time limit?
    (27) Should the Commission define ``as soon as technologically 
practicable'' in a similar manner to the definition in part 43?

G. Sec.  37.7--Prohibited Use of Data Collected for Regulatory Purposes

    The Commission proposes to move and amend Sec.  37.7, which 
prohibits a SEF from using proprietary or personal information that it 
collects or receives to fulfill regulatory obligations for business or 
marketing purposes, as a new Sec.  37.504 under the Core Principle 5 
(Ability to Obtain Information) regulations. The Commission discusses 
the proposed amendments to the existing requirements further 
below.\231\
---------------------------------------------------------------------------

    \231\ See infra Section X.D.--Sec.  37.504--Prohibited Use of 
Data Collected for Regulatory Purposes.
---------------------------------------------------------------------------

H. Sec.  37.8--Boards of Trade Operating Both a Designated Contract 
Market and a Swap Execution Facility 232
---------------------------------------------------------------------------

    \232\ The Commission proposes to renumber Sec.  37.8 to Sec.  
37.7 based on the proposed changes described above.
---------------------------------------------------------------------------

    Section 37.8(a) requires an entity that operates as both a DCM and 
a SEF to separately register with the Commission in accordance with the 
procedures set forth under part 38 and part 37 of the Commission's 
regulations, respectively. Section 37.8(a) further requires that a 
dually-registered entity comply with the respective DCM and SEF core 
principles and regulations on an ongoing basis.
    The Commission notes that the language is superfluous to the 
similar requirements that already exist under Sec.  38.2 and Sec.  37.2 
for DCMs and SEFs, respectively, and therefore proposes to delete this 
latter requirement. The Commission notes, however, that this is not a 
substantive change and DCMs and SEFs must otherwise comply with the Act 
and applicable regulations.

I. Sec.  37.9--Methods of Execution for Required and Permitted 
Transactions; Sec.  37.10--Process for a Swap Execution Facility To 
Make a Swap Available to Trade; Sec.  37.12--Trade Execution Compliance 
Schedule; Sec.  38.11--Trade Execution Compliance Schedule; Sec.  
38.12--Process for a Designated Contract Market To Make a Swap 
Available To Trade

    The CEA, as amended by the Dodd-Frank Act, requires the Commission 
to develop and implement a regulatory framework for trading swaps on 
registered SEFs and establishes a corresponding trade execution 
requirement that requires certain swaps to be executed on DCMs, SEFs, 
or Exempt SEFs.\233\ The regulatory framework that the Commission 
developed to implement these provisions prescribes, among other things, 
(i) a process that allows SEFs and DCMs to initiate determinations of 
which swaps should be subject to the CEA section 2(h)(8) trade 
execution requirement, i.e., the MAT process; and (ii) the methods of 
execution that must be used for swaps that are subject to the trade 
execution requirement. In addition, the framework permits SEFs to offer 
any method of execution for swaps

[[Page 61975]]

that are not subject to the trade execution requirement.
---------------------------------------------------------------------------

    \233\ 7 U.S.C. 2(h)(8). Although the trade execution requirement 
may be satisfied through DCMs, the Commission's discussion of the 
trade execution requirement in this proposed rulemaking will 
generally pertain to SEFs, unless otherwise noted.
---------------------------------------------------------------------------

    The Commission adopted this framework in part to achieve the SEF 
statutory goals in CEA section 5h(e) of promoting trading on SEFs and 
promoting pre-trade transparency in the swaps market. The Commission 
acknowledges that the existing framework has transitioned some swaps 
trading and market participants to SEFs. Since 2013, however, the 
Commission has gained considerable knowledge and experience with swaps 
trading dynamics through implementing part 37, particularly with 
respect to the required use of certain execution methods. Based on that 
knowledge and experience, the Commission believes that certain aspects 
of the current SEF regulatory framework should be enhanced to further 
promote the statutory SEF goals and better maximize the role of SEFs as 
vibrant and liquid marketplaces for swaps trading.
    Accordingly, the Commission is proposing two revisions to the 
current framework. First, the Commission proposes to adopt a revised 
interpretation of CEA section 2(h)(8) to set the applicability of the 
trade execution requirement, i.e., swaps subject to the clearing 
requirement and listed for trading by a SEF or DCM would be subject to 
the requirement. Instead of maintaining the current MAT determination 
process, the Commission believes that this proposed approach would be 
better aligned with the intent of CEA section 2(h)(8) and further the 
statutory goal of promoting swaps trading on SEFs. As applied to the 
current scope of swaps that are subject to the clearing requirement and 
listed for trading by SEFs and DCMs, the Commission anticipates that 
this approach would significantly expand the scope of swaps that are 
subject to the trade execution requirement. Second, based on its 
understanding of swaps trading dynamics and the increased scope of 
swaps that would become subject to the trade execution requirement, the 
Commission also proposes to allow greater flexibility in the trading of 
such swaps by eliminating the prescribed execution methods for swaps 
subject to the requirement.
1. Trade Execution Requirement and MAT Process
    The trade execution requirement mandates counterparties to execute 
swap transactions subject to the clearing requirement on a SEF or DCM, 
unless no SEF or DCM ``makes the swap available to trade.'' \234\ The 
Commission adopted Sec.  37.10 and Sec.  38.12 to establish a ``MAT 
determination'' process that allows SEFs and DCMs, respectively, to 
make swaps ``available to trade,'' and therefore, subject to the trade 
execution requirement.\235\ These processes enable a SEF or DCM to make 
a swap ``available to trade'' by submitting a determination to the 
Commission pursuant to the part 40 rule filing procedures.\236\ A SEF 
or DCM that submits a MAT determination must include an assessment of 
whether the subject swap has ``sufficient trading liquidity'' and must 
address at least one of six factors that serve as indicia of the swap's 
trading liquidity.\237\ Swaps that become subject to the trade 
execution requirement pursuant to the approval or certification of a 
MAT determination must, with the limited exception of block 
transactions, be executed by counterparties on a SEF or DCM.\238\
---------------------------------------------------------------------------

    \234\ 7 U.S.C. 2(h)(8). CEA section 2(h)(8) also specifies that 
swaps that are subject to a clearing exception under section 2(h)(7) 
are not subject to the trade execution requirement. See infra 
Section XXI.A.3.--Sec.  36.1(c)--Exemption for Swap Transactions 
Excepted or Exempted from the Clearing Requirement under Part 50. 
The Commission interprets ``swap execution facility'' in CEA section 
2(h)(8)(B) to include a swap execution facility that is exempt from 
registration pursuant to CEA section 5h(g). See supra note 10.
    \235\ 17 CFR 37.10; 17 CFR 38.12.
    \236\ The Commission notes that a SEF or DCM may submit a MAT 
determination pursuant to the rule approval process under Sec.  40.5 
or through the rule certification process under Sec.  40.6. 17 CFR 
37.10(a)(1) and 38.12(a)(1).
    \237\ 17 CFR 37.10(b), 38.12(b). Parts 37 and 38 respectively 
specify the same six factors: (i) Whether there are ready and 
willing buyers and sellers for the swap; (ii) the frequency or size 
of transactions in the swap; (iii) the swap's trading volume; (iv) 
the number and types of market participants trading the swap; (v) 
the swap's bid/ask spread; and (vi) the usual number of resting firm 
or indicative bids and offers in the swap. 17 CFR 37.10(b), 
38.12(b). The Commission explained in the preamble to the MAT Final 
Rule that with respect to factors (ii)-(iii), the submitting DCM or 
SEF could look to DCM, SEF, or bilateral transactions. MAT Final 
Rule at 3360.
    \238\ Based on part 40, a MAT determination filing applies the 
trade execution requirement to a particular swap either upon 
Commission approval (in the case of a filing submitted for approval 
under Sec.  40.5) or upon the lack of Commission objection (in the 
case of a filing submitted on a self-certified basis under Sec.  
40.6).
---------------------------------------------------------------------------

2. Execution Method Requirements
    Section 37.9 defines swaps that are subject to the trade execution 
requirement, i.e., those swaps that must be executed on a SEF or DCM, 
as ``Required Transactions'' \239\ and specifies that a SEF may only 
offer two methods for executing such swaps. Specifically, Required 
Transactions must be executed on (i) an Order Book, as defined under 
Sec.  37.3(a)(3) and discussed above; \240\ or (ii) an RFQ System, as 
defined under Sec.  37.9(a)(3).\241\ An RFQ System is defined, among 
other requirements, as a trading system or platform where a market 
participant transmits a request for a bid or offer to no less than 
three market participants who are not affiliates of, or controlled by, 
the requester or each other (``RFQ-to-3 requirement'').\242\ To the 
extent that a SEF offers an RFQ System for Required Transactions, that 
system must operate in conjunction with an Order Book, which a SEF is 
currently required to establish and maintain as a minimum trading 
functionality.\243\ Pursuant to the statutory SEF definition, SEFs have 
been able to offer these methods through ``any means of interstate 
commerce,'' \244\ which the Commission has interpreted to mean ``a 
variety of means of execution or communication, including, but not 
limited to, telephones, internet communications, and electronic 
transmissions.'' \245\ Accordingly, SEFs have been able to develop and 
offer an Order Book or RFQ System through various forms, including 
voice-based systems.
---------------------------------------------------------------------------

    \239\ 17 CFR 37.9(a)(1).
    \240\ See supra notes 123-125 and accompanying discussion 
(definition of ``Order Book'' under Sec.  37.3(a)(3)).
    \241\ 17 CFR 37.9(a)(2).
    \242\ 17 CFR 37.9(a)(3). The RFQ System definition additionally 
specifies that the three requesters may not be affiliates or 
controlled by one another; and the system must provide each of its 
market participants with equal priority in receiving RFQs and 
transmitting and displaying for execution responsive orders. 17 CFR 
37.9(a)(3); 17 CFR 37.9(a)(3)(iii).
    \243\ 17 CFR 37.9(a)(2)(i)(B). In operating an RFQ System in 
conjunction with an Order Book, a SEF must communicate to a 
requester any firm bid or offer pertaining to the same instrument 
resting on any of the SEF's Order Books; and provide the requester 
with the ability to execute against such firm resting bids or offers 
along with any responsive RFQ orders. 17 CFR 37.9(a)(3)(i)-(ii). As 
discussed above, the Commission is proposing to eliminate the 
minimum trading functionality under Sec.  37.3(a)(2) and the Order 
Book definition under Sec.  37.3(a)(3). See supra Section IV.C.2.--
Sec. Sec.  37.3(a)(2)-(3)--Minimum Trading Functionality and Order 
Book Definition.
    \244\ 7 U.S.C. 1a(50).
    \245\ SEF Core Principles Final Rule at 33501 n.328.
---------------------------------------------------------------------------

    In establishing the Order Book and RFQ System requirements, the 
Commission sought in part to transition swaps trading onto SEFs and 
achieve the statutory SEF goal of promoting pre-trade price 
transparency in the swaps market. In addition to establishing the Order 
Book as a minimum trading functionality for all swaps listed for 
trading by a SEF, the Commission intended for the Order Book 
requirement to promote such transparency for swaps subject to the trade 
execution requirement. The Commission did acknowledge, however, that an 
Order Book lacks the appropriate

[[Page 61976]]

flexibility to be suitable for trading many types of swaps, in 
particular those lacking liquidity.\246\ The lack of liquidity is a 
characteristic of broad segments of the swaps market, which trade 
episodically among a limited number of market participants in large 
average notional amounts.
---------------------------------------------------------------------------

    \246\ SEF Core Principles Final Rule at 33564-65. In the 
preamble to the SEF Core Principles Final Rule, the Commission 
expressed its anticipation that ``the order book method will 
typically work well for liquid Required Transactions (i.e., 
transactions involving swaps that are subject to the trade execution 
requirement in CEA section 2(h)(8)), but for less liquid Required 
Transactions, RFQ systems are expected to help facilitate trading.'' 
Id.
---------------------------------------------------------------------------

    To address this lack of suitability even within the scope of 
Required Transactions, the Commission prescribed the RFQ System as an 
alternative execution method for these transactions.\247\ At the time, 
the Commission observed that RFQ systems provide market participants 
with a certain level of trading flexibility, in particular by allowing 
them to balance the risks of information leakage and front-running 
associated with disclosing trading interests against the price 
competition benefits derived by disseminating a request to a larger 
number of participants.\248\ The Commission recognizes that most SEFs 
currently offer an RFQ System for most of the respective products that 
they list for trading; when trading swaps subject to the trade 
execution requirement, market participants have mostly utilized an RFQ 
System, transmitting RFQs to more than three unaffiliated market 
participants in many instances.\249\
---------------------------------------------------------------------------

    \247\ 17 CFR 37.9(a)(2). The Commission adopted the RFQ System 
requirement based upon its prevalence in the OTC swaps market. Id. 
at 33564. The Commission stated that ``RFQ systems are currently 
used by market participants in the OTC swap market, many in 
conjunction with order book functionality.'' In adopting the 
requirement, the Commission also stated it was ``leveraging best 
practices from current swaps trading platforms.'' Id. at 33565.
    \248\ SEF Core Principles Final Rule at 33476.
    \249\ In discussing trading of CDX and iTraxx indices, Lynn 
Riggs, Esen Onur, David Reiffen, and Haoxiang Zhu found that 
``[c]ustomers most frequently request quotes from three dealers, 
which happens in about 45% of the RFQ sessions, followed by five 
dealers, which happens in just below 30% of the RFQ sessions. In 
about 18% of the sessions the customer selects four dealers.'' Lynn 
Riggs, Esen Onur, David Reiffen, & Haoxiang Zhu, Mechanism Selection 
and Trade Formation on Swap Execution Facilities: Evidence from 
Index CDS 10 (2017), https://www.cftc.gov/idc/groups/public/@economicanalysis/documents/file/oce_mechanism_selection.pdf (``2017 
Riggs Study'').
---------------------------------------------------------------------------

3. Implementation of Existing Requirements
    While the Commission acknowledges that the existing approach has 
transitioned some swaps trading to SEFs, this transition has stagnated 
and will not likely increase further without changes to the existing 
regulatory framework. This stagnation, as discussed further below, is 
reflected by the limited set of swaps that have become subject to the 
trade execution requirement, and therefore subject to mandatory trading 
on SEFs, through the Commission's MAT process. The lack of additional 
swaps becoming subject to the requirement over the last several years 
has been attributable to market participants' concerns over the 
Commission's Order Book and RFQ System requirements for Required 
Transactions under Sec.  37.9; this concern, in turn, has dissuaded 
SEFs from submitting additional MAT determinations.
    Since the Commission's adoption of the MAT determination process, a 
small number of swaps that are subject to the clearing requirement have 
become subject to the trade execution requirement. In the fall of 2013, 
four SEFs and one DCM submitted a limited number of swaps to the 
Commission as ``available to trade'' via the Commission's Sec.  40.6 
self-certification process.\250\ The swaps submitted consist of the 
current ``on-the-run'' and most recent ``off-the-run'' index CDS with a 
five-year tenor and fixed-to-floating IRS with benchmark tenors 
denominated in U.S. dollars, euros, and pound sterling.\251\ The IRS 
and CDS that are currently subject to the trade execution requirement 
represent the most standardized and highly liquid swaps contracts 
offered by SEFs,\252\ but also represent a very limited segment of the 
potential universe of swaps eligible to become subject to the trade 
execution requirement, i.e., those swaps that are both subject to the 
clearing requirement and currently listed for trading on a SEF.\253\ 
Based on data evaluated by the International Swaps and Derivatives 
Association (``ISDA''), approximately 85 percent of total reported IRS 
traded notional volume (``traded notional'') in 2017 consisted of swaps 
subject to the clearing requirement.\254\ This represents an increase 
from the approximately 73 to 77 percent of total reported IRS traded 
notional during 2015 to 2016 that was subject to the clearing 
requirement.\255\ Data analysis conducted by Commission staff found 
that the percentage of trading volume in IRS subject to the trade 
execution requirement is far lower than the percentage subject to the 
clearing requirement and has actually declined, from approximately 10 
to 12 percent of total reported IRS traded notional in 2015 to 
approximately 7 to 9 percent of the total reported IRS traded notional 
in 2017 and the first half of 2018.\256\
---------------------------------------------------------------------------

    \250\ TW SEF LLC--Amendment to Self-Certification for Swaps to 
be Made Available to Trade (Jan. 26, 2014) (third amended filing 
from initial submission on October 28, 2013); Javelin SEF, LLC, No. 
13-06R(3), Javelin Determination of Made Available to Trade of 
Certain Interest Rate Swaps made Pursuant to Parts 37 of the Rules 
of the Commodity Futures Trading Commission (Jan. 8, 2014) (third 
amended filing from initial submission on October 18, 2013) 
(``Javelin SEF MAT Determination''); Bloomberg SEF LLC, No. 2013-R-
9, Bloomberg SEF LLC--Made Available to Trade (``MAT'') Submission 
of Certain Credit Default Swaps (``CDS'') and Interest Rate Swaps 
(``IRS'') pursuant to Commodity Futures Trading Commission (the 
``Commission'') Regulation 40.6 (submission #2013-R-9) (Dec. 5, 
2013) (``Bloomberg SEF MAT Determination''); MarketAxess SEF 
Corporation, Made Available to Trade (``MAT'') Submission of Certain 
Credit Default Swaps (Oct. 30, 2013) (``MarketAxess SEF MAT 
Determination''); trueEX, LLC, Submission 2013-14, Made Available to 
Trade (``MAT'') Submission of Certain Interest Rate Swaps (``IRS'') 
pursuant to CFTC Regulation 40.6 (Oct. 21, 2013) (``trueEX MAT 
Determination'').
    \251\ CFTC, Industry Filings--Swaps Made Available to Trade, 
https://www.cftc.gov/idc/groups/public/@otherif/documents/file/swapsmadeavailablechart.pdf.
    \252\ See, e.g., TW SEF LLC--Self-Certification for Swaps to be 
Made Available to Trade at 8 (Oct. 28, 2013) (describing the IRS 
submitted as benchmark swaps with the most liquidity and the CDS 
submitted as the most actively traded); Javelin SEF MAT 
Determination at 11 (noting that the bid-offer spreads for the IRS 
submitted is tight and characteristic of considerable liquidity); 
Bloomberg SEF MAT Determination at 3 (stating that the scope of the 
MAT determination represents IRS and CDS that are the most 
standardized and liquid); MarketAxess SEF MAT Determination at 1 
(stating that the MAT determination consists of the most liquid CDS 
listed); trueEX MAT Determination at 4 (specifying that the trade 
frequency of IRS with whole-year tenors is sufficient to support a 
MAT determination).
    \253\ The clearing requirement currently applies to various 
categories of IRS, including fixed-to-floating swaps denominated in 
U.S. dollars, pound sterling, and euros with whole- and partial-year 
tenors that range from 28 days to 50 years; fixed-to-floating swaps 
in additional currency denominations with whole and partial tenors 
that range from 28 days up to 30 years; basis swaps, overnight index 
swaps, and forward rate agreements in varying denominations and 
tenors; and various CDX and iTraxx index CDS in the current on-the-
run series and a broad range of older series (prior to the most 
recent off-the-run series) with whole-year benchmark tenors. 17 CFR 
50.4.
    \254\ ISDA, ISDA Research Note: Actual Cleared Volumes vs. 
Mandated Cleared Volumes: Analyzing the US Derivatives Market 3 
(July 2018), https://www.isda.org/a/6yYEE/Actual-Cleared-Volumes-vs-Mandated-Cleared-Volumes.pdf (``2018 ISDA Research Note'').
    \255\ Id.
    \256\ Commission staff conducted data analysis based on publicly 
available data accessed via Clarus Financial Technology 
(``Clarus''). In a separate analysis, ISDA found that only 5 percent 
of trading volume in IRS during 2015 and the first three quarters of 
2016 consisted of IRS subject to the trade execution requirement. 
ISDA, ISDA Research Note: Trends in IRD Clearing and SEF Trading 1, 
3, 11 (December 2016), https://www.isda.org/a/xVDDE/trends-in-ird-clearing-and-sef-trading1.pdf (``2016 ISDA Research Note'').
---------------------------------------------------------------------------

    Beyond this limited initial set of self-certified MAT 
determinations, however,

[[Page 61977]]

the Commission has not received any additional MAT determinations for 
the significantly large number of IRS and CDS that are subject to the 
clearing requirement. This discrepancy has grown even larger as a 
result of a subsequent expansion of the clearing requirement.\257\ The 
Commission believes that the lack of further MAT determinations from 
SEFs or DCMs is largely attributed to the influence of market 
participants who believe that applying the trade execution requirement, 
and therefore the required use of an Order Book or RFQ System, would 
adversely impact their ability to utilize execution methods that are 
best suited for the swap they are trading and their individual trading 
needs.\258\
---------------------------------------------------------------------------

    \257\ The Commission expanded the list of swaps subject to the 
clearing requirement in 2016 by adding several new classes of IRS 
denominated in nine different currencies. See supra note 35. The 
Commission believes that the expansion likely contributed to the 
increase noted above in the percentage of total reported IRS traded 
notional subject to the clearing requirement in 2017 relative to 
prior years.
    \258\ SIFMA AMG noted that these limited methods of execution 
meant that a MAT determination ``could force the entire swap market 
to change its practice, disrupting trading and upending the natural 
evolution of market dynamics.'' See Letter from the Asset Management 
Group of the Securities Industry and Financial Markets Association 
(``SIFMA AMG''), In re Concerns Regarding the SEF Framework 3 (May 
11, 2015) (``2015 SIFMA AMG Letter''). Further, SIFMA AMG argued 
that the ``artificial limitation'' on execution methods for required 
transactions ``has resulted in reduced liquidity and fewer options 
for asset managers working to reduce portfolio risk in a cost-
effective manner. . . .'' Id. At a Commission roundtable discussion 
on the MAT process, one participant noted that market participant 
aversion to a broad MAT determination by Javelin SEF discouraged 
other SEFs from submitting determinations, based on the fear that 
market participants would cease trading or avoid their respective 
platforms altogether. 2015 MAT Roundtable at 65-67. See also Joe 
Rennison, Experts split on MAT determinations, Risk.net (Nov. 8, 
2013), https://www.risk.net/infrastructure/trading-platforms/2305790/experts-split-mat-determinations (noting market participant 
resistance to Javelin SEF's initial MAT submission).
---------------------------------------------------------------------------

    To establish which swaps would be sufficiently liquid to be traded 
via an Order Book or RFQ System, the Commission relied upon the 
expertise and experience of SEFs and DCMs in the MAT determination 
process.\259\ The limited number of MAT determinations that has 
resulted reflects these execution methods' lack of suitability in 
facilitating a broad range of swaps trading. Market participants have 
stated that the prescriptive requirements under Sec.  37.9 limit their 
ability to otherwise utilize other execution methods that they believe 
may be better suited to address their business needs, adapt to quickly-
changing market conditions, or achieve some combination thereof.\260\ 
Given that many of the swaps that are subject to the clearing 
requirement are highly customizable and less liquid, continuing to 
mandate the use of an Order Book and RFQ System is inconsistent with 
transitioning a broader segment of the swaps market to the SEF 
regulatory framework. Therefore, the Commission recognizes the need for 
greater flexibility in execution methods to broaden the scope of the 
trade execution requirement over additional swaps trading.\261\
---------------------------------------------------------------------------

    \259\ MAT Final Rule at 33609.
    \260\ See 2015 SIFMA AMG Letter at 8 (In re the current approach 
to required methods of execution: ``this prescriptive approach has 
negatively impacted market conditions and has caused fragmentation 
of the U.S. swap market. The unnecessary restriction on modes of 
execution . . . limits a SEF's ability to foster liquidity and 
diminishes the venues that asset managers may access for liquid, 
competitive pricing.'').
    \261\ The Commission notes that the current SEF regulatory 
framework allows a SEF to offer flexible methods of execution for 
swaps that are not subject to the trade execution requirement, i.e., 
Permitted Transactions; this approach would facilitate trading in 
bespoke or less liquid swaps on a SEF. 17 CFR 37.9(c). As noted 
above, only 7 to 9 percent of total reported IRS traded notional has 
consisted of swaps subject to the trade execution requirement in 
recent months; however, approximately 57 percent of total reported 
IRS traded notional has occurred on SEFs in 2018. ISDA, ISDA 
SwapsInfo Weekly Analysis: Week Ending October 19, 2018, http://analysis.swapsinfo.org/2018/10/interest-rate-and-credit-derivatives-weekly-trading-volume-week-ending-october-19-2018/ (``2018 ISDA 
SwapsInfo Weekly Analysis''). Accordingly, the Commission believes 
that adopting a more flexible approach to execution methods in the 
SEF regulatory framework would better reflect the current swaps 
market environment.
---------------------------------------------------------------------------

    The Commission acknowledges that the Order Book and RFQ System 
requirements are too prescriptive and limiting to be applied over a 
broader segment of the swaps market. Specifically, these methods do not 
account for the swaps products that are highly customized and 
episodically liquid by nature. The Commission previously acknowledged 
that market participants take into account factors such as swap product 
complexity, trade size, and liquidity in deciding how to trade swaps, 
including the number of market participants to whom a request for quote 
will be sent.\262\ Thus, even the RFQ-to-3 requirement, which the 
Commission adopted to provide more execution flexibility, may hinder 
market participants from determining the appropriate number of market 
participants to disseminate an RFQ for the additional swaps that would 
be subject to the trade execution requirement. Mandating the use of 
limited methods of execution for swaps subject to the requirement 
imposes the Commission's judgment regarding how best to execute 
different swaps and ultimately inhibits market participants from 
tailoring their own trading strategies and decisions based on the swaps 
involved, their individual business needs, the desired transaction 
size, and existing market conditions, among other factors.
---------------------------------------------------------------------------

    \262\ SEF Core Principles Final Rule at 33562.
---------------------------------------------------------------------------

    The required methods of execution has also limited SEFs from 
developing more efficient, transparent, and cost-effective methods of 
trading, as well as impeded their ability to compete with one another 
using innovative and different methods of execution.\263\ For example, 
a SEF may develop a new trading functionality that does not qualify as 
an Order Book or RFQ System, but is effective and efficient in trading 
both IRS that are and are not subject to the trade execution 
requirement. Under the current regulatory framework, participants could 
not use that new method for IRS that are subject to the trade execution 
requirement or IRS that would become subject to the requirement in the 
future. This scenario deprives market participants of a useful 
execution method and deprives the SEF that developed the method of 
benefitting from its innovative efforts.
---------------------------------------------------------------------------

    \263\ At the Commission's 2015 MAT Roundtable, one participant 
expressed concern that a MAT determination would ``cut[ ]off 
potential modes of execution,'' rather than promoting new innovative 
execution methods. See 2015 MAT Roundtable at 165.
---------------------------------------------------------------------------

    The Commission notes that this scenario could occur with respect to 
forward rate agreements (``FRAs''), many of which are economically 
similar to IRS that are currently subject to the trade execution 
requirement. In spite of this economic similarity, FRAs in several 
different types of currency denominations and tenor ranges that are 
currently subject to the clearing requirement, but have not been 
submitted to the Commission as ``available to trade.'' \264\ Based on 
an ISDA analysis, over 97 percent of total reported FRA traded notional 
during the third quarter of 2016 was cleared and approximately 81 
percent of which was traded on SEF and accounted for slightly less than 
54 percent of total reported IRS traded notional occurring on 
SEFs.\265\ The Commission has

[[Page 61978]]

observed that FRA trading on SEFs occurs through ``permitted'' 
execution methods, such as risk mitigation services,\266\ that assist 
market participants with managing their exposures to market, credit, 
and other sources of risk.\267\ Despite their utility, risk mitigation 
services do not constitute an Order Book or RFQ System, and therefore, 
are not available as an execution method for swaps subject to the trade 
execution requirement under the current regulatory framework. Given 
that many FRAs would become subject to the trade execution requirement 
under the Commission's proposed regulatory framework, as discussed 
further below, allowing SEF participants to continue executing these 
types of swaps would require more flexible execution methods that are 
appropriate for conducting risk mitigation exercises.
---------------------------------------------------------------------------

    \264\ 17 CFR 50.4 (specifying the FRAs that are subject to 
mandatory clearing).
    \265\ 2016 ISDA Research Note at 5. The Commission notes that 
these statistics include both swaps subject to the clearing 
requirement and swaps that are voluntarily cleared. In a subsequent 
analysis, however, ISDA determined that 92 to 98 percent of total 
reported FRA traded notional from 2014 to 2017 consisted of FRAs 
subject to the clearing requirement. 2018 ISDA Research Note at 9. 
Commission staff replicated ISDA's results and also found that in 
2018, the share of total reported FRA traded notional that is 
cleared has increased to 99 percent, with approximately 81 percent 
of cleared FRAs continuing to trade on SEF. Commission staff also 
found that during the first half of 2018, cleared FRAs accounted for 
approximately 48 percent of IRS volume on SEFs, a somewhat smaller 
share than the amount that ISDA found during its own review period.
    \266\ The Commission notes that market participants have 
contended that the required methods of execution are unsuitable for 
allowing SEFs to conduct risk mitigation services for swaps that are 
subject to the trade execution requirement. See CFTC Letter No. 13-
81, Time-Limited No-Action Relief from Required Transaction 
Execution Methods for Transactions that Result from Basis Risk 
Mitigation Services (Dec. 23, 2013). See also 2016 WMBAA Letter at 
app. A (stating that ``[a]dditional methods of execution for 
Required Transactions should include risk mitigation [platforms]'').
    \267\ The Commission previously determined that risk mitigation 
services that facilitate swap execution are subject to the SEF 
registration requirement. SEF Core Principles Final Rule at 33482-
83.
---------------------------------------------------------------------------

    Further, the Commission believes that the current approach to 
required methods of execution may have imposed barriers to entry for 
entities that seek to offer swaps trading. As noted above, limiting the 
execution methods that a SEF can provide limits their ability to offer 
new and innovative trading solutions. As a result, new entrant SEFs 
have been unable to differentiate themselves from incumbent SEFs on the 
basis of innovation and development, given that both incumbent 
platforms and newly-registered entities are otherwise limited to 
offering an Order Book and an RFQ System. Accordingly, SEFs have been 
forced to compete with one another on a more ancillary basis, rather 
than on fundamental operating aspects that provide value to market 
participants, in particular the available trading system and platform.
    The Commission's current approach to required methods of execution 
has also compelled SEFs to make unintended adjustments and alterations 
to their execution methods, including auction platforms \268\ and work-
up trading protocols.\269\ Given the prescriptive requirements that a 
SEF execution method must comply with to qualify as an Order Book under 
Sec.  37.3(a)(3) or as an RFQ System under Sec.  37.9(a)(3), some SEFs 
have expended time and effort to amend certain aspects of their trading 
systems or platforms, including trading protocols, prior to allowing 
participants to use those methods to execute swaps subject to the trade 
execution requirement. The Commission acknowledges that SEFs have not 
been able to employ and operate execution methods that are fully 
developed to facilitate price discovery and more robust participation 
on the SEF in periods of episodic liquidity. Rather, requiring SEFs to 
adjust various aspects of their respective systems or platforms to 
comply with the required methods of execution has likely introduced 
operating inefficiencies that have not provided corresponding benefits 
to SEF participants. Therefore, the Commission believes that the 
prescriptive execution methods have inhibited the effectiveness of 
execution methods designed and developed by SEFs to promote trading.
---------------------------------------------------------------------------

    \268\ For a description of auction-based platforms, see infra 
note 313 and accompanying discussion.
    \269\ In a trade work-up session associated with a SEF's trading 
system or platform, two participants that execute a particular swap 
transaction at a particular price have the opportunity to execute 
additional volume of that swap at that price within a given time 
period established by the SEF. When that period has lapsed, multiple 
other buyers and sellers may then seek to execute that particular 
swap at the established price set by the initial transaction. 
Interested participants may continue to seek to execute that swap at 
the established price until the buying and selling interest is 
exhausted or the work-up session has expired, as set forth by the 
SEF. The Commission has observed that SEFs offer these sessions 
within a particular execution method, e.g., an electronic order 
book, to encourage participants to provide liquidity to the market.
---------------------------------------------------------------------------

4. Proposed Approach
    To further promote the SEF statutory goals, the Commission proposes 
a SEF regulatory framework that would facilitate a more robust 
application of the trade execution requirement and allow more 
flexibility in the execution methods that may be offered and used for 
trading swaps that are subject to the requirement. The Commission 
believes that this approach would better establish SEFs as vibrant and 
liquid marketplaces for swaps trading that foster price discovery and 
liquidity formation. The Commission believes that its proposed approach 
is consistent with the statutory SEF provisions and would also further 
the statutory SEF goals, while helping to alleviate the challenges of 
the existing approach described above.
    The Commission proposes to adopt a new interpretation of the trade 
execution requirement that would greatly expand the scope of swaps that 
are subject to the requirement. Considering the market characteristics 
and episodic liquidity profiles of these additional swaps, the 
Commission's proposed approach would provide needed flexibility to SEFs 
and market participants to support more trading through SEF trading 
systems or platforms. In conjunction with an expansion of the trade 
execution requirement, the Commission also proposes to eliminate the 
prescriptive execution methods for swaps subject to the requirement. 
Rather than impose execution method requirements that are limited to an 
Order Book or RFQ System, the Commission's proposed approach would 
allow SEFs to develop and offer--and therefore enable--market 
participants to choose execution methods that are appropriate to their 
trading. Providing market participants with greater choice in execution 
methods allows them to utilize trading systems or platforms that are 
not constrained by prescriptive regulatory requirements and suit their 
trading circumstances and the market conditions for those swaps at a 
given time. This flexibility is necessary to facilitate trading in the 
broad scope of swaps that would become subject to the trade execution 
requirement. This flexibility should also allow the swaps market and 
SEFs to continue to naturally evolve and innovate to more efficient, 
transparent, and cost effective means of trading, even for swaps 
currently subject to the trade execution requirement. The Commission 
believes that this flexibility, in concert with the concentration of 
trading activity in episodically liquid swaps on SEFs, should help 
foster price discovery and allow market participants to pursue more 
appropriate, counterparty and swap-specific levels of pre-trade price 
transparency through additional methods of execution.\270\ Accordingly,

[[Page 61979]]

the Commission believes that more execution flexibility also reduces 
certain complexity, costs, and burdens that have impeded SEF 
development and innovation, particularly with more swaps that would be 
subject to mandatory trading on SEFs. Ultimately, this approach is 
intended to attract greater liquidity that would promote more trading 
on SEFs.
---------------------------------------------------------------------------

    \270\ As discussed above, the Commission acknowledges that 
market participants take into account factors such as swap product 
complexity, trade size, liquidity, and the associated desire to 
minimize potential information leakage and front-running risks in 
deciding how to trade swaps, including the number of market 
participants to whom a request for quote will be sent. In selecting 
that number of market participants to whom a request for quote will 
be sent, the market participant is determining the appropriate level 
of pre-trade transparency necessary to efficiently and effectively 
execute that swap transaction based on the above factors and its 
individual trading needs. See supra Section I.B.1.b.--Swaps Market 
Characteristics.
---------------------------------------------------------------------------

a. Sec.  36.1(a)--Trade Execution Requirement
    The Commission has interpreted the trade execution requirement in 
CEA Section 2(h)(8)--in particular, the phrase ``makes the swap 
available to trade''--in a manner that has limited the scope of swaps 
that must be traded on a SEF.\271\ Initially designed to ensure that 
the Order Book and RFQ System requirements could support swaps that are 
sufficiently liquid for trading, the MAT determination process has 
resulted in a small number of swaps that are currently subject to the 
trade execution requirement. As noted above, Commission staff has 
determined that only a small and declining percentage of total reported 
IRS traded notional over a recent time period is subject to the trade 
execution requirement, with only part of overall IRS trading volume 
occurring on SEFs.\272\
---------------------------------------------------------------------------

    \271\ MAT Final Rule at 33606.
    \272\ See supra notes 256 and 261 and accompanying discussion.
---------------------------------------------------------------------------

    Given the current regulatory framework's limited ability in 
promoting swaps trading on SEFs, which limits the statutory SEF goals, 
the Commission is proposing to adopt a revised interpretation of CEA 
section 2(h)(8). The Commission believes that the phrase ``makes the 
swap available to trade'' should be interpreted to mean that once the 
clearing requirement applies to a swap, then the trade execution 
requirement applies to that swap upon any single SEF or DCM listing the 
swap for trading.\273\ As previously noted by some commenters to the 
proposed MAT rule, CEA section 2(h)(8) does not mandate the MAT process 
adopted by the Commission to implement the trade execution 
requirement.\274\ The Commission believes that the most straightforward 
reading of CEA section 2(h)(8) would specify that once the clearing 
requirement applies to a swap, then the trade execution requirement 
also applies to that swap unless no SEF or DCM ``makes the swap 
available to trade.'' Accordingly, once any single DCM or SEF ``makes 
available,'' i.e., lists, a swap that is subject to the clearing 
requirement for trading on its facility, then the trade execution 
requirement would apply to that swap, such that market participants may 
only execute the swap on a SEF, a DCM, or an Exempt SEF.
---------------------------------------------------------------------------

    \273\ In addition to DCMs and SEFs, CEA section 2(h)(8) 
contemplates the ability of Exempt SEFs to list swaps subject to the 
clearing requirement. As discussed below, the Commission proposes to 
use its exemptive authority pursuant to CEA section 4(c) to exclude 
swaps that are exclusively listed by Exempt SEFs from being subject 
to the trade execution requirement. Accordingly, only a CFTC-
registered DCM or SEF would be able to trigger the CEA section 
2(h)(8) trade execution requirement by listing a clearing 
requirement swap. See infra Section XXI.A.2.--Sec.  36.1(b)--
Exemption For Certain Swaps Listed Only By Exempt SEFs.
    \274\ MAT Final Rule at 33607. These commenters believed that 
use of the clearing determination process in CEA section 2(h)(2) 
``as the exclusive basis for finding that a swap is available to 
trade would subject more swaps to the trade execution requirement 
and further the objectives of the Dodd-Frank Act.'' SEF Core 
Principles Final Rule at 33607-08. Some commenters pointed out that 
the procedure for determining whether a swap was made available to 
trade was ``duplicative of the mandatory clearing determination 
process [in CEA section 2(h)(2)] and accordingly stated that the 
Commission should rely on the clearing determination process to also 
determine whether a swap is available to trade.'' MAT Final Rule at 
33607.
---------------------------------------------------------------------------

    The Commission notes that Congress had the ability to delineate a 
comprehensive statutory process for determining when a swap should be 
subject to the trade execution requirement, but did not do so when 
amending the CEA via the Dodd-Frank Act.\275\ In contrast, the clearing 
requirement, established by Congress concurrently with the trade 
execution requirement under the Dodd-Frank Act, sets forth a formal 
statutory process for the Commission to follow in determining which 
swaps must be submitted to a DCO for clearing.\276\ The Commission 
notes that the statutory process in CEA section 2(h)(2) establishes 
that submissions from a DCO for each swap, or any group, category, 
type, or class of swap that it plans to accept for clearing is 
automatically subject to a clearing determination by the 
Commission.\277\ As part of a clearing requirement determination, the 
CEA requires the Commission to evaluate submitted swaps based on a 
prescribed set of factors that includes trading liquidity.\278\ Given 
the absence of analogous CEA provisions governing the trade execution 
requirement and based on its experience since implementing the swaps 
trading framework, the Commission believes that the proposed 
interpretation of CEA section 2(h)(8) is consistent both with that 
statutory provision and with the statutory goal of promoting the 
trading of swaps on SEFs.
---------------------------------------------------------------------------

    \275\ The Commission also observes that Congress specifically 
placed the trade execution requirement within the CEA section 2(h) 
heading of ``clearing requirement.'' The Commission believes that 
this placement of the trade execution requirement within the 
clearing requirement further supports the view that no additional 
framework was intended by Congress beyond the processes already 
enumerated within this section. 7 U.S.C. 2(h).
    \276\ Specifically, CEA section 2(h)(2) delineates a structured 
process that outlines a specific set of factors that the Commission 
must consider in its clearing requirement determination and includes 
a provision for public comment. Among other things, the Commission 
must consider outstanding notional exposures; trading liquidity; 
adequate pricing data; adequate clearing infrastructure; mitigation 
of systematic risk; effects on competition; and legal certainty 
surrounding solvency concerns. 7 U.S.C. 2(h)(2).
    \277\ CEA section 2(h)(2)(B)(iii)(II).
    \278\ As adopted under part 50 of the Commission's regulations, 
the Commission has noted that this required analysis of a swap's 
trading liquidity is intended for risk management purposes, i.e., 
pricing and margining of cleared swaps. In this connection, the 
Commission has noted that higher trading liquidity in swaps would 
assist DCOs in end-of-day settlement procedures, as well as in 
managing the risk of CDS portfolios, particularly in mitigating the 
liquidity risk associated with unwinding a portfolio of a defaulting 
clearing member. 77 FR 47176.
---------------------------------------------------------------------------

    As support for its view that the proposed interpretation of CEA 
section 2(h)(8) would promote the trading of swaps on SEFs, the 
Commission notes that more than 85 percent of IRS and index CDS trading 
volume is currently subject to the clearing requirement; \279\ many, 
but not all, of those swaps are currently listed for trading by SEFs. 
Therefore, the proposed reading would both promote the statutory SEF 
goal of swaps trading on SEFs and help to further swaps liquidity on 
SEFs by requiring all counterparties to trade these swaps on a SEF, 
which may promote increased pre-trade price transparency.\280\ A more 
robust trade

[[Page 61980]]

execution requirement would help migrate and concentrate additional 
trading interests to available trading systems or platforms on 
SEFs.\281\ The Commission believes that all of these factors can 
increase activity on SEFs, as well as help improve their efficiency and 
effectiveness.
---------------------------------------------------------------------------

    \279\ 2018 ISDA Research Note at 3, 15-16.
    \280\ The Commission believes that further achieving both SEF 
statutory goals--promoting trading on SEFs and promoting pre-trade 
price transparency--requires both (i) increasing the number of swaps 
that are subject to the trade execution requirement, thereby 
increasing the amount of trading that must occur on SEF; and (ii) 
concurrently providing flexible execution methods. The Commission 
believes that requiring market participants to conduct a larger 
portion of their swaps trading on SEFs would centralize liquidity, 
foster additional competition among a more concentrated number of 
market participants, and reduce information asymmetries that would 
increase market efficiency and decrease transaction costs. While 
offering flexible methods of execution alone could transition 
additional swaps trading to SEFs, the Commission believes that 
maximizing the potential benefits of the proposed approach 
necessitates an approach that would also lessen fragmentation in 
trading of swaps on SEFs versus the OTC environment.
    Accordingly, the Commission's proposed approach would have a 
profound impact on the amount of swaps trading that occurs on SEFs. 
As noted above, Commission staff found that a small and declining 
percentage of the reported IRS volume in recent months has consisted 
of swaps subject to the trade execution requirement (currently less 
than 10 percent). ISDA determined, however, that more than 55 
percent of total reported IRS traded notional has been occurring on 
SEFs since 2015. See supra note 261 (noting that SEFs have 
facilitated trading of Permitted Transactions). Based on these 
determinations, the Commission's proposed interpretation of the 
trade execution requirement may result in a significantly larger 
amount of additional IRS trading volume on SEFs, given that the 
Commission believes that many, but not all, of that 85 percent of 
IRS that is subject to clearing requirement is currently listed on 
SEFs. Moreover, it is plausible that adopting this proposed 
interpretation would induce SEFs to list additional swaps subject to 
the clearing requirement, which would expand the amount of swaps 
trading that is subject to the trade execution requirement.
    \281\ As noted above, the Commission expects that the proposal 
would greatly expand the scope of the trade execution requirement. 
In particular, the Commission expects that the following swaps would 
become subject to the trade execution requirement based on the fact 
they are currently subject to the clearing requirement and also 
listed by at least one SEF or DCM: (i) Various swaps in the interest 
rate asset class including fixed-to floating swaps denominated in 
U.S. dollars, pound sterling, and euros with non-benchmark tenors 
(whole and partial) that range from 28 days to 50 years; fixed-to-
floating swaps in additional denominations with whole and partial 
tenors ranging from 28 days up to 30 years; basis swaps, overnight 
index swaps (``OIS''), and FRAs with different denominations and 
tenors; and (ii) various CDX and iTraxx index CDSs in older series 
(prior to the most recent off-the-run series) and additional tenors, 
as well as new CDS indices.
---------------------------------------------------------------------------

    Given the Commission's proposed approach to the trade execution 
requirement, as described above, the Commission proposes to eliminate 
(i) the MAT process for SEFs under Sec.  37.10; (ii) the associated 
trade execution compliance schedule under Sec.  37.12; (iii) the MAT 
process for DCMs under Sec.  38.12; and (iv) the associated trade 
execution compliance schedule under Sec.  38.11.
    The Commission further proposes to codify under Sec.  36.1(a) the 
statutory language of the trade execution requirement in CEA section 
2(h)(8), which requires counterparties to execute a swap that is 
subject to the clearing requirement on a DCM, a SEF, or an exempt SEF 
unless no such entity ``makes the swap available to trade'' or the swap 
is subject to a clearing exception in CEA section 2(h)(7).\282\ As 
proposed, Sec.  36.1(a) would specify that counterparties must execute 
a transaction subject to the clearing requirement on a DCM, a SEF, or 
an Exempt SEF that lists the swap for trading. As discussed above, the 
Commission believes that the statutory phrase ``makes the swap 
available to trade'' specifies the listing of a swap by a DCM, a SEF, 
or an exempt SEF on its facility for trading. Accordingly, the trade 
execution requirement would apply to a swap that is subject to the 
clearing requirement upon the listing of that swap by any DCM or 
SEF.\283\
---------------------------------------------------------------------------

    \282\ 7 U.S.C. 2(h)(8)(B). The Commission interprets ``swap 
execution facility'' in CEA section 2(h)(8)(B) to include a swap 
execution facility that is exempt from registration pursuant to CEA 
section 5h(g). See supra note 10.
    \283\ As discussed below, the Commission is proposing an 
exemption from the requirement for swap transactions involving swaps 
that are listed for trading only by an Exempt SEF. See infra Section 
XXI.A.2.--Sec.  36.1(b)--Exemption For Certain Swaps Listed Only By 
Exempt SEFs.
---------------------------------------------------------------------------

    As discussed further below, the Commission is also proposing (i) 
exemptions of various transactions from the trade execution requirement 
under Sec.  36.1 pursuant to its exemptive authority in CEA section 
4(c); (ii) a compliance schedule for market participants with respect 
to the expanded application of the trade execution requirement to 
additional swaps; (iii) a public registry with information as to which 
swaps are subject to the trade execution requirement and the SEFs or 
DCMs that list them for trading; and (iv) a standardized form to assist 
the Commission in populating the public registry with relevant 
information regarding the trade execution requirement.\284\
---------------------------------------------------------------------------

    \284\ See infra Section XXI.A.--Sec.  36.1--Trade Execution 
Requirement.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of its proposed 
approach to the trade execution requirement, including Sec.  36.1(a) as 
well as any alternative approaches to implementation of the trade 
execution requirement.
b. Elimination of Required Execution Methods
    To better foster trading on SEFs--particularly with respect to the 
many episodically liquid swaps that will become subject to the trade 
execution requirement--the Commission proposes to eliminate the 
existing execution method requirements under Sec.  37.9. These 
requirements include the (i) definition of and associated requirements 
for Required Transactions under Sec.  37.9(a), including the RFQ System 
definition under Sec.  37.9(a)(3); \285\ and (ii) the definition and 
associated provision for Permitted Transactions under Sec.  37.9(c). 
Therefore, a SEF would be permitted to offer any method of execution 
that meets the SEF definition for any swap that it lists for trading, 
irrespective of whether the particular swap is or is not subject to the 
trade execution requirement. The Commission believes that this approach 
is consistent with the statutory SEF definition in CEA section 1a(50), 
which establishes that a SEF operates a trading system or platform 
whereby multiple participants have the ability to execute or trade 
swaps by accepting bids and offers made by multiple participants also 
using the trading system or platform.\286\
---------------------------------------------------------------------------

    \285\ As discussed above, the Commission is also proposing to 
eliminate the Order Book definition set forth under Sec.  
37.3(a)(3). See supra Section IV.C.2.--Sec. Sec.  37.3(a)(2)-(3)--
Minimum Trading Functionality and Order Book Definition. As 
discussed below, the Commission is also proposing to eliminate the 
time delay requirement under Sec.  37.9(b), which applies to 
Required Transactions executed on an Order Book. See infra Section 
VI.A.2.--Sec.  37.203(a)--Pre-Arranged Trading Prohibition; Sec.  
37.9(b)--Time Delay Requirement.
    \286\ 7 U.S.C. 1a(50).
---------------------------------------------------------------------------

    The Commission's proposed elimination of Sec.  37.9(a) also 
includes the elimination of subparagraph (a)(2)(ii), which currently 
specifies that with respect to offering an Order Book or RFQ System for 
Required Transactions, a SEF may utilize ``any means of interstate 
commerce'' for purposes of execution and communication, including, but 
not limited to, the mail, internet, email and telephone.\287\ Given the 
elimination of the Order Book and RFQ System requirements, the 
Commission notes that this provision is no longer necessary.
---------------------------------------------------------------------------

    \287\ 17 CFR 37.9(a)(2)(ii).
---------------------------------------------------------------------------

    As noted above, implementing the proposed interpretation of the 
trade execution requirement would increase the number of swaps that are 
required to trade on a SEF. Many of these swaps, which are all 
currently subject to the clearing requirement would have terms and 
conditions, e.g., partial-year tenors and varying payment terms, that 
counterparties customize to address idiosyncratic risks, such as larger 
and longer duration risk exposures.\288\ Given

[[Page 61981]]

their variable and complex nature, trading in these types of swaps can 
be punctuated by alternating periods of liquidity and illiquidity.\289\ 
The markets for many of these swaps may consist of only a few trades 
per day or, in some cases, a few trades per month.\290\ Historically, 
market participants have had discretion to utilize execution methods 
tailored to their particular trading motives and needs, the liquidity 
profile and characteristics of the swap being traded, and current 
market conditions, among other considerations.\291\
---------------------------------------------------------------------------

    \288\ Additionally, market participants may execute such swaps 
as part of different transaction structures, including package 
transactions composed of multiple risk-assuming or risk-hedging swap 
and non-swap components that are priced together. In their review of 
three months of OTC IRS trading, Federal Reserve Bank of New York 
(``FRBNY'') staff found that the swaps traded were ``broad in scope 
with a wide range of products, currencies, and maturities traded . . 
. [including] transactions in eight different product types, 28 
currencies and maturities ranging from less than one month to 55 
years.'' Michael Fleming, John Jackson, Ada Li, Asani Sarkar, & 
Patricia Zobel, Federal Reserve Bank of New York Staff Report No. 
557, An Analysis of OTC Interest Rate Derivatives Transactions: 
Implications for Public Reporting 2 (2012) (``2012 FRBNY 
Analysis''). The analysis further identified ``a meaningful degree 
of customization in contract terms, particularly in payment 
frequencies and floating rate tenors.'' Id. at 3. The Commission 
acknowledges that while some of the swaps that were included in the 
FRBNY's analysis would not be subject to the clearing requirement, 
e.g., any IRS with a 55-year tenor, the Commission nevertheless 
believes that this analysis captures many of the swaps that are 
subject to the clearing requirement.
    \289\ In a 2011 Senate hearing related to SEFs, one participant 
testified that ``[t]rading in [swaps] markets is characterized by 
variable or non[-]continuous liquidity. Such liquidity can be 
episodic, with liquidity peaks and troughs that can be seasonal . . 
. or more volatile and tied to external market and economic 
conditions (e.g., many credit, energy and interest rate products).'' 
Emergence of Swap Execution Facilities: A Progress Report: Hearing 
Before the S. Subcomm. on Sec., Ins., and Investment of the S. Comm. 
on Banking, Hous., and Urban Affairs, 112th Cong. 15 (2011) 
(statement of Stephen Merkel, Executive Vice President and General 
Counsel, BGC Partners, Inc.).
    \290\ In their review of three months of OTC IRS swaps, FRBNY 
staff also ``found over 10,500 combinations of product, currency, 
tenor and forward tenor traded during [their] three-month sample, 
with roughly 4,300 combinations traded only once.'' 2012 FRBNY 
Analysis at 3. Further, their analysis found that within the data 
set, even the most commonly traded instruments were not frequently 
traded. No single instrument in the data set traded more than 150 
times per day, on average, and the most frequently traded 
instruments in OIS and FRA only traded an average of 25 and 4 times 
per day, respectively. Id. Collin-Dufresne, Junge, and Trolle also 
made similar observations with respect to index CDS trading on SEFs, 
noting that the market is generally characterized by relatively few 
trades in very large sizes. Based on their analysis, the CDX.IG 
swaps market consists of 114 dealer-to-client trades and 24 dealer-
to-dealer trades per day, on average, with a median trade size of 
USD $50 million in both segments. The average number of trades in 
the CDX.HY market are greater--164 dealer-to-client trades and 27 
dealer-to-dealer trades per day, on average--but the median trade 
size is smaller--USD $10 million in both segments--which they 
attributed to the significantly higher volatility of high-yield 
contracts. 2017 Collin-Dufresne Research Paper at 16.
    \291\ Those means include, for example, voice-based trading 
systems or platforms that utilize human trading specialists who 
exercise discretion and judgment in managing the degree to which 
trading interests are exposed and how orders are filled. Where pre-
trade market information from bids and offers may be limited due to 
market participants' caution in displaying trading interests, SEFs 
often offer session-based execution methods, such as auctions, to 
generate trading interest.
---------------------------------------------------------------------------

    The existing execution methods for Required Transactions under the 
current framework, however, has precluded the full use of such 
discretion and forces participants to trade certain swaps in accordance 
with an Order Book or an RFQ System. As noted above, the Commission 
believes that these limited execution methods would not be suitable for 
the broad swath of the swaps market that would become newly subject to 
the trade execution requirement. Instead, prescribing those execution 
methods for this expanded group of swaps would likely impose greater 
trading risks on market participants, including execution and liquidity 
risks that negate any benefits associated with the centralized exchange 
trading of such swaps.\292\ The Commission also notes that the current 
execution methods could exacerbate the current information leakage and 
front running risks as described above.\293\
---------------------------------------------------------------------------

    \292\ See supra note 130 (explaining that requiring all market 
participants to use a central limit order book will not necessarily 
promote price competition among dealers in markets that lack 
continuous trading or have episodic liquidity).
    \293\ SEF Core Principles Final Rule at 33562. See generally 
2017 Riggs Study (discussing the ``winner's curse,'' which is 
similar to information leakage in context, in the dealer-to-client 
CDS market).
---------------------------------------------------------------------------

    The existing framework was designed to promote the SEF statutory 
goals, in particular to promote pre-trade price transparency, but based 
on its implementation experience, the Commission believes that a SEF 
regulatory framework that requires a greater number of swaps to be 
traded through flexible execution methods on a SEF will better promote 
both SEF statutory goals. The Commission believes that requiring more 
swaps to be traded on SEFs would help foster vibrant and liquid SEF 
markets as liquidity formation and price discovery is centralized on 
these markets. With more swaps trading activity occurring in a 
concentrated SEF environment, the Commission anticipates that a greater 
number of observable transactions--for example, IRS of varying tenors 
along a single price curve--would allow for a richer price curve that 
provides participants with more accurate pricing for economically 
similar swaps along other points of the curve.
    For example, auction platforms and work-up sessions--both of which 
SEFs currently offer under the existing framework--help to maximize 
participation and trading on the SEF at specific points of time and 
serve as effective tools for price discovery for market participants in 
periods of episodic liquidity. By allowing SEFs the flexibility to 
develop and tailor these types of functionalities to facilitate trading 
across a wide range of market liquidity conditions, a SEF can 
effectively promote appropriate counterparty and swap-specific levels 
of pre-trade price transparency \294\ across a broader range of swaps. 
Further, as discussed above, affording SEFs with greater flexibility 
with execution methods would avoid forcing them to alter these types of 
functionalities in a sub-optimal manner simply to conform to certain 
limited execution methods that are not suitable for trading a broad 
range of swaps with varying liquidity profiles.
---------------------------------------------------------------------------

    \294\ See supra note 270 (discussing appropriate counterparty 
and swap-specific levels of pre-trade price transparency).
---------------------------------------------------------------------------

    By eliminating the existing approach to required methods of 
execution, the Commission's proposed regulatory framework is also 
expected to foster customer choice in a manner that would benefit the 
swaps markets. The Commission believes that its proposed approach 
appropriately allows market participants, each of whom is a 
sophisticated entity trading in a professional market, to determine the 
execution method that best suits the swap being traded and their 
trading needs and strategies.\295\ As noted above, the Commission 
believes that market participants in a professional market, in part 
because of sophistication and self-interest, will seek the most 
efficient and cost-effective method of execution to achieve their 
business and trading objectives. The Commission believes that providing 
for customer choice, while also concentrating liquidity and price 
discovery onto SEFs, may help create an environment for swaps trading 
that is better able to promote appropriate counterparty and swap-
specific levels of pre-trade price transparency than the existing 
framework and will also do so for a significantly broader segment of 
the swaps markets than the existing framework. As noted above, 
execution methods such as auction platforms and work-up sessions may do 
a better job of maximizing participation and concentrating liquidity 
than Order Books or RFQ Systems in episodically liquid markets.
---------------------------------------------------------------------------

    \295\ The Commission notes that other markets--such as bonds, 
U.S. treasuries, and FX--do not prescribe methods of execution, but 
rather permit their market participants to determine the best method 
of execution for the transaction. Swaps markets have historically 
followed this model. In this respect, the Commission believes that 
its proposal realigns the swaps market trading characteristics with 
other fixed income markets.
---------------------------------------------------------------------------

    The proposed approach would allow SEFs to offer varied and 
innovative execution methods that are best suited to the products they 
list, as well as the

[[Page 61982]]

trading needs of their market participants. Rather than being confined 
to limited execution methods, SEFs would be able to develop more 
efficient, transparent, and cost-effective means for participants to 
trade swaps. In turn, the Commission believes that this innovation may 
serve to promote more competition between SEFs to attract participation 
through novel trading systems or platforms. The Commission further 
believes greater execution flexibility may also potentially incentivize 
new entrant trading venues to enter the SEF marketplace, as they would 
be able to utilize new and different execution methods than are 
currently employed by incumbent platforms.
Request for Comment
    The Commission requests comment on all aspects of its proposed 
approach to execution methods as well as any alternative approaches.

V. Part 37--Subpart B: Core Principle 1 (Compliance With Core 
Principles)

    The Commission is not proposing any amendments to Sec.  37.100, 
which codifies the language of Core Principle 1.\296\
---------------------------------------------------------------------------

    \296\ Core Principle 1 requires a SEF to comply with the core 
principles set forth in CEA section 5h(f) and any requirement that 
the Commission may impose by rule or regulation pursuant to CEA 
section 8a(5) as a condition of obtaining and maintain registration 
as a SEF. 7 U.S.C. 7b-3(f)(1). Core Principle 1 also provides a SEF 
with reasonable discretion in establishing the manner in which it 
complies with the core principles, unless the Commission determines 
otherwise by rule or regulation. 7 U.S.C. 7b-3(f)(1)(B).
---------------------------------------------------------------------------

VI. Part 37--Regulations Related to SEF Execution Methods--Subpart C: 
Core Principle 2 (Compliance With Rules)

    Core Principle 2 requires a SEF to establish and enforce rules that 
govern its facility, including trading procedures to be followed when 
entering and executing orders, among other requirements.\297\
---------------------------------------------------------------------------

    \297\ Core Principle 2 also requires a SEF to (i) establish and 
enforce compliance with rules, including terms and conditions of 
swaps traded or processed on or through the SEF and any limitation 
on access to the SEF; (ii) establish and enforce trading, trade 
processing, and participation rules that will deter abuses and have 
the capacity to detect, investigate, and enforce those rules, 
including means to provide market participants with impartial access 
to the market and to capture information that may be used in 
establishing whether rule violations have occurred; and (iii) 
provide by its rules that when a SD or MSP enters into or 
facilitates a swap that is subject to the clearing requirement, the 
SD or MSP will be responsible for compliance with the trade 
execution requirement. 7 U.S.C. 7b-3(f)(2). The Commission codified 
Core Principle 2 under Sec.  37.200. 17 CFR 37.200.
---------------------------------------------------------------------------

    To support the proposed approach of allowing more flexible 
execution methods on SEFs, which is intended to foster more liquidity 
formation through trading activity on SEF trading systems and 
platforms, the Commission is proposing to amend certain rules and adopt 
new rules under Core Principle 2, as described below. These proposed 
rules would, among other things, help foster open and transparent 
markets as well as promote market efficiency and integrity. In 
particular, the Commission proposes to establish general rules that 
would apply to any execution method that a SEF offers on its facility. 
The Commission also proposes to limit the ability of market 
participants to conduct pre-execution communications and submit 
resulting pre-negotiated or pre-arranged trades to a SEF for execution; 
and eliminate exceptions to the pre-arranged trading prohibition under 
Sec.  37.203(a), including the time delay requirement under Sec.  
37.9(b).
    Additionally, the Commission proposes to amend certain existing 
rules and adopt new rules under Core Principle 2, as described below, 
that correspond to the Commission's application of the SEF registration 
requirement to swap broking entities, including interdealer brokers. 
Among other goals, these proposed rules would enhance professionalism 
requirements for certain SEF personnel--``SEF trading specialists''--
that operate as part of a SEF's trading system or platform, e.g., 
voice-based trading functionalities, by facilitating trading and 
execution on the facility. Specifically, the Commission proposes rules 
under Sec.  37.201(c) that would require SEFs to ensure minimum 
proficiency and conduct standards for SEF trading specialists.

A. Sec.  37.201--Requirements for Swap Execution Facility Execution 
Methods 298
---------------------------------------------------------------------------

    \298\ The Commission proposes to retitle Sec.  37.201 to 
``Requirements for swap execution facility execution methods'' from 
``Operation of swap execution facility and compliance with rules'' 
based on the proposed changes described below.
---------------------------------------------------------------------------

    Section 37.201 implements the Core Principle 2 requirement that a 
SEF establish and enforce rules that govern its facility. Section 
37.201(a) specifies that these requirements include trading procedures 
to be followed when entering and executing orders traded or posted on 
the SEF.\299\ Section 37.201(b) additionally requires a SEF to 
establish and impartially enforce rules related to (i) the terms and 
conditions of swaps traded or processed on the SEF; (ii) access to the 
SEF; (iii) trade practice requirements; (iv) audit trail requirements; 
(v) disciplinary requirements; and (vi) mandatory trading 
requirements.\300\ The Commission proposes to eliminate these rules, 
which are largely duplicative of the Core Principle 2 requirements, and 
adopt the new rules described below.
---------------------------------------------------------------------------

    \299\ 17 CFR 37.201(a).
    \300\ 17 CFR 37.201(b).
---------------------------------------------------------------------------

1. Sec.  37.201(a)--Required Swap Execution Facility Rules
    Proposed Sec.  37.201(a) would require a SEF to establish rules 
that govern the operation of the SEF, including rules that specify (i) 
the protocols and procedures for trading and execution; (ii) the 
permissible uses of ``discretion'' in facilitating trading and 
execution; and (iii) the sources and methodology for generating any 
market pricing information.
    Pursuant to a SEF regulatory framework that would allow SEFs to 
offer flexible execution methods, the Commission believes that such 
rules would benefit market participants by providing a baseline level 
of transparency in SEF trading. As the Commission previously noted, one 
of the central goals of the Dodd-Frank Act is to bring transparency to 
the opaque OTC swaps market.\301\ The Commission has further observed 
that when markets are open and transparent, prices are more competitive 
and markets are more efficient.\302\ In this regard, the Commission 
notes that rather than imposing detailed, prescriptive SEF execution 
method requirements that do not comport with swaps market 
characteristics, this proposed rule represents a more balanced 
approach--a SEF would have the flexibility to develop and offer 
execution methods designed to foster trading based on the dynamics of 
the applicable swaps market (e.g., liquidity and product 
characteristics) and on its market participants' needs, but also would 
be required to disclose how these execution methods operate. This 
disclosure would help to foster open and transparent markets, and 
promote market efficiency and integrity by establishing a consistent 
level of disclosure and information across all SEFs, which would allow 
market participants to make informed decisions regarding whether to 
onboard to a particular SEF and whether to use a particular execution 
method offered by a SEF.\303\ In making such decisions,

[[Page 61983]]

market participants would be able to understand more fully any 
differences among those flexible methods across SEFs.
---------------------------------------------------------------------------

    \301\ SEF Core Principles Final Rule at 33553.
    \302\ Id.
    \303\ The Commission notes that this view is analogous to the 
principles set forth in the FX Global Code. The FX Global Code was 
developed by a partnership between central banks and participants 
from 16 jurisdictions. The code does not impose legal or regulatory 
obligations on participants nor does it act as a substitute for 
regulation, but rather serves as a supplement to local laws by 
setting forth guidelines for good practices in the FX markets. The 
code specifies, among other recommendations, that ``Market 
Participants,'' which include operators of trading systems or 
platforms, should provide all relevant disclosures and information 
to participants to help them make informed decisions about whether 
to transact or not. See FX Global Code at 13-14 (updated Aug. 2018) 
(``FX Global Code''), available at https://www.globalfxc.org/docs/fx_global.pdf.
---------------------------------------------------------------------------

    Based on the definition of ``rule'' under Sec.  40.1(a), which 
encompasses any SEF ``trading protocol,'' the proposed rule clarifies 
those features of a SEF's execution methods that constitute SEF 
``rules'' and must be submitted to the Commission pursuant to part 40 
and disclosed to SEF market participants.\304\ Accordingly, SEFs would 
be required to disclose such information in their rulebooks. After 
reviewing SEF rulebooks, the Commission believes that this proposed 
disclosure requirement is consistent with current market practice and 
the general level of information already disclosed by many SEFs. 
Accordingly, the Commission does not anticipate that this proposed rule 
would require material changes to most SEF rulebooks; rather, the 
proposed rule would ensure that currently-registered and new SEFs 
provide a consistent, minimum level of transparency and disclosure to 
the marketplace. The Commission further notes that SEFs are free to 
provide additional levels of disclosure beyond that required under 
proposed Sec.  37.201(a).
---------------------------------------------------------------------------

    \304\ See supra note 179 (definition of ``rule'' in the 
Commission's regulations).
---------------------------------------------------------------------------

a. Sec.  37.201(a)(1)--Trading and Execution Protocols and Procedures
    Proposed Sec.  37.201(a)(1) would require a SEF to establish rules 
governing the protocols and procedures for trading and execution, 
including entering, amending, cancelling, or executing orders for each 
execution method offered by the SEF. The Commission believes that 
requiring SEFs to provide this level of detail and transparency for 
each of their execution methods is particularly important given the 
Commission's proposal to permit SEFs to offer flexible execution 
methods for all of their listed swaps.
    The Commission believes that proposed Sec.  37.201(a)(1) clarifies 
a SEF's existing obligations and is consistent with current market 
practice, in particular the general level of disclosure and information 
that many SEFs already provide in their rulebooks. This proposed rule 
is also better aligned with other proposed Core Principle 2 regulations 
that relate to SEF trading protocols and procedures, such as proposed 
Sec.  37.203(e), which would require SEFs to promulgate rules and 
procedures to resolve error trades, including trade amendments or 
cancellations, as discussed below.\305\
---------------------------------------------------------------------------

    \305\ See infra Section VII.B.5.--Sec.  37.203(e)--Error Trade 
Policy.
---------------------------------------------------------------------------

    To comply with this rule, for example, a SEF that offers an RFQ 
protocol could specify various operational aspects of that protocol in 
its rulebook. Those aspects could include, among other things, how a 
requestor could initiate an RFQ; whether the RFQ requestor's identity 
is disclosed or anonymous; whether an RFQ request could be made visible 
to the entire market; whether a responder could offer either indicative 
or firm bids or offers; the length of time that an RFQ response with a 
firm bid or firm offer would have to remain executable by the RFQ 
requestor; or whether RFQ responses are disclosed to the whole market 
or just the requestor. By specifically requiring a SEF to disclose 
information regarding how each offered execution method operates, a 
market participant would have the ability to (i) make an informed 
decision about whether to trade and execute on that SEF; (ii) determine 
the type of trading system or platform that best suits its needs; and 
(iii) conform its trading and execution practices to the SEF's 
protocols and procedures.\306\
---------------------------------------------------------------------------

    \306\ See FX Global Code at 13-14 (recommending that trading 
systems or platforms have rules that are transparent, including how 
orders are handled and transacted).
---------------------------------------------------------------------------

b. Sec.  37.201(a)(2)--Discretion
    Proposed Sec.  37.201(a)(2) would require a SEF, where applicable, 
to establish rules specifying the manner or circumstances in which the 
SEF may exercise ``discretion'' in facilitating trading and execution 
for each of its execution methods. Many SEFs, in particular those that 
resemble or are based upon operations of swaps broking entities, 
including interdealer brokers, feature execution methods that involve 
the use of discretion.\307\ SEF trading specialists,\308\ who have 
traditionally served as interdealer brokers in the wholesale swaps 
market, exercise discretion on behalf of market participants in a 
variety of ways. This discretion includes determining how, when, and 
with whom to disseminate, arrange, and execute bids and offers; and 
determining whether and when to amend or cancel those bids and offers 
in response to market developments. Exercising this type of trading and 
execution judgment involves taking different factors into account, such 
as the characteristics and needs of the client, size and nature of the 
order, likelihood and speed of execution, price and costs of execution, 
and current market conditions. The use of discretion in trading 
reflects the market characteristics of the wholesale swaps market, 
where the wide range of different swaps and transaction sizes results, 
in some instances, in low liquidity markets with episodic, non-
continuous trading activity.
---------------------------------------------------------------------------

    \307\ As noted above, upon the adoption of part 37, some 
interdealer brokers have registered their operations or components 
of their operations, i.e., trading systems or platforms, as SEFs. 
See supra Section IV.C.1.c.(1)--Structure and Operations of Swaps 
Broking Entities, Including Interdealer Brokers.
    \308\ ``SEF trading specialist'' refers to a natural person 
employed by a SEF (or acting in a similar capacity as a SEF 
employee) to perform various core functions that facilitate trading 
and execution, including discussing market color with market 
participants, negotiating trade terms, issuing RFQs, and arranging 
bids and offers. For the Commission's proposed definition of ``SEF 
trading specialist,'' see infra Section VI.A.3.--Sec.  37.201(c)--
SEF Trading Specialists.
---------------------------------------------------------------------------

    Given the established role of swaps broking entities, including 
interdealer brokers, in fostering market liquidity through identifying 
and arranging multiple trading interests--both liquid and illiquid--
amidst changing market conditions, the Commission recognizes that the 
use of discretion is an important element in fostering an efficient 
market. Therefore, the Commission's proposed regulatory framework would 
further accommodate the use of discretion by SEFs. As described above, 
SEFs would be allowed to offer flexible execution methods, thereby 
allowing methods that involve the exercise of discretion by SEF trading 
specialists.\309\ Further, the proposed expansion of the trade 
execution requirement would lead to a greater number of swaps being 
traded on SEFs.
---------------------------------------------------------------------------

    \309\ The Commission's clarification of the SEF registration 
requirement, as discussed above, would require swaps broking 
entities, including interdealer brokers, to register as SEFs. Id. 
The Commission notes that as a result, a significant number of 
personnel at these entities would likely meet the definition of 
``SEF trading specialist.''
---------------------------------------------------------------------------

    The Commission believes that the proposed broadening of both the 
SEF registration requirement and the trade execution requirement would 
increase the level of discretion that SEFs (and their trading 
specialists) exercise in connection with swaps trading. To address this 
situation, proposed Sec.  37.201(a)(2) would require SEFs to disclose 
the manner or circumstances in which they may exercise discretion. The 
Commission believes that such a disclosure requirement is important to

[[Page 61984]]

inform market participants, facilitate an orderly SEF trading 
environment, foster open and transparent markets, and promote market 
integrity while remaining consistent with Core Principle 2.\310\ Such 
information would help a market participant have important awareness of 
how a trading system or platform is designed, thereby allowing them to 
make informed decisions with respect to swaps trading on a particular 
SEF. For example, such information would help market participants 
determine appropriate parameters or instructions in submitting their 
bids and offers to a particular SEF, as well as inform their 
expectations about possible trading outcomes or objectives on that SEF. 
The Commission believes that more informed market participants would 
promote fairer and more efficient trading on SEFs and, ultimately, make 
SEFs more robust price discovery mechanisms.
---------------------------------------------------------------------------

    \310\ See FX Global Code at 13-14 (recommending that trading 
systems or platforms should make participants aware of where 
discretion may exist or may be expected, and how it may be 
exercised, as a way to promote fairness and transparency in 
trading).
---------------------------------------------------------------------------

    Pursuant to proposed Sec.  37.201(a)(2), the Commission intends to 
require each SEF to generally disclose the possible areas in which it 
may use discretion for each execution method, rather than establish 
exact, pre-determined trading protocols and procedures. In identifying 
those general areas, a SEF's rules should disclose sufficient 
information that a reasonable market participant would consider 
important in deciding whether to onboard onto the SEF and, once 
participating on the SEF, in understanding how discretion may affect 
trading. The proposed rule, however, does not necessarily require a SEF 
to disclose any proprietary or confidential information in its public 
rulebook.\311\ Based on its experience with reviewing SEF rulebooks, 
the Commission believes that proposed Sec.  37.201(a)(2) is consistent 
with current market practice and the general level of information that 
many SEFs already provide in their rulebooks.\312\ Accordingly, the 
Commission does not anticipate that existing SEFs will be required to 
adopt material changes to their rulebooks; rather, the proposed rule 
would ensure that both currently-registered and new SEFs continue to 
provide sufficient transparency and disclosure.
---------------------------------------------------------------------------

    \311\ The Commission notes, however, that if a SEF believes that 
any such information should be kept confidential, such that it 
should be provided to market participants but not in a public 
filing, the SEF may submit a request for confidential treatment with 
its respective rule submission. 17 CFR 40.8. The Commission's 
treatment of such information would be governed by Sec.  145.9, 17 
CFR 145.9, and the Freedom of Information Act. 5 U.S.C. 552.
    \312\ The Commission notes, for example, that SEF rules have 
generally specified several areas where discretion may be exercised 
in facilitating trading, such as determining when to enter orders on 
behalf of participants; determining when and with which participants 
to gauge possible trading interest; and determining how to calculate 
mid-market prices for use in a session-based execution method, i.e., 
determining the number of factors to consider in the calculation of 
a mid-market price or the weight of each factor.
---------------------------------------------------------------------------

c. Sec.  37.201(a)(3)--Market Pricing Information
    Proposed Sec.  37.201(a)(3) would require each SEF to adopt rules 
that disclose the general sources and methodology for generating any 
market pricing information that the SEF provides to market participants 
to facilitate trading and execution. The term ``sources'' would include 
any general inputs that the SEF may consider when forming a price, such 
as swaps pricing data, e.g., the last traded price; historical, 
executable, or indicative bids and offers on the SEF or other trading 
platforms; or the views of market participants, who the SEF may contact 
to ascertain interest. The term ``methodology'' means that a SEF should 
generally identify the extent to which it may formulate a price on its 
trading systems or platforms, whether prices generated by SEFs are 
based on discretion or some type of pre-set approach, and how the 
information or data sources are generally applied or weighted within 
the SEF's methodology.
    The Commission recognizes that some SEFs provide participants 
either an indicative or executable ``market price'' to encourage price 
discovery and liquidity or otherwise inform trading interest. The use 
of market prices is particularly prevalent in connection with certain 
execution methods, such as auctions and similar matching sessions.\313\ 
SEFs often generate these prices by considering various sources of 
data, including prices from executed transactions, prices from 
executable or indicative bids and offers, publicly reported swaps data, 
active market participant views, or prices from related instruments in 
other markets. Based on the availability of this information at a given 
time, a SEF may take one or more of these factors into account 
differently in formulating a single price. These pricing mechanisms 
help to initiate the price discovery process and allow market 
participants to formulate views about the current state of the market. 
By relying upon an established price, a market participant may make 
trading decisions without being exposed to information leakage that 
might otherwise cause widened bid-offer spreads and impose higher 
transaction costs.\314\ Given this unique feature of the swaps market 
due to its episodic liquidity, the Commission recognizes that SEF 
pricing practices are an important element in fostering liquidity on 
SEFs and, therefore, in promoting the Act's statutory goals of 
encouraging SEF trading and pre-trade price transparency.
---------------------------------------------------------------------------

    \313\ In a typical SEF auction or matching session-based trading 
functionality, a SEF establishes a price for a listed swap that is 
determined through a variety of different factors. Participants may 
submit their trading interest in the swap at the established price, 
either within an established time session or on a continuous basis, 
and subsequently execute that swap at the established price, often 
on a time-priority basis.
    \314\ The Commission understands that participants often avoid 
acting as a ``first-mover'' for relatively less liquid swaps by 
exercising caution in displaying their trading interests, i.e., 
price and size; accordingly, SEFs--similar to historical OTC trading 
environments--utilize these types of methods to promote trading for 
particular swaps and pre-trade price transparency.
---------------------------------------------------------------------------

    Where pricing generated by a SEF in lieu of pricing based on market 
participant bids and offers help to foster liquidity and price 
discovery, the Commission believes that requiring SEFs to inform market 
participants as to their price formation sources and methodology would 
foster open and transparent markets and promote market integrity and 
efficiency. Requiring a SEF to disclose the sources of information used 
to generate a price and the methodology for calculating that price, for 
example, would allow market participants to be aware of prevailing 
liquidity and market conditions, thereby helping them to form views as 
to whether that price is an appropriate indicator of a particular 
market. Accordingly, market participants would be able to make informed 
trading decisions, such as whether to participate in an available 
trading session, and if so, the level of participation, e.g., whether 
they would contribute their own information to help establish a trading 
price in a particular execution method.\315\ The Commission believes 
that this information should build confidence among participants in the 
integrity, fairness, and effectiveness of the SEF as a regulated 
trading venue. In turn, a greater level of confidence in SEFs should 
lead to increased swaps trading volume and, ultimately, an increased 
potential for higher levels of pre-trade price transparency through 
increased participation.
---------------------------------------------------------------------------

    \315\ See supra note 313 (describing mechanics of a SEF auction 
or matching session-based trading functionality).
---------------------------------------------------------------------------

    Similar to proposed Sec.  37.201(a)(2), the Commission emphasizes 
that proposed Sec.  37.201(a)(3) would establish a general

[[Page 61985]]

approach as to the scope of information that a SEF must disclose and 
does not require the SEF to specify detailed calculations or algorithms 
used to generate pricing information. The Commission also notes that 
the proposed rule would not require SEFs to disclose the identities of 
market participants who provide data used to formulate prices or to 
disclose proprietary aspects of their pricing methodology.\316\ Rather, 
a SEF's rules should disclose sufficient information that a reasonable 
market participant would consider important to determine whether to 
join the SEF and to generally understand the nature of the market 
pricing information provided by the SEF. In addition, proposed Sec.  
37.201(a)(3) would not require a SEF to provide any proprietary or 
confidential information in its public rulebook. Based on its 
experience with reviewing SEF rulebooks submitted via the part 40 rule 
filing process, the Commission believes that proposed Sec.  
37.201(a)(3) is consistent with current market practice and the general 
level of information that many SEFs already include in their 
rulebooks.\317\
---------------------------------------------------------------------------

    \316\ The Commission further notes, however, that regardless of 
whether market participants participate in the price-formation 
process or whether their identities remain anonymous, all market 
participants remain subject to section 9(a)(2) of the Act. That 
provision prohibits any attempt to provide false, misleading, or 
knowingly inaccurate reports concerning market information or 
conditions that affect or tend to affect the price of any swap. 7 
U.S.C. 13(a)(2).
    \317\ In disclosing the general sources and methodologies for 
generating market pricing information, the Commission notes that 
such SEF rules have generally specified (i) the SEF's ability to 
consider either a single or multiple number of established factors 
in determining a price; (ii) the various types of factors that it 
may take into account to determine a price; or (iii) other 
additional analytical methods that may be used to supplement a price 
calculated from existing bids and offers on the platform.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.201(a). In particular, the Commission requests comment on the 
following question:
    (28) Do the requirements under proposed Sec. Sec.  37.201(a)(1)-(3) 
set an appropriate level of disclosure by SEFs to market participants? 
Are the requirements too broad? Should the Commission require 
additional disclosures that would be material for market participants 
to make an informed decision to participate on the SEF? If so, what 
additional disclosures should be required? Please provide specific 
examples in your responses.
2. Sec.  37.203(a)--Pre-Arranged Trading Prohibition; Sec.  37.9(b) 
Time Delay Requirement
    Part 37 has permitted market participants to communicate with one 
another away from a SEF in connection with the eventual execution of 
swap transactions via the SEF's trading systems or platforms.\318\ The 
Commission has observed that such communications, which commonly occur 
on a direct basis between swap dealers and their clients in the dealer-
to-client market, vary in nature and scope. Such communication may, for 
example, include communications to discern trading interest prior to 
trading on the SEF, e.g., obtaining market color, identifying potential 
trades, and locating interested counterparties. Such communications, 
however, may also consist of the actual negotiation or arrangement of a 
swap transaction's terms and conditions prior to execution on a SEF. 
Such communications are permitted through several provisions in the 
current regulatory framework, as described below, based in part on 
whether the transaction qualifies for an exception to the prohibition 
on pre-arranged trading under Sec.  37.203(a); or whether the swap is 
otherwise not subject to the trade execution requirement.
---------------------------------------------------------------------------

    \318\ SEF Core Principles Final Rule at 33503.
---------------------------------------------------------------------------

    The Commission notes that ``pre-arranged trading'' is prohibited as 
an abusive trading practice under Sec.  37.203(a). This prohibition 
generally applies to market participants who communicate with one 
another to pre-negotiate the terms of a trade away from a SEF's trading 
system or platform, but then execute the trade on such system or 
platform in a manner that appears competitive and subject to market 
risk. The Commission has intended for this prohibition to maintain the 
integrity of price competition and market risk that is incident to 
trading in the market.\319\ Notwithstanding this prohibition, SEFs have 
permitted pre-arranged trading on their facilities in certain 
instances.
---------------------------------------------------------------------------

    \319\ The Commission generally considers pre-arranged trading to 
be a form of ``fictitious'' trading that is prohibited pursuant to 
CEA section 4c(a)(1), which makes it unlawful for any person to 
offer to enter into, or confirm the execution of a fictitious sale. 
7 U.S.C. 6c(a)(1), 6c(a)(2)(A)(ii). Specifically, pre-arranged 
trading involves ``the use of trading techniques that give the 
appearance of submitting trades to the open market while negating 
the risk of price competition incident to such a market.'' Harold 
Collins, [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) 22982, 
31902 (CFTC Apr. 4, 1986). Generally, pre-arranged trading creates a 
false impression to the market that an executed transaction is 
indicative of a competitive trading environment. Id. at 31903 (``By 
determining trade information such as price and quantity outside the 
pit, then using the market mechanism to shield the private nature of 
the bargain from public scrutiny, both price competition and market 
risk are eliminated.'').
---------------------------------------------------------------------------

    For Required Transactions executed via an Order Book, a SEF may 
permit market participants to communicate with one another and pre-
arrange or pre-negotiate a swap transaction away from its trading 
system or platform, subject to a time delay requirement and facility 
rules on pre-execution communications. Section 37.9(b)(1) currently 
permits a broker or dealer to engage in pre-execution communications to 
pre-arrange or pre-negotiate a swap, as long as one side of the 
resulting transaction is entered into the Order Book for a 15-second 
delay before the second side is entered for execution against the first 
side (the ``time delay requirement''). The Commission defined ``pre-
execution communications'' as communications between market 
participants to discern interest in the execution of a transaction 
prior to the exposure of the market participants' orders (e.g., price, 
size, and other terms) to the market; such communications include 
discussion of the size, side of market, or price of an order, or a 
potentially forthcoming order.\320\ To the extent that SEFs would allow 
their market participants to engage in such pre-execution 
communications, the Commission required SEFs to adopt associated 
rules.\321\
---------------------------------------------------------------------------

    \320\ SEF Core Principles Final Rule at 33503. In light of the 
Commission's general prohibition on pre-arranged trading under Sec.  
37.203(a), the Commission defined this term to clarify the 
permissible types of communications in which market participants can 
pre-arrange or pre-negotiate a transaction consistent with Sec.  
37.9(b)(1). The Commission currently requires that SEFs that choose 
to allow their market participants to engage in pre-execution 
communications prior to executing such transactions must do so 
pursuant to their rules. 17 CFR 37.203(a). Such communications may 
constitute an element of pre-arranged trading, which is an abusive 
trading practice prohibited under existing Sec.  37.203(a).
    \321\ SEF Core Principles Final Rule at 33509.
---------------------------------------------------------------------------

    The Commission implemented Sec.  37.9(b) to ensure a minimum level 
of pre-trade price transparency for orders based on pre-execution 
communications that occur away from the SEF, and to incentivize price 
competition between market participants for orders entered into an 
Order Book.\322\ The Commission

[[Page 61986]]

anticipated that disclosing one side of a pre-arranged transaction in 
the Order Book first would provide other market participants with an 
opportunity to execute against that side prior to entry of the second 
side in the Order Book.\323\ A similar requirement, however, was not 
applied to Required Transactions executed through a SEF's RFQ System. 
The Commission noted that the requirement to send an RFQ to three other 
market participants already provides pre-trade price transparency, 
thereby obviating the need for a corresponding time delay.\324\
---------------------------------------------------------------------------

    \322\ Id. at 33503. The Commission modeled the time delay 
requirement after similar DCM rules that have imposed time delays on 
cross trades involving futures and options on futures. Pursuant to 
these rules, market participants are permitted to conduct pre-
execution communications with respect to orders that are later 
exposed to the market for a certain period of time prior to 
execution on the DCM's trading system or platform. As DCM Core 
Principle 9 requires DCMs to provide a competitive, open, and 
efficient market and mechanism for executing transactions that 
protects the price discovery process of trading in the centralized 
market of the DCM, 7 U.S.C. 7(d)(9)(A), DCMs have implemented 
certain time delay procedures that establish a ``safe harbor'' for 
orders resulting from pre-execution communications that would 
otherwise be considered pre-arranged trading. To protect price 
discovery, such orders must be exposed to the market for a minimum 
amount of time prior to allowing such orders to match against one 
another on a DCM. This time delay generally provides other 
participants with an opportunity to execute against the initial 
order. See, e.g., CME Group, Rule 539.C (rules on pre-execution 
communications regarding Globex trades).
    \323\ 17 CFR 37.9(b)(1).
    \324\ SEF Core Principles Final Rule at 33504. The SEF Core 
Principles Final Rule did not explicitly require a SEF to adopt pre-
execution communication rules for swaps executed using its RFQ 
System. Nevertheless, the Commission has observed that some SEFs 
have self-certified rules under Sec.  40.6 to allow their market 
participants to engage in pre-execution communication prior to 
transmitting an RFQ through the facility's RFQ System.
---------------------------------------------------------------------------

    In addition to the time delay requirement, Sec.  37.203(a) also 
specifies that a SEF may choose to permit pre-arranged trading in other 
instances. First, a SEF may permit a swap that it lists to be executed 
as a block trade away from a SEF pursuant to part 43. This exception 
allows such large-sized transactions to be privately negotiated to 
avoid potentially significant and adverse price impacts that would 
occur if traded on trading systems or platforms with pre-trade price 
transparency.\325\ Second, a SEF may permit pre-arranged trading for 
``other types of transactions'' through rules that are filed with the 
Commission pursuant to part 40. These rules permit pre-arranged trading 
with respect to Required Transactions that are intended to resolve 
error trades \326\ or are executed as a component of certain categories 
of package transactions.\327\
---------------------------------------------------------------------------

    \325\ As defined under Sec.  43.2, a ``block trade'' involves a 
SEF-listed swap transaction with a notional amount that meets the 
corresponding appropriate minimum block size and is executed away 
from the SEF's trading system or platform, but pursuant to the SEF's 
rules and procedures. 17 CFR 43.2. The Commission is proposing to 
amend that definition to specify that block trades must be executed 
on a SEF. See infra Section XXII.--Part 43--Sec.  43.2--Definition 
of ``Block Trade.''
    \326\ Based on time-limited no-action relief issued by DMO, a 
SEF may submit pre-arranged Required Transactions for execution on 
the SEF that resolve error trades, i.e., correct transactions to 
offset an initial transaction executed on the SEF containing a 
clerical or operational error, and where necessary, a new 
transaction that reflects the terms to which the counterparties had 
originally assented. See infra note 433 and accompanying discussion.
    \327\ Based on time-limited no-action relief issued by DMO, a 
SEF may submit pre-arranged Required Transactions for execution on 
SEFs that are components of certain categories of package 
transactions. See infra note 334.
---------------------------------------------------------------------------

    In the preamble to the SEF Core Principles Final Rule, the 
Commission did not discuss the issue of pre-execution communications 
regarding swaps that are not subject to the trade execution 
requirement, i.e., Permitted Transactions, but the Commission has 
permitted SEFs to adopt a more flexible approach to the use of 
communications away from the SEF. This approach corresponds to the 
Commission's approach to Permitted Transactions, which are not required 
to be executed on a SEF and otherwise may be executed on a SEF through 
flexible execution methods.\328\ Under a more flexible approach, the 
Commission has observed that SEFs--both those that facilitate trading 
in the dealer-to-client market and those that facilitate trading in the 
dealer-to-dealer market--have consequently adopted rules to allow their 
market participants to engage in a variety of pre-execution 
communications away from their respective trading systems or platforms 
prior to executing Permitted Transactions on SEFs. The Commission notes 
in particular that some methods allow counterparties to submit pre-
negotiated terms and conditions of a transaction to a SEF ``order 
entry'' system for execution and related post-trade processing.\329\
---------------------------------------------------------------------------

    \328\ SEF Core Principles Final Rule at 33504.
    \329\ As noted above, several SEFs affiliated with interdealer 
brokers offer this type of functionality. As participants affiliated 
with a SEF, interdealer brokers have arranged Permitted Transactions 
on behalf of dealer clients through ``communications'' on their 
trading systems or platforms and submitted those transactions to a 
SEF for execution without being subject to any corresponding order 
exposure. See supra note 88 and accompanying discussion.
---------------------------------------------------------------------------

a. Sec.  37.201(b)--Pre-Execution Communications
    The Commission proposes several amendments under the proposed 
framework that would broadly apply to pre-execution communications that 
occur away from a SEF. For swaps subject to the trade execution 
requirement, proposed Sec.  37.201(b) would require a SEF to prohibit 
its participants from engaging in pre-execution communications away 
from its facility, including negotiating or arranging the terms and 
conditions of a swap prior to its execution on the SEF, i.e., via the 
SEF's methods of execution. This prohibition would be subject to 
certain proposed exceptions discussed further below. Given this general 
prohibition, the Commission also proposes to eliminate the existing 
exceptions to the pre-arranged trading prohibition, including (i) the 
time delay requirement under Sec.  37.9(b); (ii) the exception for 
block trades under Sec.  37.203(a) as part of the Commission's proposed 
amendments to the ``block trade'' definition under Sec.  43.2; \330\ 
and (iii) the exception for ``other types of transactions'' under Sec.  
37.203(a). Proposed Sec.  37.203(a), as discussed below, would continue 
to require a SEF to prohibit abusive trading practices, including pre-
arranged trading, as appropriate to its trading systems or platforms. 
Therefore, a SEF would not be allowed to provide rules that allow 
market participants to pre-negotiate or pre-arrange a transaction and 
submit the sides of the transaction to an order book pursuant to a time 
delay.
---------------------------------------------------------------------------

    \330\ See infra Section XXII.--Part 43--Sec.  43.2--Definition 
of ``Block Trade.''
---------------------------------------------------------------------------

    In eliminating the prescriptive execution methods and allowing more 
flexible execution for swaps subject to the trade execution 
requirement, the Commission believes that pre-execution communications, 
including the negotiation or arrangement of those swaps, would be able 
to occur entirely within a SEF's trading system or platform. Such 
negotiation or arrangement, regardless of the method through which they 
may occur, i.e., among participants themselves or through a swaps 
broking entity, constitutes ``trading'' that should occur on a SEF. The 
Commission notes that ``trading,'' as discussed above, includes the 
negotiation or arrangement of transactions through the interaction of 
bids and offers.\331\ Based on its experience with implementing part 
37, the Commission believes that the broad scope of pre-execution 
communications that have been allowed to occur away from the SEF under 
the existing framework has undermined a meaningful role of the SEF in 
facilitating trading activity and liquidity formation.
---------------------------------------------------------------------------

    \331\ With respect interdealer brokers, the Commission believes 
that their trading systems or platforms facilitate ``trading'' 
between multiple participants in conformance with the statutory SEF 
definition and, therefore, are subject to the SEF registration 
requirement. See supra Section IV.C.1.c.(2)--SEF Registration 
Requirement for Swaps Broking Entities, Including Interdealer 
Brokers.
---------------------------------------------------------------------------

    Accordingly, the Commission believes that these proposed changes 
are an important element of the proposed SEF regulatory framework and 
are intended

[[Page 61987]]

to enhance this framework, such that a broader range of swaps trading 
activity would be occurring on SEFs and creating a vibrant and liquid 
marketplace for swaps trading. For example, the Commission notes the 
likely increase in the number of swaps that would become subject to the 
trade execution requirement under this proposal. Currently, many of 
those swaps are Permitted Transactions submitted to a SEF for execution 
after negotiation or arrangement away from the facility, or are 
negotiated and executed on an OTC basis. With an expanded scope of 
swaps subject to the trade execution requirement, the Commission is 
concerned that allowing a disproportionate amount of SEF transactions 
to be pre-arranged or pre-negotiated away from the facility under the 
pretense of trading flexibility would undercut the import of the 
expansion of the requirement. Without a limitation on pre-execution 
communications that occur away from the SEF, the SEF's role in 
facilitating swaps trading is also diminished and would undermine the 
statutory goals of promoting greater swaps trading on SEFs and 
promoting pre-trade price transparency.
    The Commission also notes that its proposed approach to pre-
execution communications, as applied to SEFs in the dealer-to-dealer 
market, is consistent with the application of the SEF registration 
requirement to swaps broking entities, e.g., interdealer brokers that 
facilitate swaps trading activity between market participants. As 
discussed above, the Commission believes that brokers, who facilitate 
trading communications between market participants away from a SEF and 
subsequently submit pre-negotiated or pre-arranged trades to the SEF 
for execution, relegate the SEF to a de facto post-trade processing 
venue. Requiring these entities to register as SEFs would ensure that 
this type of liquidity formation occurs on a SEF.\332\ Similarly, the 
submission of trade terms negotiated or arranged via direct 
communications between participants, e.g., a swap dealer and a client, 
away from a SEF allows liquidity formation to occur outside of the SEF 
regulatory framework, which undermines the statutory SEF goals. 
Limiting the scope of these communications would also help ensure that 
this activity occurs on a registered SEF via flexible means of 
execution, which promotes the statutory goals of promoting trading on 
SEFs and promoting pre-trade price transparency.
---------------------------------------------------------------------------

    \332\ As noted above, the Commission recognizes that domestic 
swaps broking entities and foreign swaps broking entities would be 
subject to a six-month and two-year delayed application of the SEF 
registration requirement, respectively. These delays would allow 
them to continue to negotiate or arrange swaps transactions between 
multiple participants and route them to SEFs or Exempt SEFs for 
execution. Accordingly, the compliance date of any final rule with 
respect to the prohibition on pre-execution communication under 
proposed Sec.  37.201(b) and the pre-arranged trading prohibition 
under Sec.  37.203(a) for these entities would also be subject to a 
delay of six months or two years, depending on the entity's domicile 
and starting from the effective date of the final rule. See supra 
Section IV.C.1.c.--Swaps Broking Entities, Including Interdealer 
Brokers and Section IV.C.1.d.--Foreign Swaps Broking Entities and 
Other Foreign Multilateral Swaps Trading Facilities.
---------------------------------------------------------------------------

(1) Exception for Swaps Not Subject to the Trade Execution Requirement
    The Commission proposes an exception to the proposed prohibition on 
pre-execution communications under Sec.  37.201(b) for swaps that are 
not subject to the trade execution requirement. The Commission's 
proposed exception recognizes that market participants do not have to 
execute such swaps on SEFs. The Commission also acknowledges that two 
counterparties may initially discuss or negotiate a potential swap 
transaction on a bilateral basis away from a SEF with the intent to 
execute the transaction away from the SEF, but subsequently determine 
to submit the resulting arranged transaction to be executed on a SEF. 
The Commission believes that applying the proposed Sec.  37.201(b) 
prohibition to swaps not subject to the trade execution requirement 
would not be practical, given that counterparties do not have to 
execute these swaps on a SEF. The Commission emphasizes, however, that 
this proposed exception does not affect the SEF registration 
requirement under proposed Sec.  37.3(a), which would specify that a 
person operating a facility that meets the statutory SEF definition 
must register as a SEF without regard to whether the swaps that it 
lists for trading are subject to the trade execution requirement.\333\
---------------------------------------------------------------------------

    \333\ See supra Section IV.C.1.a.--Footnote 88. For example, the 
exception would inherently not apply to a swaps broking entity that 
conducts pre-execution communications to facilitate trading activity 
on behalf of multiple participants in swaps that are not subject to 
the trade execution requirement. As noted above, such an entity 
would be subject to the SEF registration requirement and personnel 
facilitating those communications would likely be designated as SEF 
trading specialists that constitute part of a SEF's trading system 
or platform. See supra notes 308-309.
---------------------------------------------------------------------------

(2) Sec.  37.201(b)(1)--Exception for Package Transactions
    The Commission also proposes an exception under Sec.  37.201(b)(1) 
to the proposed prohibition on pre-execution communications for swaps 
subject to the trade execution requirement that are components of 
``package transactions'' that also include components that are not 
subject to the trade execution requirement.\334\ For purposes of this

[[Page 61988]]

exception, a ``package transaction'' involves two or more 
counterparties and consist of two or more component transactions whose 
executions are (i) contingent upon one another, (ii) priced or quoted 
together as one economic transaction, and (iii) executed simultaneous 
or near simultaneous to each other.\335\
---------------------------------------------------------------------------

    \334\ The Commission notes that the swap components of different 
categories of package transactions have been subject to time-limited 
no-action relief provided by Commission staff from the trade 
execution requirement and required methods of execution. These 
categories of package transactions include those where (i) each of 
the components is a swap subject to the trade execution requirement 
(``MAT/MAT''); (ii) at least one of the components is subject to the 
trade execution requirement and each of the other components is 
subject to the clearing requirement (``MAT/Non-MAT (Cleared)''); 
(iii) each of the swap components is subject to the trade execution 
requirement and all other components are U.S. Treasury securities 
(``U.S. Dollar Swap Spreads''); (iv) each of the swap components is 
subject to the trade execution requirement and all other components 
are agency mortgage-backed securities (``MAT/Agency MBS''); (v) at 
least one individual swap component is subject to the trade 
execution requirement and at least one individual component is a 
bond issued and sold in the primary market (``MAT/New Issuance 
Bond''); (vi) at least one individual swap component is subject to 
the trade execution requirement and all other components are futures 
contracts (``MAT/Futures''); (vii) at least one of the swap 
components is subject to the trade execution requirement and at 
least one of the components is a CFTC swap that is not subject to 
the clearing requirement (``MAT/Non-MAT (Uncleared)''); (viii) at 
least one of the swap components is subject to the trade execution 
requirement and at least one of the components is not a swap 
(excluding aforementioned categories) (``MAT/Non-Swap 
Instruments''); and (ix) at least one of the swap components is 
subject to the trade execution requirement and at least one of the 
components is a swap over which the CFTC does not have exclusive 
jurisdiction, e.g., a mixed swap (``MAT/Non-CFTC Swap''). See CFTC 
Letter No. 14-12, No-Action Relief from the Commodity Exchange Act 
Sections 2(h)(8) and 5(d)(9) and from Commission Regulation Sec.  
37.9 for Swaps Executed as Part of a Package Transaction (Feb. 10, 
2014) (``NAL No. 14-12''); CFTC Letter No. 14-62, No-Action Relief 
from the Commodity Exchange Act Sections 2(h)(8) and 5(d)(9) and 
from Commission Regulation Sec.  37.9 for Swaps Executed as Part of 
Certain Package Transactions and No-Action Relief for Swap Execution 
Facilities from Compliance with Certain Requirements of Commission 
Regulations Sec.  37.9(a)(2), Sec.  37.203(a) and Sec.  38.152 for 
Package Transactions (May 1, 2014) (``NAL No. 14-62''); CFTC Letter 
No. 14-121, Extension of No-Action Relief for Swap Execution 
Facilities and Designated Contract Markets from Compliance with 
Certain Requirements of Commission Regulations Sec.  37.9(a)(2), 
Sec.  37.203(a) and Sec.  38.152 for Package Transactions (Sept. 30, 
2014) (``NAL No. 14-121''); CFTC Letter No. 14-137, Extension of No-
Action Relief from the Commodity Exchange Act Sections 2(h)(8) and 
5(d)(9) and from Commission Regulation Sec.  37.9 and Additional No-
Action Relief for Swap Execution Facilities from Commission 
Regulation Sec.  37.3(a)(2) for Swaps Executed as Part of Certain 
Package Transactions (Nov. 10, 2014) (``NAL No. 14-137''); CFTC 
Letter No. 15-55, Extension of No-Action Relief from the Commodity 
Exchange Act Sections 2(h)(8) and 5(d)(9) and from Commission 
Regulation Sec.  37.9 and No-Action Relief for Swap Execution 
Facilities from Commission Regulation Sec.  37.3(a)(2) for Swaps 
Executed as Part of Certain Package Transactions (Oct. 15, 2014) 
(``NAL No. 15-55''); CFTC Letter No. 16-76, Re: Extension of No-
Action Relief from the Commodity Exchange Act Sections 2(h)(8) and 
5(d)(9) and from Commission Regulation Sec.  37.9 and No-Action 
Relief for Swap Execution Facilities from Commission Regulation 
Sec.  37.3(a)(2) for Swaps Executed as Part of Certain Package 
Transactions (Nov. 1, 2016) (``NAL No. 16-76''); CFTC Letter No. 17-
55, Re: Extension of No-Action Relief from Sections 2(h)(8) and 
5(d)(9) of the Commodity Exchange Act and from Commission 
Regulations 37.3(a)(2) and 37.9 for Swaps Executed as Part of 
Certain Package Transactions (Oct. 31, 2017) (``NAL No. 17-55''). To 
the extent that counterparties may be facilitating package 
transactions that involve a ``security,'' as defined in section 
2(a)(1) of the Securities Act of 1933 or section 3(a)(10) of the 
Securities Exchange Act of 1934, or any component agreement, 
contract, or transaction over which the Commission does not have 
exclusive jurisdiction, the Commission does not opine on whether 
such activity complies with other applicable law and regulations.
    \335\ The Commission notes that it similarly defines ``package 
transaction'' under proposed Sec.  36.1(d)(1) for purposes of 
providing an exemption to the trade execution requirement for swaps 
that are executed as part of package that includes a bond issued in 
a primary market. See infra Section XXI.A.4.--Sec.  36.1(d)--
Exemption for Swaps Executed with Bond Issuance.
---------------------------------------------------------------------------

    The Commission recognizes that some package transactions contain 
both a swap that is subject to the trade execution requirement and 
other swap or non-swap components that are not subject to the 
requirement. Components not subject to the requirement include, for 
example, swaps not subject to the clearing requirement, e.g., 
swaptions, and various types of securities.\336\ The negotiation or 
arrangement of each of these components generally occurs concurrently 
or on a singular basis; in particular, negotiations for the pricing of 
such package transactions may be primarily based on the components that 
are not subject to the requirement. Further, the swap components in 
those types of transactions that are subject to the requirement often 
serve as hedging tools to other components. For those components not 
subject to the requirement, market participants may negotiate the terms 
away from a SEF.
---------------------------------------------------------------------------

    \336\ Based on time-limited no-action relief issued by DMO, the 
categories of package transactions that consist of components not 
subject to the requirement include (i) U.S. Dollar Swap Spreads; 
(ii) MAT/Agency MBS; (iii) MAT/New Issuance Bond; (iv) MAT/Futures; 
(v) MAT/Non-MAT (Uncleared); (vi) MAT/Non-Swap Instruments; and 
(vii) MAT/Non-CFTC Swaps. See supra note 334.
---------------------------------------------------------------------------

    The Commission believes that imposing a prohibition on swaps 
subject to the trade execution requirement that are part of a package 
transaction that includes components not subject to the requirement 
would inhibit the ability of counterparties to negotiate or arrange the 
latter components away from the SEF.\337\ Given that components of 
package transactions are each priced or quoted together as part of one 
economic transaction, the Commission recognizes the impracticality of 
requiring communications related to the negotiation or the arrangement 
of the swap component that is subject to the trade execution 
requirement to occur on the SEF. Accordingly, an exception from the 
prohibition on pre-execution communications away from the SEF for swap 
components subject to the requirement would be appropriate in such 
circumstances.\338\ Consistent with its intent to incorporate existing 
staff no-action relief into the Commission's regulations, the 
Commission notes that the proposed exception would codify some of the 
relief that currently applies to certain types of package 
transactions.\339\
---------------------------------------------------------------------------

    \337\ Package transactions composed entirely of swaps that are 
subject to the trade execution requirement would be subject to the 
prohibition of pre-execution communications under proposed Sec.  
37.201(b) and are not eligible for this proposed exception.
    \338\ The Commission notes that a swaps broking entity that 
facilitates trading in any swap component on behalf of multiple 
participants, regardless of whether the swap is subject to the trade 
execution requirement, would be subject to the SEF registration 
requirement. See supra note 333.
    \339\ Swap components in the following categories of package 
transactions are currently subject to relief from the required 
methods of execution under existing Sec.  37.9: (i) MAT/Non-MAT 
(Uncleared); (ii) MAT/Non-Swap Instruments; and (iii) MAT/Non-CFTC 
Swap. NAL No. 17-55 at app. A. Pursuant to this relief, the 
Commission notes that SEFs have allowed market participants to 
negotiate or arrange the swap components away from the SEF and 
submit them for execution.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.201(b). In particular, the Commission seeks insights regarding 
market participants' use of pre-execution communications and requests 
comment on the following questions:
    (29) What are market participants' current pre-execution 
communication practices? How often do market participants currently 
engage in pre-execution communication? What level of trade detail is 
discussed during such pre-execution communications? What role, if any, 
should pre-execution communications continue to have in the SEF market 
structure?
    (30) Is the Commission's proposal to require a SEF to prohibit 
market participants from conducting pre-execution communications away 
from a SEF with respect to swaps that are subject to the trade 
execution requirement appropriate? In light of the Commission's 
proposal to allow SEFs to offer flexible execution methods, are there 
any impediments for market participants to execute those swaps, in 
particular those that would become subject to the Commission's proposed 
approach to the trade execution requirement?
    (31) With respect to swaps that are not subject to the trade 
execution requirement, is the Commission's proposal to allow SEFs to 
permit market participants to conduct pre-execution communications away 
from a SEF appropriate?
    (32) Are there any technical limitations that a SEF would face to 
accommodate pre-execution communications that would otherwise impede 
the ability of market participants to trade and execute swaps on a SEF?
    (33) Should the Commission allow an exception to the proposed 
prohibition against pre-execution communications for communications 
involving ``market color''? If so, how should the Commission define 
``market color''? For example, should such a definition consist of 
views shared by market participants on the general state of the market 
or trading information provided on an anonymized and aggregated basis? 
Should such a definition exclude (i) an express or implied arrangement 
to execute a specified trade; (ii) non-public information regarding an 
order; and (iii) information about an individual trading position? Are 
these elements appropriate and should the Commission consider 
additional elements?
    (34) Should the Commission allow an exception to the proposed 
prohibition against pre-execution communications for communications 
intended to discern the type of transaction--which may or may not be a 
swap--that a market participant may ultimately execute on a SEF? The 
Commission understands that these types of communications are common in 
the dealer-to-client market and allow a dealer to assist a client with 
determining which financial instruments may be best suited to manage 
the client's risks or to establish certain market positions. If so, 
please describe the nature and scope of these communications that would 
support an exception to the proposed prohibition.
    (35) Should the Commission allow an exception to the proposed 
prohibition against pre-execution communications for all corrective 
trades intended to resolve error trades pursuant to the proposed error 
trade policy rules under Sec.  37.203(e), as discussed further below? 
Please explain why or why not.

[[Page 61989]]

    (36) The Commission is proposing to allow market participants to 
engage in pre-execution communications away from a SEF for package 
transactions in which at least one component is not subject to the 
trade execution requirement. For the swap components of some of these 
package transactions that are currently traded and executed on SEFs--
for example, those where all other components are U.S. Treasury 
securities--should they not be subject to this exception? Are there 
other types of package transactions for which the Commission should 
provide an exception to the proposed prohibition on pre-execution 
communications?
3. Sec.  37.201(c)--SEF Trading Specialists
    The Commission notes that a number of registered SEFs--in 
particular, those that operate in the dealer-to-dealer market--offer 
voice-based or voice-assisted execution platforms that utilize natural 
persons to facilitate trading in varying degrees. These persons, 
commonly referred to as ``trading specialists'' or ``execution 
specialists,'' perform core functions that facilitate swaps trading and 
execution in a multiple-to-multiple participant environment, including 
disseminating trading interests to the market, e.g., transmitting RFQs 
provided by participants; matching bids and offers; and negotiating or 
arranging transaction terms and conditions on behalf of participants.
    Many individuals currently carry out the same functions away from a 
SEF as part of a swaps broking entity, such as an interdealer broker, 
prior to execution of the transaction on the SEF.\340\ These swaps 
broking entities are often registered with the Commission as IBs \341\ 
and these individuals are registered as associated persons of IBs.\342\ 
As associated persons of IBs, these persons are subject to various 
regulatory requirements for intermediaries aimed at protecting 
customers.\343\ As noted above, the Commission has proposed that these 
swaps broking entities be registered as a SEF, given that they 
facilitate trading.\344\
---------------------------------------------------------------------------

    \340\ See supra Section IV.C.1.c.(1)--Structure and Operations 
of Swaps Broking Entities, Including Interdealer Brokers.
    \341\ The Commission notes above that IBs are registered with 
the Commission pursuant to CEA section 4f. See supra note 93 and 
accompanying discussion. IBs and their associated persons are 
required to register pursuant to registration procedures set forth 
by the NFA. 17 CFR 3.10, 3.12. Section 170.17 requires that each IB 
becomes and remains a member of at least one registered futures 
association, e.g., the NFA. 17 CFR 170.17. Pursuant to CEA sections 
4p and 17(p), such entities are subject to, among other requirements 
administered by the registered futures association, training 
standards and proficiency testing. 7 U.S.C. 6p, 21(p). Depending on 
the category of intermediary, registrants may be subject to various 
financial and reporting requirements, e.g., 17 CFR 1.10 (financial 
reports of FCMs and IBs), 1.17 (minimum financial requirements for 
FCMs and IBs), as well as trading standards, e.g., 17 CFR part 155 
(trading standards for floor brokers, FCMs, and IBs). Pursuant to 
CEA section 6c and part 180, all registrants are subject to 
prohibitions against fraud and manipulation. 7 U.S.C. 9; 17 CFR part 
180. Applicants for registration are subject to statutory 
disqualifications from registration pursuant to CEA section 8a(2) 
based on related past convictions that involve fraud or other acts 
of malfeasance. 7 U.S.C. 12a(2).
    \342\ Section 1.3 defines an ``associated person'' of an IB as 
any natural person who is associated with an introducing broker as a 
partner, officer, employee, or agent (or any natural person 
occupying a similar status or performing similar functions), in any 
capacity which involves the solicitation or acceptance of customers' 
orders (other than in a clerical capacity) or the supervision of any 
person or persons so engaged. 17 CFR 1.3.
    \343\ See supra note 341. See also NFA Registration Rules part 
400 (proficiency requirements established by the NFA for various 
registered entities and associated person).
    \344\ Upon adoption of the SEF Core Principles Final Rule, some 
swaps broking entities, in particular interdealer brokers, 
registered their operations or components of their operations, i.e., 
trading systems or platforms, as SEFs. See supra Section 
IV.C.1.c.(1)--Structure and Operations of Swaps Broking Entities, 
Including Interdealer Brokers. As part of this process, the 
Commission understands that some specialists have transitioned to 
the SEF from affiliated broker entities, in either a permanent 
capacity or pursuant to a secondment arrangement.
---------------------------------------------------------------------------

    The Commission recognizes, however, that the current regulatory 
requirements for swaps broking entities do not necessarily fully 
address the unique functions of trading specialists on a SEF, which are 
broader in scope than the traditional IB functions of solicitation or 
acceptance of orders. SEF trading specialists serve an intermediary-
type role for each market participant that accesses their SEF by 
facilitating fair, orderly, and efficient trading and overall market 
integrity. From a regulatory perspective, the Commission believes that 
SEF trading specialists--whether operating as part of a fully voice-
based system or as a voice-assisted system with electronic-based 
features--are an integral part of their respective SEF's trading system 
or platform.
    A voice-based or voice-assisted SEF trading system or platform is 
unique among SEF execution methods. Unlike a trading system or platform 
that executes orders and facilitates trading through generally 
automated means, trading specialists that comprise part of the voice-
based or voice-assisted systems usually exercise a level of discretion 
and judgment in facilitating interaction between bids and offers from 
multiple market participants. That discretion and judgment is informed 
by their knowledge and understanding of market conditions, which are 
based upon information obtained from observing historical activity and 
gauging potential or actual trading interest from communications with 
participants.
    By allowing SEFs to offer flexible methods of execution and 
broadening the trade execution requirement to swaps with more episodic 
liquidity, the Commission believes that the proposed rulemaking would 
lead to greater volumes of trading on voice-based trading systems or 
platforms that utilize discretion and judgment. The use of these 
methods should increase and enhance the utility of SEFs in a manner 
consistent with the SEF statutory intent and goals, but the Commission 
also believes that the expected increased role of discretion in SEF 
trading operations should be accompanied with a regulatory approach 
that aims to enhance professionalism among trading specialists and 
enhance market integrity. The Commission believes in particular that 
such a regulatory approach should address in particular the integral 
role that trading specialists play in exercising that discretion in a 
SEF's multiple-to-multiple trading environment.
    Therefore, the Commission proposes to adopt a definition under 
Sec.  37.201(c) that would categorize certain persons employed by a SEF 
as a ``SEF trading specialist'' and require a SEF to ensure that any 
such person (i) is not subject to a statutory disqualification under 
CEA sections 8a(2) or 8a(3); (ii) has met certain proficiency 
requirements; and (iii) undergoes ethics training on a periodic basis. 
The proposed regulations would further require a SEF to establish and 
enforce a code of conduct for its SEF trading specialists, as well as 
diligently supervise their activities. These proposed rules are 
intended to enhance professionalism in the swaps market and promote 
market integrity.
a. Sec.  37.201(c)(1)--Definition of ``SEF Trading Specialist''
    The Commission proposes to define a ``SEF trading specialist'' 
under Sec.  37.201(c)(1) as any natural person who, acting as an 
employee (or in a similar capacity) of a SEF, facilitates the trading 
or execution of swap transactions (other than in a ministerial or 
clerical capacity), or who is responsible for direct supervision of 
such persons. This proposed definition would include both persons 
directly employed by the SEF and persons who are not directly employed, 
such as independent contractors and persons who are serving as SEF 
personnel pursuant to an arrangement with an affiliated broker 
employer, i.e.,

[[Page 61990]]

``seconded'' persons. Based on the Commission's proposed application of 
the SEF registration requirement, as described above, the Commission 
notes that this definition would also apply to those persons who 
facilitate swaps trading through swaps broking entities, including 
interdealer brokers, who would be subject to SEF registration.\345\ As 
noted above, facilitating the ``trading'' of swaps means the 
negotiating or arranging swaps transactions; \346\ negotiating or 
arranging consists of facilitating the interaction of bids and 
offers.\347\ The proposed definition, however, would exclude SEF 
personnel who facilitate trading solely in a ministerial or clerical 
capacity because the activities of such employees do not involve the 
level of discretion and judgement as the activities of SEF trading 
specialists and, thus, do not implicate the same regulatory 
concerns.\348\
---------------------------------------------------------------------------

    \345\ See supra Section IV.C.1.c.(2)--SEF Registration 
Requirement for Swaps Broking Entities, Including Interdealer 
Brokers and Section IV.C.1.d.--Foreign Swaps Broking Entities and 
Other Foreign Multilateral Swaps Trading Facilities.
    \346\ See supra Section IV.C.1.c.(2)--SEF Registration 
Requirement for Swaps Broking Entities, Including Interdealer 
Brokers.
    \347\ Id.
    \348\ The Commission notes that persons acting in a ministerial 
or clerical capacity are subject to exceptions from other Commission 
requirements. For example, the definition of ``associated person'' 
under Sec.  1.3 excludes a person who solicits or accepts customer 
orders in a clerical capacity on behalf of an FCM or IB, or who 
solicits or accepts swaps in a clerical or ministerial capacity on 
behalf of an SD or MSP. 17 CFR 1.3.
---------------------------------------------------------------------------

b. Sec.  37.201(c)(2)--Fitness
    In light of the activities of SEF trading specialists and the 
regulatory considerations discussed above, the Commission proposes 
Sec.  37.201(c)(2)(i) to prohibit a SEF from permitting any person who 
is subject to a statutory disqualification under CEA sections 8a(2) or 
8a(3) to serve as a SEF trading specialist if the SEF knows, or in the 
exercise of reasonable care should know, of the person's statutory 
disqualification.\349\ CEA sections 8a(2) and 8a(3) set forth numerous 
bases upon which the Commission may refuse to register a person, 
including, without limitation, felony convictions, commodities or 
securities law violations, and bars or other adverse actions taken by 
financial regulators.\350\ While SEF trading specialists would not be 
required to register with the Commission, the Commission believes that 
given the nature of their interaction with market participants in 
facilitating swaps trading and execution, as well as the central role 
they play in maintaining market integrity and orderly trading, a SEF 
should not be permitted to employ those who are subject to such a 
statutory disqualification.
---------------------------------------------------------------------------

    \349\ The Commission notes that CEA section 4s(b)(6) makes it 
unlawful for an SD or MSP to permit any person associated with the 
SD or MSP who is subject to a statutory disqualification to effect 
or be involved in effecting swaps on behalf of the SD or MSP, if the 
SD or MSP knew, or in the exercise of reasonable care should have 
known, of the statutory disqualification. 7 U.S.C. 6s(b)(6). This 
prohibition applies with respect to an AP of an SD or MSP, but does 
not include an individual employed in a clerical or ministerial 
capacity. 17 CFR 23.22(a) (definition of ``person'' applicable to 
the prohibition).
    \350\ 7 U.S.C. 12a(2)-(3).
---------------------------------------------------------------------------

    The Commission, however, also proposes two exceptions to the 
proposed prohibition. Under proposed Sec.  37.201(c)(2)(ii)(A), the 
prohibition would not apply where a person is listed as a principal 
\351\ or is registered with the Commission as an AP of a Commission 
registrant or as a floor trader or floor broker, notwithstanding that 
the person is subject to a disqualification from registration under 
sections 8a(2) or 8a(3) of the Act. Pursuant to authority delegated to 
it by the Commission,\352\ the NFA has permitted a person to be listed 
as a principal or registered with the Commission where, in its 
discretion, the NFA has determined that the incident giving rise to a 
statutory disqualification is insufficiently serious, recent, or 
otherwise relevant to evaluating the person's fitness. Under proposed 
Sec.  37.201(c)(2)(ii)(B), the prohibition also would not apply where a 
person subject to a statutory disqualification is not registered with 
the Commission, but provides a written notice from a registered futures 
association (``RFA'') stating that if the person were to apply for 
registration as an AP, then the RFA would not deny the application on 
the basis of the statutory disqualification. The Commission believes 
that a statutory disqualification that has not or would not prevent a 
person from being listed as a principal or from registering with the 
Commission because it is insufficiently serious, recent, or otherwise 
relevant to evaluating the person's fitness for registration with the 
Commission, as determined by an RFA, should not be a basis for 
prohibiting a SEF from employing the person as a SEF trading 
specialist.
---------------------------------------------------------------------------

    \351\ Section 3.10(a)(2) requires each natural person who is a 
principal of an applicant for registration to execute a Form 8-R to, 
among other things, be listed as a principal of a registrant. 17 CFR 
3.10(a)(2).
    \352\ CEA section 8a(10) enables the Commission to authorize any 
person to perform any portion of the registration functions under 
the Act. 7 U.S.C. 12(a)(10). The Commission has delegated to the NFA 
the authority to perform the full range of registration functions, 
including vetting of applicants for statutory disqualifications. 
See, e.g., 50 FR 34885 (Aug. 28, 1985); 57 FR 23136 (Jun. 2, 1992).
---------------------------------------------------------------------------

c. Sec.  37.201(c)(3)--Proficiency Requirements
    The Commission proposes to require a SEF to maintain proficiency 
standards for SEF trading specialists. Proposed Sec.  37.201(c)(3)(i) 
would require a SEF to establish and enforce standards and procedures 
to ensure that its SEF trading specialists have the proficiency and 
knowledge necessary to fulfill their responsibilities to the SEF and to 
comply with the Act, applicable Commission regulations, and the SEF's 
rules. Further, the Commission proposes under proposed Sec.  
37.201(c)(3)(ii) to mandate that a SEF require any person employed as a 
SEF trading specialist to have taken and passed a swaps proficiency 
examination as administered by an RFA.\353\ Accordingly, SEFs would not 
have to comply with the examination requirement until an RFA, such as 
the NFA, completes development of the exam and establishes an 
administration process. Pursuant to proposed Sec.  37.201(c)(3)(iii), a 
SEF's compliance with the proficiency examination requirement would 
constitute compliance with the general proficiency requirements upon 
establishment of an exam and administration process by the RFA.\354\ 
Additionally, a SEF would satisfy the examination requirement if a SEF 
trading specialist took and passed the examination once without any 
further testing, unless the person has

[[Page 61991]]

not served in such a capacity for a continuous two-year period. In that 
case, the SEF trading specialist would have to retake and pass the 
examination.
---------------------------------------------------------------------------

    \353\ As proposed, the swaps proficiency examination would have 
to be developed and administered by an RFA. The NFA currently 
requires persons seeking to become members or associate members of 
the NFA, or persons seeking to register with the Commission as an AP 
to take and pass the National Commodity Futures Examination 
(``Series 3 Exam''), which is administered by FINRA, subject to 
certain exceptions. The Series 3 Exam does not test for swaps 
proficiency. As a result, NFA Registration Rule 401(e) currently 
provides an exception to the NFA's qualification testing requirement 
for a person applying for registration with the Commission as an AP, 
if the applicant's sole activities subject to regulation by the 
Commission are swaps-related. NFA Registration Rule 401(e). The 
Commission is aware that the NFA recently announced that it would 
develop a swaps proficiency requirements program for all APs 
engaging in swaps activities, including those of FCMs, IBs, 
commodity pool operators (``CPOs''), commodity trading advisors 
(``CTAs''), and individuals who act as APs at SDs. NFA, NFA to 
Develop Swaps Proficiency Requirements Program,'' https://www.nfa.futures.org/news/newsRel.asp?ArticleID=5014 (Jun. 5, 2018).
    \354\ The Commission clarifies, however, that in the absence of 
an available examination that meets the Commission's requirements, 
SEFs would still be required to ensure that their SEF trading 
specialists meet the general proficiency requirements set forth 
under proposed Sec.  37.201(c)(3)(i).
---------------------------------------------------------------------------

    Given the level of discretion and judgement that SEF trading 
specialists exercise in facilitating swaps trading and execution, as 
well as the size and complexity of the transactions often executed on a 
SEF, the Commission believes that it is essential that a SEF ensure 
that its SEF trading specialists possess appropriate skills and 
knowledge. Accordingly, the Commission believes that demonstrating such 
skills and knowledge would be best achieved through a swaps proficiency 
examination regime. The Commission notes that persons who intermediate 
transactions in the futures markets and securities markets are already 
subject to proficiency requirements that include examinations.\355\ The 
Commission believes that requiring SEFs to ensure that their SEF 
trading specialists have the necessary skills and proficiency to 
perform the key functions of a SEF would similarly enhance the level of 
professionalism and market integrity in the swaps market.\356\
---------------------------------------------------------------------------

    \355\ In addition to the Series 3 Exam, which applies to persons 
seeking membership with the NFA as an AP of a registered entity with 
respect to futures and options on futures, see supra note 353, 
persons who seek registration as a securities professional must also 
pass various qualification exams to demonstrate competency in 
particular securities-related areas. See generally FINRA, 
Registrations and Qualifications, www.finra.org/industry/registration-qualification.
    \356\ The Commission notes that this proposed requirement is 
analogous to the principles set forth in the FX Global Code 
regarding ethics. The code specifies, among other recommendations, 
that operators of trading systems or platforms and their personnel, 
have sufficient knowledge of, and comply with, applicable law and 
have sufficient relevant experience, technical knowledge, and 
qualifications. FX Global Code at 6-7.
---------------------------------------------------------------------------

d. Sec.  37.201(c)(4)--Ethics Training
    The Commission proposes Sec.  37.201(c)(4) to require a SEF to 
establish and enforce policies and procedures to ensure that its SEF 
trading specialists receive ethics training on a periodic basis. Given 
each trading specialist's obligation to promote a fair and orderly 
market in facilitating trading and execution while also using 
discretion in handling orders on behalf of individual market 
participants, a SEF must maintain a training program to ensure that its 
trading specialists are aware of and understand the relevant 
professional and ethical standards established by the SEF.\357\ 
Proposed Sec.  37.201(c)(4) is consistent with and would further a 
SEF's existing obligation under Core Principle 12 to establish and 
enforce rules that minimize conflicts of interest.\358\ Additionally, 
the proposed rule corresponds to the existing requirement under Sec.  
37.1501 that a SEF CCO establish and administer a written code of 
ethics for the SEF that is designed to prevent ethical violations and 
promote honesty and ethical conduct by the SEF's personnel.\359\ The 
Commission also views ethics training as a necessary element of a SEF's 
adequate supervision of its trading specialists and, accordingly, 
proposes to require such supervision under Sec.  37.201(c)(6), as 
described below.\360\ The Commission believes that the proposed 
requirement would enhance professionalism in the overall swaps market 
and promote swaps market integrity.
---------------------------------------------------------------------------

    \357\ As discussed above, this proposed requirement is similar 
to one of the leading principles set forth in the Global FX Code 
regarding ethical standards. The Global FX Code states, in part, 
that firms should promote ethical values and behavior, support 
efforts to promote such ethical standards in the wider FX market, 
and encourage involvement by personnel in such efforts. FX Global 
Code at 6-7.
    \358\ 7 U.S.C. 7b-3(f)(12).
    \359\ See infra Section XX.A.3.--Sec.  37.1501(c)--Duties of 
Chief Compliance Officer (requirement under proposed Sec.  
37.1501(c)(6)).
    \360\ See infra Section VI.A.3.f.--Sec.  37.201(c)(6)--Duty to 
Supervise.
---------------------------------------------------------------------------

(1) Guidance to Core Principle 2 in Appendix B--Ethics Training
    The Commission also proposes new guidance to Core Principle 2 in 
Appendix B that would provide the general objectives for an ethics 
training program and examples of topics that should be addressed.\361\ 
The guidance provides SEFs with the latitude to determine the 
appropriate frequency, duration, and format of ethics training for its 
trading specialists, including the use of qualified third-party 
providers and various forms of technology and media. The proposed 
guidance, however, specifies that an ethics training program is 
essential to enable SEF trading specialists to remain current with 
respect to the ethical and regulatory implications of evolving 
technology, trading practices, products, and other relevant changes. 
For example, if a SEF's trading protocols or operations continue to 
develop, e.g., the SEF adopts a new discretionary approach to 
prioritizing or managing competing bids on its voice-based or voice-
assisted trading system, then the SEF's ethics training should address 
how its trading specialists should appropriately conduct themselves 
under such new protocols. This approach is generally consistent with 
the Commission's implementation of the training requirements applicable 
to Commission registrants under CEA section 4p(b), as set forth in 
acceptable practices established by the Commission for ethics training 
for registered persons under part 3 of the Commission's 
regulations.\362\
---------------------------------------------------------------------------

    \361\ The Commission proposes to add this guidance as a new 
paragraph (a)(1) and eliminate existing paragraph (a)(1), which 
states that a SEF's rules may authorize its compliance staff to 
issue warning letters or recommend that a disciplinary panel take 
such action. See infra note 456 (discussing proposed changes to the 
existing SEF warning letter requirements).
    \362\ 17 CFR part 3 app. B (Statement of Acceptable Practices 
With Respect to Ethics Training).
---------------------------------------------------------------------------

e. Sec.  37.201(c)(5)--Standards of Conduct
    The Commission proposes to require a SEF to establish and enforce a 
code of conduct for its SEF trading specialists. Like the proposed 
ethics training requirement under Sec.  37.201(c)(4), the proposed code 
of conduct requirement aims to ensure that SEFs foster and maintain a 
high level of professionalism, integrity, and ethical conduct among 
their trading specialists when dealing with market participants and 
facilitating trading and execution. A SEF's code of conduct may provide 
that, among other things, a SEF trading specialist should (i) act in an 
honest and ethical manner and observe high standards of 
professionalism; (ii) handle orders with fairness and transparency; and 
(iii) not engage in fraudulent, manipulative, or disruptive conduct. 
The Commission includes these items for SEF consideration, but a SEF 
may include different or additional standards as well. These proposed 
standards of conduct are intended to be general and principles-based, 
given the many unique aspects of a SEF trading specialist's role in 
facilitating trading and execution as part of the SEF's particular 
trading system or platform.
f. Sec.  37.201(c)(6)--Duty To Supervise
    To help promote compliance with a SEF's professionalism 
requirements, including ethics requirements and standards of conduct, 
the Commission also proposes Sec.  37.201(c)(6) to require a SEF to 
diligently supervise the activities of its trading specialists in 
facilitating trading and execution on the SEF. While a SEF is generally 
responsible for the actions of its agents pursuant to CEA section 
2(a)(1)(B) and Sec.  1.2,\363\ proposed Sec.  37.201(c)(6) would impose 
an affirmative duty of supervision on each SEF. Given the dynamic 
manner in

[[Page 61992]]

which SEF trading specialists may use discretion to facilitate swaps 
trading and execution on behalf of market participants, a SEF should 
have an affirmative obligation to supervise its trading specialists. 
The Commission notes that a similar customer protection rule currently 
applies to registered entities, including IBs--Sec.  166.3 requires 
each Commission registrant to diligently supervise all the activities 
of its partners, officers, employees and agents (or persons occupying a 
similar status or performing a similar function) relating to its 
business as a Commission registrant.\364\ Therefore, to the extent that 
some of these SEFs were previously registered with the Commission and 
operated as IBs, the Commission believes that proposed Sec.  
37.201(c)(6) would impose certain analogous requirements.
---------------------------------------------------------------------------

    \363\ CEA section 2(a)(1)(B) and Sec.  1.2 establish that the 
act, omission, or failure of any official, agent, or other person 
acting for a principal within the scope of his employment or office 
is imputed to the principal. 7 U.S.C. 2(a)(1)(B); 17 CFR 1.2.
    \364\ 17 CFR 166.3.
---------------------------------------------------------------------------

g. Sec.  37.201(c)(7)--Additional Sources for Compliance
    The Commission is proposing Sec.  37.201(c)(7) to refer SEFs to the 
new guidance to Core Principle 2 in Appendix B as discussed above.
Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.201(c). In particular, the Commission requests comment on the 
following questions:
    (37) Is the proposed definition of the term ``SEF trading 
specialist'' overly broad or too narrow? Are there additional 
activities that SEF trading specialists engage in that should be 
reflected in the definition? Are there additional natural persons who 
should be captured by the proposed definition?
    (38) Are the exceptions to the fitness requirement for SEF trading 
specialists under proposed Sec.  37.201(c)(2)(ii) appropriate? Should 
the Commission prohibit a SEF from employing persons other than those 
subject to a statutory disqualification under CEA sections 8a(2) or 
8a(3)? If so, what additional disqualification factors should the 
Commission use? In this connection, should the Commission not rely on 
any of the disqualification factors in CEA sections 8a(2) or 8a(3)?
    (39) Should the qualification testing requirement under proposed 
Sec.  37.201(c)(3)(ii) be broadened to allow a SEF to employ persons 
who have taken and passed a swaps proficiency examination developed and 
administered by parties other than an RFA? If so, should the Commission 
then adopt standards to ensure that such testing adequately ensures 
proficiency? How could the Commission ensure that the examination meets 
appropriate standards and consistency, such that it could be recognized 
by all SEFs? Should the Commission approve each examination to ensure 
appropriate standards are met and consistency is achieved across 
different examinations?
    (40) Are the ethics training and standards of conduct requirements 
under proposed Sec. Sec.  37.201(c)(4)-(5), respectively, overly 
prescriptive or too flexible? Should the Commission provide greater 
specificity regarding the standards of conduct that a SEF must enforce? 
Are there particular subjects that should be specifically required as 
part of ethics training?

VII. Additional Part 37 Regulations--Subpart C: Core Principle 2 
(Compliance With Rules)

    In addition to requiring a SEF to establish and enforce rules that 
govern its facility, Core Principle 2 requires a SEF to adopt trading, 
trade processing, and participation rules that provide participants 
with impartial access to the market and deter abuses; and establish and 
enforce compliance with any limitation on access.\365\ Further, Core 
Principle 2 requires a SEF to have the capacity to detect, investigate, 
and enforce those rules, including the means to capture information 
that may be used in identifying rule violations.\366\ The Commission 
adopted many detailed regulations in part 37 to further implement these 
requirements, including impartial access requirements under Sec.  
37.202; rule enforcement program requirements under Sec.  37.203; 
third-party service provider requirements under Sec.  37.204; audit 
trail requirements under Sec.  37.205; and disciplinary procedures and 
sanctions requirements under Sec.  37.206.
---------------------------------------------------------------------------

    \365\ 7 U.S.C. 7b-3(f)(2)(B)(i).
    \366\ 7 U.S.C. 7b-3(f)(2)(B)(ii).
---------------------------------------------------------------------------

    The Commission is proposing several new rules and rule amendments 
under Core Principle 2, including clarifications of existing rules 
where appropriate, to implement its proposed swaps regulatory 
framework. These proposed amendments would streamline the SEF rules and 
allow SEFs to account for technological developments, existing market 
practices, and costs in their trading and market operations. Further, 
the amendments would codify no-action relief that has been provided 
under several existing Commission staff no-action letters. Among these 
changes, the Commission is proposing a modification to the impartial 
access requirements under Sec.  37.202 and several corresponding 
amendments, which would provide a SEF with the ability to devise its 
participation criteria based on its own trading operations and market 
focus. Further, the Commission is proposing several amendments to 
Sec. Sec.  37.203-206 that would allow a SEF to better tailor its own 
compliance and regulatory oversight rules to its trading operations and 
markets, while still maintaining a robust compliance program.

A. Sec.  37.202 Access Requirements

    The Commission implemented the statutory impartial access 
requirement by adopting Sec.  37.202. Existing Sec.  37.202(a)(1) 
requires a SEF to provide any ECP and any independent software vendor 
(``ISV'') with impartial access to its market(s) and market services, 
including indicative quote screens or any similar pricing data 
displays, provided that the facility has, among other things, criteria 
governing such access that are ``impartial, transparent, and applied in 
a fair and non-discriminatory manner.'' \367\ In the preamble to the 
SEF Core Principles Final Rule, the Commission stated that 
``impartial'' means ``fair, unbiased, and unprejudiced.'' \368\ The 
Commission further stated that the impartial access requirement allows 
ECPs to ``compete on a level playing field'' \369\ and does not allow a 
SEF to ``limit access . . . to certain types of ECPs or ISVs.'' \370\ 
The Commission also noted that each similarly situated group of ECPs 
and ISVs must be treated similarly.\371\ The Commission believed that 
this approach would increase the number of market participants on SEFs, 
which in turn would increase SEF trading, thereby improving liquidity 
and price discovery in the swaps market.\372\
---------------------------------------------------------------------------

    \367\ 17 CFR 37.202(a)(1).
    \368\ SEF Core Principles Final Rule at 33508.
    \369\ Id.
    \370\ Id.
    \371\ Id.
    \372\ Id.
---------------------------------------------------------------------------

    Core Principle 2, however, also allows a SEF to establish and 
enforce compliance with any rule of the SEF, including any limitation 
on access to the SEF.\373\ Accordingly, existing Sec.  37.202(c) 
requires a SEF to establish and impartially enforce rules that govern 
the SEF's decision to allow, deny, suspend, or permanently bar ECPs' 
access to the SEF, including when such decisions are made as part of a 
disciplinary or emergency action by the SEF.\374\ The Commission 
further stated that a SEF may establish different access criteria for 
each of its markets, provided that the criteria are impartial and are 
not

[[Page 61993]]

used as a competitive tool against certain ECPs and ISVs.\375\ Subject 
to these requirements, the Commission stated that a SEF may ``use its 
own reasonable discretion to determine its access criteria, provided 
that the criteria are impartial, transparent and applied in a fair and 
non-discriminatory manner, and are not anti-competitive.'' \376\
---------------------------------------------------------------------------

    \373\ 7 U.S.C. 7b-3(f)(2)(A)(ii).
    \374\ 17 CFR 37.202(c).
    \375\ SEF Core Principles Final Rule at 33508.
    \376\ Id.
---------------------------------------------------------------------------

    Existing Sec.  37.202(a)(3) requires a SEF to have a comparable fee 
structure for ECPs and ISVs receiving comparable access to, or services 
from, the SEF.\377\ The Commission clarified that this requirement 
neither sets nor limits fees that a SEF may charge.\378\ The Commission 
further clarified that a SEF may establish different categories of ECPs 
and ISVs seeking access to, or services from, the SEF, but may not 
discriminate with respect to fees within a particular category.\379\ 
The Commission stated that existing Sec.  37.202(a)(3) is not intended 
to be a ``rigid requirement that fails to take into account legitimate 
business justifications for offering different fees to different 
categories of entities seeking access to the SEF.'' \380\
---------------------------------------------------------------------------

    \377\ 17 CFR 37.202(a)(3).
    \378\ SEF Core Principles Final Rule at 33509.
    \379\ Id.
    \380\ Id.
---------------------------------------------------------------------------

    Finally, existing Sec.  37.202(a)(2) requires SEFs to have 
procedures for ECPs to provide written or electronic confirmation of 
their ECP status with the SEF prior to obtaining access.\381\ Under 
existing Sec.  37.202(b), an ECP must consent to a SEF's jurisdiction 
prior to obtaining access to the SEF.\382\
---------------------------------------------------------------------------

    \381\ 17 CFR 37.202(a)(2).
    \382\ 17 CFR 37.202(b).
---------------------------------------------------------------------------

1. Sec.  37.202(a)--Impartial Access to Markets, Market Services, and 
Execution Methods \383\
---------------------------------------------------------------------------

    \383\ The Commission proposes to retitle Sec.  37.202(a) to 
``Impartial access to markets, market services, and execution 
methods'' from ``Impartial access to markets and market services'' 
based on the proposed changes described below.
---------------------------------------------------------------------------

    The Commission has applied the impartial access requirements to 
various areas of a SEF's operations that concern participant access to 
the market. These features include (i) eligibility or onboarding 
criteria; (ii) a participant's ability to access the SEF's 
functionalities, i.e., trade and execute on a SEF's execution methods; 
(iii) the manner in which a SEF's execution methods treat market 
participants' bids and offers, in particular the use of discretion; and 
(iv) participation fee structures. The Commission's current approach to 
impartial access in these areas, however, has raised two issues that 
have led to certain inconsistencies in implementation of the 
requirement.
    First, the existing approach has created uncertainty for SEFs 
seeking to establish and apply access criteria in a consistent manner. 
The Commission recognizes that SEF Core Principle 2 requires a SEF to 
provide impartial access, but also allows a SEF to establish 
limitations on access. Accordingly, the Commission has allowed SEFs to 
establish different access criteria for different markets, but has also 
required each ``similarly situated'' group of ECPs and ISVs to be 
treated in the same manner.\384\ The preamble to the SEF Core 
Principles Final Rule also states that SEFs can use their own 
reasonable discretion to determine their access criteria, provided that 
they are impartial. In practice, implementation of the rule has led to 
some uncertainty by SEFs as to whether different access criteria for 
their markets, market services, and execution methods would be allowed 
or not allowed under Sec.  37.202.
---------------------------------------------------------------------------

    \384\ SEF Core Principles Final Rule at 33508.
---------------------------------------------------------------------------

    Second, the manner in which the Commission has implemented the 
existing approach has often favored the promotion of an ``all-to-all'' 
trading environment and has, thus, limited the ability of SEFs to adapt 
their operations to the characteristics and dynamics of the swaps 
market.\385\ All-to-all trading environments, such as futures markets, 
are generally marked by smaller-sized products with standardized terms 
and conditions that appeal to a broad range of market participants, 
including retail customers. These same characteristics are also more 
conducive to continuous and liquid trading. By contrast, swaps trading 
often occurs between a limited number of ECPs in a broad array of 
unique, larger-sized products with more variable terms that are 
customized to address specific and unique hedging risks. These 
characteristics result in episodic market liquidity in many swaps 
markets, in contrast to the continuous liquidity found in all-to-all 
trading environments. The Commission believes that the imposition of 
features found in an ``all-to-all'' trading environment upon swaps 
markets is at odds with general market characteristics and dynamics of 
swaps trading.
---------------------------------------------------------------------------

    \385\ Id.
---------------------------------------------------------------------------

a. Sec.  37.202(a)(1)--Impartial Access Criteria
    Based on its experience with implementing part 37, the Commission 
proposes to modify its approach to applying the impartial access 
requirement. In doing so, the Commission proposes to streamline and 
consolidate the existing language and relevant preamble discussion from 
the SEF Core Principles Final Rule, including the Commission's view of 
``impartial'' and the concept of ``similarly situated,'' to establish a 
revised impartial access requirement. Under proposed Sec.  
37.202(a)(1), a SEF would be required to establish rules that set forth 
impartial access criteria for accessing its markets, market services, 
and execution methods, including any indicative quote screens or any 
similar pricing data displays. Such impartial access criteria must be 
transparent, fair and non-discriminatory and applied to all or 
similarly situated market participants.
    In proposing this approach, the Commission believes that criteria 
that are ``fair and non-discriminatory'' would inherently be ``fair, 
unbiased, and unprejudiced,'' which the Commission previously defined 
as ``impartial.'' The Commission also believes that the proposed rule 
clarifies that this criteria must be applied to market participants in 
a fair and non-discriminatory manner, as currently required under the 
existing requirements of Sec.  37.202(a)(1). Finally, proposed Sec.  
37.202(a)(1) would continue to allow each SEF to determine which market 
participants are ``similarly situated'' in its market and configure 
appropriate access criteria, provided that such criteria are 
transparent, fair, and non-discriminatory to participants. Applying 
access criteria in a ``fair and non-discriminatory'' manner means that 
a SEF should permit or deny access to a market participant on a non-
arbitrary basis, based on objective, pre-established requirements or 
limitations. The Commission emphasizes, however, that this streamlined 
approach does not mean that a SEF must create an ``all-to-all'' trading 
environment.
    The Commission acknowledges that it has often applied the impartial 
access requirement to promote an ``all-to-all'' trading environment, 
which is neither required under Core Principle 2 nor is consistent with 
swaps market structure. Under the proposed approach, the Commission 
would not seek to apply the requirement to mandate that all 
participants have access to all SEFs, which may have circumscribed a 
SEF's ability under Core Principle 2 to set access limitations. Rather, 
to allow SEFs to serve different types of market participants or have 
different access criteria for different execution methods, the 
Commission would allow SEFs to apply access limitations, as long as 
they

[[Page 61994]]

are applied in a fair and non-discriminatory manner.
    This approach would also align with swaps market characteristics--
in particular, the episodic nature of swaps liquidity--that have led to 
the overall swaps market being made up of both dealer-to-client and 
dealer-to-dealer markets, as described below. The Commission believes 
that the structure of the swaps market is a natural outgrowth of 
certain fundamental features of swaps trading. The Commission further 
believes that all-to-all markets are inimical to these fundamental 
swaps trading features; therefore, imposing all-to-all, market-derived 
requirements on swaps markets ultimately detracts from achieving the 
statutory SEF goals of promoting swaps trading on SEFs and pre-trade 
price transparency in the swaps market. Accordingly, the Commission 
believes that each SEF should be able to use access criteria to develop 
its business in a manner that is both consistent with the 
characteristics of swaps markets and accommodating of the types of 
participants that comprise the SEF's intended market.
    The Commission still believes that any access criteria intended to 
prevent or reduce competition among similarly situated market 
participants would be unfair and discriminatory and, therefore, 
inconsistent with proposed Sec.  37.202(a)(1). If a market participant 
is willing or able to meet the objective, pre-established, and 
transparent criteria for eligibility to onboard to a SEF or gain 
additional access to a SEF's trading mechanisms, then the SEF should 
not preclude that market participant from onboarding to the SEF or 
using its functionalities. Accordingly, such a market participant 
should not be subject to access criteria that are unfair and 
discriminatory and are intended to prevent or dis-incentivize that 
market participant's participation on the SEF.\386\
---------------------------------------------------------------------------

    \386\ The Commission also notes that such criteria may be 
inconsistent with Core Principle 11. Core Principle 11 prohibits a 
SEF from adopting measures that result in any unreasonable restraint 
of trade or impose any material anticompetitive burdens on trading 
or clearing, unless they are necessary or appropriate to achieve the 
purposes of the CEA and are otherwise consistent with the CEA and 
the Commission's regulations. 17 CFR 37.1100.
---------------------------------------------------------------------------

    The Commission emphasizes that under proposed Sec.  37.202(a)(1), 
any access criteria--whether it concerns eligibility or onboarding 
criteria, prerequisites for using certain trading functionalities, or 
fee schedules--constitutes a ``rule,'' as that term is defined under 
Sec.  40.1(i), that would be subject to rule approval or self-
certification procedures under part 40.\387\ Through the part 40 rule 
review process, the Commission would continue to evaluate a SEF's 
compliance with the impartial access requirements as proposed.
---------------------------------------------------------------------------

    \387\ 17 CFR 40.5-6.
---------------------------------------------------------------------------

    The Commission also proposes to eliminate the reference to 
``ISVs,'' which the Commission notes is not required under Core 
Principle 2. Given that a SEF should be able to set its access criteria 
to develop its business based on its desired market and participant 
needs, the Commission also believes that a SEF should be able to 
determine an ISV's level of access to the SEF. The Commission 
previously applied the impartial access requirement to ISVs on the 
basis that such types of vendors would provide various benefits to the 
swaps market and market participants, such as enhanced transparency and 
trading efficiency through the consolidation of trading data from 
multiple venues, analytics, and best displayed prices.\388\ Based on 
the Commission's experience and notwithstanding the existing impartial 
access requirement, ISVs have not established a significant level of 
participation on SEFs, nor have they achieved a broad level of adoption 
among market participants. Rather, the Commission has observed that 
most participants access SEFs through means other than ISV 
services.\389\ Therefore, the Commission believes that the impartial 
access requirement should apply to market participants who are 
accessing SEF trading systems or platforms to trade swaps, rather than 
establish requirements for a separate set of entities that are merely 
providing ancillary market services.
---------------------------------------------------------------------------

    \388\ The Commission previously cited examples of ISVs that 
included smart order routers, trading software companies that 
develop front-end trading applications, and aggregator platforms. 
SEF Core Principles Final Rule at 33508 n.423.
    \389\ See supra notes 52-54 (describing the various modes of 
participation on SEFs by market participants).
---------------------------------------------------------------------------

(1) Application of Impartial Access Requirement
    Based on the areas in which the Commission has applied the existing 
impartial access requirement to various aspects of a SEF's operation 
during the part 37 implementation, the Commission discusses below how 
the proposed impartial access approach would apply to these areas to 
provide further clarity, including (i) eligibility and onboarding; (ii) 
execution methods; and (iii) SEF use of discretion.
(i) Eligibility and Onboarding Criteria
    The Commission has applied the impartial access requirement to 
assess a SEF's eligibility and onboarding criteria. In the preamble to 
the SEF Core Principles Final Rule, the Commission prospectively 
identified whether or not certain hypothetical arrangements would 
comply with the rulemaking's approach to impartial access. Certain 
criteria were deemed non-compliant, such as platforms whose 
participants were limited to wholesale liquidity providers; \390\ 
platforms that imposed participation limits based on maintaining 
financial integrity and operational safety; \391\ platforms that 
established objective minimum capital or credit requirements; \392\ and 
platforms that limited participation to sophisticated market 
participants.\393\ The Commission generally characterized these types 
of criteria as inconsistent with Core Principle 2 because they would 
inherently limit access to certain types of ECPs and ISVs.\394\ 
Subsequent Commission staff guidance further identified other 
eligibility criteria that Commission staff viewed as inconsistent with 
impartial access, based on the view that limiting access to a SEF's 
trading systems or platforms to certain types of ECPs or ISVs is 
inconsistent with Core Principle 2.\395\
---------------------------------------------------------------------------

    \390\ SEF Core Principles Final Rule at 33507-08.
    \391\ Id.
    \392\ Id. at 33507.
    \393\ Id.
    \394\ Id. at 33508.
    \395\ These criteria included (i) not providing access to an ECP 
that is both a liquidity provider and taker; (ii) prohibiting 
individuals from obtaining access despite their meeting the 
requirements to be an ECP; (iii) limiting access to ECPs that 
satisfy minimum transaction volume level requirements; and (iv) 
requiring an ECP to be a clearing member or to have an agreement 
with a clearing member to access the SEF, even if only for the 
purpose of trading swaps that are not intended to be cleared. 
Commission staff also expressed concern that SEFs allowing only 
either intermediated access or direct access may impede impartial 
access in certain instances. Division of Clearing and Risk, Division 
of Market Oversight and Division of Swap Dealer and Intermediary 
Oversight Guidance on Application of Certain Commission Regulations 
to Swap Execution Facilities (Nov. 14, 2013) (``2013 Staff Impartial 
Access Guidance'').
---------------------------------------------------------------------------

    The Commission has realized from experience that certain criteria 
developed by SEFs reflect fundamental swap market segments. In 
particular, the swaps market consists of both a dealer-to-client market 
segment and a dealer-to-dealer market segment that are related, but 
also differ in important respects. In the dealer-to-client segment, 
corporate end-users and other buy-side participants access and utilize 
the swaps market to manage risk positions

[[Page 61995]]

that are unique to their particular circumstances. Swap dealers provide 
liquidity to the participants within this market segment for a fee, 
which participants are willing to pay, that reflects the risks incurred 
by dealers from the episodic or relative lack of liquidity in the swaps 
market for many specific swaps. The swap dealers subsequently offset 
positions established through the dealer-to-client market segment by 
hedging their swaps inventories on a portfolio basis in the dealer-to-
dealer market, which is wholesale in nature. Those dealer-to-dealer 
markets consist of other primary dealers and sophisticated market-
making participants seeking to fulfill similar objectives through 
competitive execution of large-sized transactions. In pricing a 
customer trade, dealers base their prices on the cost of hedging those 
trades in the dealer-to-dealer markets.
    The dealer-to-dealer market may provide benefits to the swaps 
markets, in particular to non-dealer clients, by allowing dealers who 
provide liquidity to offload risk from clients. Without this market, 
liquidity in the dealer-to-client market may suffer because the 
inherent risks of holding swaps inventory could arguably dis-
incentivize participation by dealers in the dealer-to-client market or 
otherwise require dealers to charge their customers higher prices for 
taking on this risk. Absent the supply of liquidity providers, non-
dealers who are liquidity takers would have difficulty executing swaps 
at competitive pricing. SEFs that serve the wholesale, dealer-to-dealer 
market have stated that using eligibility or participation criteria to 
maintain a dealer-to-dealer market is beneficial, given that it allows 
participants who share similar profiles and trading interests to 
interact with each another, thereby helping to promote liquid markets 
with tight pricing.
    For the reasons stated above, the Commission believes that SEF 
eligibility and onboarding criteria that would serve to maintain this 
market structure would be appropriate and consistent with existing 
market dynamics and may provide the benefits discussed above. 
Accordingly, a SEF could premise these criteria in different ways, such 
as limiting access upon the type of the market participant or the swap 
product itself. For example, a SEF would be able to calibrate access to 
serve market participants within a particular market segment, such as 
dealers trading in a wholesale swaps market, who may be categorized as 
``similarly situated.''
(ii) Access to Execution Methods
    In addition to assessing SEF onboarding and eligibility, the 
Commission has also applied the current impartial access standard to 
evaluate various SEF-established prerequisites for trading on certain 
platforms or interacting with certain participants. Some of those 
prerequisites reflect the nature of the swap involved, e.g., whether 
the swap is submitted for clearing or is uncleared, which determines 
whether certain market participants are eligible to trade with one 
another.\396\ When a SEF lists a swap that is traded as a component of 
a transaction with other non-swap legs, the SEF might also establish 
trading eligibility criteria that take account of a participant's 
ability to trade the non-swap leg components of such swaps.\397\ Other 
prerequisites may be based upon the prior or ongoing level of trading 
activity generated by a particular participant, e.g., whether the 
participant has been actively submitting bids and offers. During the 
implementation of part 37, the Commission has deemed appropriate 
certain criteria based on business or operational justifications, but 
also deemed other criteria as inconsistent with impartial access. For 
example, platform access criteria that require a market participant to 
contribute a certain amount of liquidity, e.g., provide a minimum 
number of bids and offers, have been prohibited, despite the business 
or operational justifications offered by SEFs.
---------------------------------------------------------------------------

    \396\ Such a situation might result in a SEF limiting trading 
access to uncleared swaps to only those market participants who have 
existing underlying documentation to execute such swaps with other 
potential counterparties.
    \397\ For example, a SEF could require market participants (or 
their clearing members) to have membership in a particular clearing 
organization, e.g., membership with the Fixed Income Clearing 
Corporation (``FICC''), in order to access a method of execution in 
which counterparties execute a package transaction with a non-swap 
leg that FICC must clear.
---------------------------------------------------------------------------

    SEFs have also argued that requiring market participants to meet 
trading prerequisites or participation criteria to access certain 
platforms or trade certain products can be beneficial to promoting 
effective trading markets on SEFs. In implementing part 37, the 
Commission has acknowledged that such criteria may be beneficial toward 
maintaining and promoting orderly trading for uncleared swaps on SEFs--
for example, where participants must have certain trading enablements 
in place prior to trading uncleared swaps with other participants on 
the platform.\398\ Specifically, the Commission has allowed such types 
of enablements, e.g., trading relationship documentation with a minimum 
percentage of trading participants prior to posting bids and offers or 
trading in certain established minimum sizes, to promote a more dynamic 
and liquid trading environment for uncleared swaps with active 
participation.\399\
---------------------------------------------------------------------------

    \398\ The Commission notes that Commission staff previously used 
the term ``enablement mechanism'' in guidance to refer to ``any 
mechanism, scheme, functionality, counterparty filter, or other 
arrangement that prevents a market participant from interacting or 
trading with, or viewing the bids and offers (firm or indicative) 
displayed by any other market participant on that SEF, whether by 
means of any condition or restriction on its ability or authority to 
display a quote to any other market participant or to respond to any 
quote issued by any other market participant on that SEF, or 
otherwise.'' 2013 Staff Impartial Access Guidance at 1.
    \399\ The Commission notes that Commission staff previously 
viewed a SEF's application or support otherwise for enablement 
mechanisms with respect to swaps that were intended to be cleared as 
``prohibited discriminatory treatment,'' that is inconsistent with 
the existing impartial access requirement under Sec.  37.202. Id. at 
1-2.
---------------------------------------------------------------------------

    The Commission's current approach to impartial access, however, has 
led to confusion as to whether these types of criteria are 
inappropriate because they do not ensure equal participation by all 
market participants; or as to whether they are appropriate because they 
reflect a SEF's ability to impose limitations on access and are 
consistent with the view that SEFs should have the discretion to 
determine the most suitable way to promote trading on their platforms. 
Specifically, the Commission recognizes that requiring impartial access 
for ``similarly situated'' groups of market participants has currently 
been interpreted to require that a SEF allow all participants in that 
group to be able to interact with one another in the same manner and 
degree.
    The Commission clarifies that a SEF must have impartial access 
criteria, i.e., transparent, fair, and non-discriminatory, for trading 
prerequisites or participation criteria prior to accessing certain 
platforms or trading certain products. As long as these access criteria 
are impartial, such that any market participant who meets the criteria 
is able to utilize a certain execution method or trade a certain 
product, then they would be allowed to do so under the proposed 
approach. For example, if a SEF established a minimum trade size for 
its order book that applied to a market participant's orders, then such 
criteria would be allowed if any of its market participants who met 
these criteria could trade on the order book. As noted above, Core 
Principle 2 does not require a SEF to create an ``all-to-all'' 
marketplace, and the Commission believes that SEFs should be allowed to 
establish criteria that would facilitate trading based on its products 
and the intended trading environment. As long as a SEF also

[[Page 61996]]

applies its impartial access criteria in a fair and non-discriminatory 
manner, as described above, the Commission believes that such criteria 
would comply with Sec.  37.202(a)(1).
(iii) Use of Discretion
    The Commission has also previously determined whether a SEF 
complies with the impartial access requirement based on how the SEF's 
trading systems or platforms handle participant orders. For example, a 
SEF's voice-based or voice-assisted execution methods involve the 
exercise of ``discretion'' by a SEF trading specialist in managing the 
interaction of multiple bids and offers from multiple participants. As 
described above, SEF trading specialists solicit orders on behalf of 
the SEF and seek to arrange transactions by matching those orders with 
reciprocal trading interests.\400\ Given the variability in how 
participant orders may be handled through the use of discretion, the 
Commission has sought to ensure that market participants are receiving 
``impartial access'' in the manner in which their orders are handled 
while also acknowledging that discretion is inherent to these types of 
systems or platforms.
---------------------------------------------------------------------------

    \400\ For the Commission's previous description of the role of 
SEF trading specialists, who function as part of a SEF's voice-based 
or voice-assisted trading system or platform, and their use of 
discretion, see supra Section VI.A.1.b.--Sec.  37.201(a)(2)--
Discretion and Section VI.A.3.--Sec.  37.201(c)--SEF Trading 
Specialists.
---------------------------------------------------------------------------

    The Commission also recognizes that its current approach to 
impartial access may be in tension with its proposal to allow more 
flexible execution methods on SEFs, particularly those that involve 
discretion and are prevalent in the dealer-to-dealer market. While some 
SEF execution methods facilitate trading and execution on a non-
discretionary basis, e.g., electronic trading systems, including Order 
Books and RFQ Systems, some execution methods rely upon the ability of 
a SEF trading specialist to ascertain liquidity for particular products 
and manage multiple competing bids and offers, e.g., voice-based 
platforms. To facilitate trading and execution in such a trading 
environment, SEF trading specialists must account for a host of 
changing market conditions, such as available pricing, product 
complexity, prevailing trade sizes, and market participant needs. The 
Commission recognizes that SEF trading specialists may apply these 
factors differently among different participants during different 
periods of trading. In contrast to prevailing practices among swaps 
broking entities, such as interdealer brokers that have operated 
outside of the SEF regulatory framework,\401\ the Commission has 
scrutinized similar practices on SEF voice-based platforms against the 
impartial access requirements. The Commission acknowledges that its 
application of impartial access at times has constrained the ability of 
SEFs to establish trading systems or platforms that serve particular 
segments of the swaps marketplace.
---------------------------------------------------------------------------

    \401\ As discussed above, the Commission is clarifying the 
application of the SEF registration requirement in this notice to 
specify that these types of entities are subject to SEF registration 
based on their activity in facilitating trading and execution in 
swaps on a multiple-to-multiple basis between market participants. 
See supra Section IV.C.1.c.(2)--SEF Registration Requirement for 
Swaps Broking Entities, Including Interdealer Brokers.
---------------------------------------------------------------------------

    The Commission also believes that the trading discretion exercised 
by SEF trading specialists may affect the manner in which market 
participants are treated on a facility, but would not necessarily be 
inconsistent with the Commission's proposed approach to impartial 
access. The Commission believes that to the extent that the exercise of 
discretion furthers a SEF's ability to facilitate trading and execution 
on its system or platform--including identifying trading interest in a 
discrete manner or managing bids and offers to maintain accurate market 
pricing--it should be viewed as being consistent with impartial access. 
The Commission also notes that proposed Sec.  37.201(a)(2) would 
support the use of discretion in a manner consistent with impartial 
access; as discussed above, the proposed rule would provide 
transparency into the use of discretion by requiring each SEF to 
disclose the general manner and circumstances behind its use within 
each execution method.\402\ Notwithstanding proposed Sec.  
37.201(a)(2), however, the Commission emphasizes that a SEF would still 
be required to ensure that any use of trading discretion occurs in a 
fair and non-discriminatory manner.
---------------------------------------------------------------------------

    \402\ See supra Section VI.A.1.b.--Sec.  37.201(a)(2)--
Discretion and Section VI.A.3.--Sec.  37.201(c)--SEF Trading 
Specialists.
---------------------------------------------------------------------------

b. Sec.  37.202(a)(2)--Fees
    Based on its experience in reviewing fee structures for SEFs, the 
Commission proposes to eliminate the requirement under Sec.  
37.202(a)(3) that a SEF must establish ``comparable fee structures'' 
for ECPs and ISVs receiving ``comparable access'' to the SEF or 
services from the SEF. In practice, this requirement has not fully 
accounted for the market practices described above. Instead, the 
Commission proposes Sec.  37.202(a)(2) to require a SEF to establish 
and apply fee structures and fee practices in a fair and non-
discriminatory manner to its market participants.\403\
---------------------------------------------------------------------------

    \403\ To further streamline the other existing impartial access 
requirements, the Commission proposes to renumber existing paragraph 
(a)(2), which requires confirmation of a participant's ECP status, 
to subsection (c); and to renumber existing paragraph (a)(3), which 
addresses SEF fee requirements, to paragraph (a)(2). The Commission 
also proposes to renumber subsection (c)--``Limitations on 
access''--to subsection (b) and to amend that existing language, as 
described below. Accordingly, the Commission also proposes to 
renumber existing subsection (b)--``Jurisdiction''--to subsection 
(d).
---------------------------------------------------------------------------

    Currently, SEFs have established different fee levels for different 
categories of market participants or different types of trading 
activity, whether imposed directly through a trading fee schedule or 
indirectly through the use of trading incentive or discount 
programs.\404\ The Commission has observed that SEFs have generally 
based their fees or discounts on a host of different considerations, 
such as technological costs attributable to facilitating a particular 
method of accessing the platform or a listed product's complexity. In 
particular, fee-setting arrangements for swaps trading in the dealer-
to-dealer segment, which includes interdealer broker operations that 
would become subject to the proposed SEF registration requirement,\405\ 
may differ, even in instances where market participants are receiving 
comparable access or services from the SEF. Rather, fee arrangements in 
the dealer-to-dealer market are often subject to individualized 
negotiations between a particular market participant and its broker, 
often involving a combination of different factors and business 
considerations that can lead to different fees for market participants 
who could otherwise be characterized as similarly situated.\406\ The 
Commission has observed that these factors or considerations may 
include discounts based on past or current trading volume attributable 
to the market participant, market maker participation, or pricing 
arrangements related to services

[[Page 61997]]

provided by a SEF-affiliated entity involving other non-swap products. 
The confluence of such factors, and the varying degrees to which they 
help inform swap trading fee determinations, have been difficult to 
distill into fee structures applicable to categories of market 
participants.
---------------------------------------------------------------------------

    \404\ With respect to trading incentive or discount programs, 
the Commission has observed various types of arrangements, such as 
discounts from trading fees that vary in size and scope based on the 
method of execution utilized and the relative rank of a SEF 
participant vis a vis other participants in terms of quoting 
frequency and number of products quoted.
    \405\ See supra Section IV.C.1.c.(2)--SEF Registration 
Requirement for Swaps Broking Entities, Including Interdealer 
Brokers.
    \406\ In some instances, swap trading fees comprise part of a 
larger overall negotiated fee that is agreed upon between a market 
participant and a broker for broking services in a broad range of 
other products, including other fixed income instruments and 
equities.
---------------------------------------------------------------------------

    Based on this practical difficulty, the Commission is proposing to 
allow SEFs and market participants the flexibility to determine fees 
based on legitimate business negotiations. In this proposal, the 
Commission does not intend to limit the scope of business-related 
factors that a SEF may continue to consider in establishing 
participation fee arrangements. Proposed Sec.  37.202(a)(2) is intended 
to provide market participants and SEFs with the flexibility to 
negotiate fee arrangements on an individualized basis based on 
legitimate business justifications. The Commission emphasizes, however, 
that consistent with the impartial access requirement under proposed 
Sec.  37.202(a)(1), a SEF should not use fees to discriminate against 
certain market participants.
2. Sec.  37.202(b)--Limitations on Access
    The Commission proposes to require a SEF to maintain documentation 
of any decision to deny, suspend, permanently bar, or otherwise limit a 
market participant's access to the SEF.\407\ The Commission believes 
that such documentation is important to assisting a SEF's CCO in 
reviewing the SEF's adherence to its access criteria rules and 
determining whether the SEF is applying its access criteria in a manner 
that meets Sec.  37.202. This documentation can further assist the 
Commission in reviewing any limitation on access determinations for a 
market participant during rule enforcement reviews or in the event that 
a market participant or the Commission challenges a SEF's access 
decision.
---------------------------------------------------------------------------

    \407\ The Commission proposes to renumber existing subsection 
(c)--``Limitations on access''--to subsection (b) and amend the 
requirement as described above.
---------------------------------------------------------------------------

    The Commission also proposes non-substantive amendments to the 
existing provision, including amending the existing reference to 
``eligible contract participant'' to ``market participant'' to provide 
greater clarity.
3. Sec.  37.202(c)--Eligibility
    The Commission proposes under Sec.  37.202(c) to maintain the 
existing requirement that a SEF must require its market participants to 
provide a written confirmation (electronic or otherwise) of their ECP 
status prior to obtaining access to the SEF. The Commission also 
proposes to make minor non-substantive revisions to the current 
language.\408\
---------------------------------------------------------------------------

    \408\ The Commission proposes to renumber existing paragraph 
(a)(2) to subsection (c) and adopt a new title--``Eligibility.''
---------------------------------------------------------------------------

4. Sec.  37.202(d)--Jurisdiction
    The Commission proposes under Sec.  37.202(d) to maintain the 
existing requirement that a SEF must require that a market participant 
consent to its jurisdiction prior to granting any market participant 
access to its facilities. The Commission also proposes to make minor 
non-substantive revisions to the current language.\409\ In addition, 
the Commission confirms that consistent with prior Commission staff 
guidance, a SEF does not need to obtain consent to its jurisdiction 
through an affirmative writing, and a SEF may obtain consent through a 
notification in its rulebook.\410\
---------------------------------------------------------------------------

    \409\ The Commission proposes to renumber existing subsection 
(b)--``Jurisdiction'' to subsection (d).
    \410\ 2014 Staff Jurisdiction Guidance at 2.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.202. In particular, the Commission requests comment on the following 
questions:
    (41) Should the Commission specify a basis for how it would 
determine that a SEF's access criteria are unfair and discriminatory? 
Should a SEF be limited in the type of justifications that it may 
provide for its access criteria to demonstrate that they are impartial, 
e.g., such criteria are intended to promote participation and/or 
liquidity? If so, what would those justifications be?
    (42) What should be the bases or factors for determining whether 
market participants are ``similarly situated''?
    (43) Should enablements be allowed as a type of access criteria for 
cleared swaps, in addition to their usage for uncleared swaps? Is this 
consistent with the Commission's proposed approach to impartial access? 
Why or why not? If so, please provide examples of enablements for 
cleared swaps that are consistent with the Commission's proposed 
approach to impartial access.

B. Sec.  37.203--Rule Enforcement Program

    Section 37.203 implements certain aspects of Core Principle 2, 
which requires a SEF to (i) establish and enforce trading, trade 
processing, and participation rules to deter abuses; and (ii) have the 
capacity to detect, investigate, and enforce those rules, including the 
ability to capture information to identify rule violations.\411\ The 
regulation sets forth the requirements of an acceptable SEF rule 
enforcement program, including requirements related to prohibiting 
abusive trading practices; detecting and investigating rule violations; 
maintaining sufficient staffing and resources; maintaining an automated 
trade surveillance system; conducting real-time market monitoring; and 
conducting investigations.
---------------------------------------------------------------------------

    \411\ 7 U.S.C. 7b-3(f)(2).
---------------------------------------------------------------------------

    During the part 37 implementation process, the Commission has 
acquired greater experience with the swaps markets, in particular 
related to SEF compliance and regulatory oversight requirements. The 
Commission acknowledges that the existing swaps regulatory framework 
was developed based in part on the futures regulatory framework. As a 
result, the current part 37 regulations do not sufficiently account for 
differences between futures and swaps markets, in particular the 
differences in the complexity and size of transactions, the number and 
sophistication of market participants,\412\ and the variations in the 
methods of execution offered. Within the swaps market, the Commission 
also recognizes that product offerings, execution methods, types of 
market participants, and liquidity may even vary among SEFs.
---------------------------------------------------------------------------

    \412\ The Commission notes that CEA section 2(e) limits swaps 
trading to ECPs, as defined by section 1a(18) of the Act. 7 U.S.C. 
2(e).
---------------------------------------------------------------------------

    Accordingly, the Commission believes that instead of prescribing a 
limited approach to compliance and regulatory oversight requirements, a 
SEF should be enabled to tailor its compliance and oversight program to 
fit its respective operations and market.\413\ Further, the Commission 
seeks to ensure that SEF rule enforcement requirements are consistent 
with the ability of a SEF to offer flexible execution methods for any 
of its listed swaps. Therefore, as described below, the Commission 
proposes to amend Sec.  37.203 to enable a SEF to establish a rule 
enforcement program that is best suited to its trading systems and 
platforms, as well as its market participants, while still ensuring the 
ability to fulfill its self-regulatory obligations. The Commission 
believes that these proposed amendments would also reduce certain 
complexities, costs, and burdens, while still continuing to implement 
the Core Principle 2 requirements and require a robust compliance 
program.
---------------------------------------------------------------------------

    \413\ The Commission proposes to eliminate the introductory 
sentence under Sec.  37.203, which states that a SEF shall establish 
and enforce trading, trade processing, and participation rules that 
will deter abuses and it shall have the capacity to detect, 
investigate, and enforce those rules. This language is duplicative 
of the existing requirements under Core Principle 2.

---------------------------------------------------------------------------

[[Page 61998]]

1. Sec.  37.203(a)--Abusive Trading Practices Prohibited
    Section 37.203(a) requires a SEF to generally prohibit abusive 
trading practices on its markets by members and market participants, 
but also enumerates specific practices that a SEF must specifically 
prohibit, including front-running, wash trading, pre-arranged trading 
(except for block trades or other types of transactions certified or 
approved by the Commission under part 40), fraudulent trading, money 
passes, and any other trading practice that the SEF deems to be 
abusive.\414\ Section 37.203(a) further requires a SEF to prohibit any 
other manipulative or disruptive trading practices prohibited by the 
Act or Commission regulations. SEFs permitting intermediation must also 
prohibit customer-related abuses, such as trading ahead of customer 
orders, trading against customer orders, accommodation trading, and 
improper cross trading.
---------------------------------------------------------------------------

    \414\ 17 CFR 37.203(a).
---------------------------------------------------------------------------

    The Commission proposes a non-substantive amendment to Sec.  
37.203(a) to eliminate the term ``members.'' The Commission notes that 
its proposed definition of ``market participant'' under Sec.  37.2(b) 
would capture the universe of persons and entities that could engage in 
abusive trading practices, including a SEF's members.\415\
---------------------------------------------------------------------------

    \415\ See supra Section IV.B.2.--Sec.  37.2(b)--Definition of 
``Market Participant.''
---------------------------------------------------------------------------

    As discussed above in conjunction with the proposed prohibition on 
pre-execution communications under Sec.  37.201(b), the Commission is 
also proposing to eliminate exceptions to the pre-arranged trading 
prohibition under Sec.  37.203(a).\416\
---------------------------------------------------------------------------

    \416\ See supra Section VI.A.2.a.--Sec.  37.201(b)--Pre-
Execution Communications.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.203(a). In particular, the Commission requests comment on the 
following questions:
    (44) Are there any abusive trading practices enumerated under 
proposed Sec.  37.203(a) that are not applicable to swaps trading on a 
SEF, on certain SEF markets, or through certain methods of execution?
    (45) Are there other abusive trading practices that could 
potentially occur in the swaps markets that the Commission should 
enumerate as a required prohibition under Sec.  37.203(a), e.g., 
intradesk and intracompany trading; order flashing; a failure to honor 
firm prices; attempting to change the general conditions of a swap 
transaction after price has been agreed upon; or potential abuses at 
those points in the day when options are settled against swaps levels?
2. Sec.  37.203(b)--Authority To Collect Information \417\
---------------------------------------------------------------------------

    \417\ The Commission proposes to retitle Sec.  37.203(b) to 
``Authority to collect information'' from ``Capacity to detect and 
investigate rule violations'' based on the proposed changes 
described below.
---------------------------------------------------------------------------

    Section 37.203(b) currently requires a SEF to have arrangements and 
resources for effective enforcement of its rules, which includes the 
authority to collect information and examine books and records of SEF 
members and persons under investigation. A SEF must also facilitate 
direct supervision of the market and analysis of data collected to 
determine whether a rule violation has occurred.\418\
---------------------------------------------------------------------------

    \418\ 17 CFR 37.203(b).
---------------------------------------------------------------------------

    The Commission proposes several amendments to the existing 
requirements. First, the Commission proposes to eliminate the 
requirement that a SEF's arrangements and resources must facilitate the 
direct supervision of the market and the analysis of data collected to 
determine whether a rule violation has occurred. The Commission views 
the language of this requirement as superfluous because other 
regulations already set forth these requirements in greater 
specificity, such as Sec.  37.203(d), which requires a SEF to maintain 
an automated trade surveillance system that is capable of detecting and 
reconstructing potential trade practice violations.\419\
---------------------------------------------------------------------------

    \419\ 17 CFR 37.203(d). The Commission also notes that other 
part 37 regulations require a SEF to supervise the market and 
analyze data, including regulations that implement Core Principle 4. 
As amended, Sec.  37.401(a) would require a SEF to conduct real-time 
market monitoring of all trading activity on the SEF to identify 
disorderly trading, any market or system anomalies, and instances or 
threats of manipulation, price distortion, and disruption. See infra 
Section IX.A.--Sec.  37.401--General Requirements.
---------------------------------------------------------------------------

    Second, the Commission proposes to eliminate the requirements that 
SEFs have the authority to collect documents on a routine and non-
routine basis and examine books and records kept by members and persons 
under investigation. Instead, the Commission proposes to require that 
each SEF have the authority to collect information required to be kept 
by persons subject to the SEF's recordkeeping rules.\420\ The 
Commission recognizes that the existing requirement does not provide 
clarity as to the meaning of collecting of documents on a ``routine and 
non-routine'' basis and how a SEF can collect information from 
``persons under investigation.'' \421\ Based on the Commission's 
experience in implementing part 37, the Commission believes that SEFs 
are better suited to determine what recordkeeping rules are appropriate 
based on the products that it offers for trading and the types of 
participants on its market, among other considerations.
---------------------------------------------------------------------------

    \420\ A SEF's recordkeeping rules are established by, among 
other provisions, Sec.  37.404(b), which requires a SEF to have 
rules that require its market participants to keep records of their 
trading. 17 CFR 37.404(b).
    \421\ The Commission notes that this lack of clarity existed 
during the adoption of part 37. For example, one commenter 
previously requested clarity regarding the scope of the rule. SEF 
Core Principles Final Rule at 33511.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.203(b).
3. Sec.  37.203(c)--Compliance Staff and Resources
    Section 37.203(c) currently requires a SEF to establish and 
maintain sufficient compliance staff and resources to conduct a number 
of enumerated tasks, such as audit trail reviews, trade practice 
surveillance, market surveillance, and real-time monitoring. The rule 
further requires that such staff must be sufficient to address unusual 
market or trading events and to conduct investigations in a timely 
manner.\422\
---------------------------------------------------------------------------

    \422\ 17 CFR 37.203(c).
---------------------------------------------------------------------------

    The Commission proposes to eliminate the enumerated tasks and 
replace them with the phrase ``self-regulatory obligations under the 
Act and Commission regulations.'' The proposed amendment is intended to 
apply the requirement to all of the SEF's applicable self-regulatory 
functions and clarify that the existing requirement is not limited to 
the enumerated tasks. Similarly, the Commission also proposes to 
eliminate the language that requires staffing to be sufficient to 
address unusual market or trading events and to complete investigations 
in a timely manner, given that these enumerated requirements are an 
inherent part of a SEF's existing self-regulation obligations. As the 
Commission noted in the SEF Core Principles Final Rule, a SEF may also 
take into account the staff and resources of any third-party entities 
it uses under Sec.  37.204 to provide regulatory services when 
evaluating the sufficiency of its compliance staff.\423\ Further, the 
Commission reiterates that as stated in the preamble to the SEF Core 
Principles

[[Page 61999]]

Final Rule, some SEF compliance staff can be shared among affiliated 
entities as appropriate.\424\
---------------------------------------------------------------------------

    \423\ The Commission notes that a SEF must, at all times, 
maintain sufficient internal compliance staff to oversee the quality 
and effectiveness of the regulatory services provided, as required 
by Sec.  37.204. As discussed below, the Commission proposes to 
expand Sec.  37.204(a) to allow a SEF to use a non-registered entity 
approved by the Commission for the provision of regulatory services.
    \424\ SEF Core Principles Final Rule at 33511.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.203(c).
4. Sec.  37.203(d)--Automated Trade Surveillance System
    Section 37.203(d) requires a SEF to maintain an automated trade 
surveillance system capable of detecting potential trade practice 
violations.\425\ The rule also requires that the system load and 
process daily orders and trades no later than twenty-four hours after 
the completion of the trading day. Given that this requirement applies 
to all orders and trades regardless of the type of execution method, 
Sec.  37.203(d) requires orders that are not submitted to an electronic 
trading system, e.g., orders submitted by voice or certain other 
electronic communications, such as instant messaging and email, also be 
loaded and processed into an automated trade surveillance system. Such 
a system, among other requirements, must have the capability to detect 
and flag specific trade execution patterns and trade anomalies; 
compute, retain, and compare trading statistics; compute trading gains 
and losses and swap-equivalent positions; and reconstruct the sequence 
of trading activity.
---------------------------------------------------------------------------

    \425\ 17 CFR 37.203(d).
---------------------------------------------------------------------------

    The Commission proposes to eliminate the specific automated trade 
surveillance system capabilities enumerated under Sec.  37.203(d), 
except for the ability of a SEF to reconstruct the sequence of market 
activity. Specifically, the Commission proposes to retain this concept 
by amending the remaining rule language to require that a SEF's 
automated trade surveillance system be capable of detecting potential 
trade practice violations and reconstructing the sequence of market 
activity and trading. The Commission believes that an automated trade 
surveillance system must be able to reconstruct both the sequence of 
market activity and trading in order to detect such violations.
    The Commission recognizes based on its experience with implementing 
the existing requirement that a SEF's automated trade surveillance 
system cannot perform all of the enumerated capabilities under the 
existing rule, such as computing trade gains, losses, and swap 
equivalent positions. The Commission also acknowledges that it has not 
clarified the enumerated capabilities, which has led to some 
confusion.\426\ As amended, the rule would provide each SEF with the 
ability to tailor its automated trade surveillance system requirements 
as needed to fulfill its compliance responsibilities, thereby allowing 
the SEF to account for the nature of its trading systems or platforms. 
The Commission believes that this proposed approach is consistent with 
the reasonable discretion given to a SEF under Core Principle 1 to 
establish the manner in which it complies with the SEF core principles.
---------------------------------------------------------------------------

    \426\ The Commission notes that some commenters previously 
expressed concern about the clarity of the enumerated capabilities. 
SEF Core Principles Final Rule at 33512.
---------------------------------------------------------------------------

    The Commission also proposes to amend Sec.  37.203(d) to clarify 
that all trades executed by voice or by entry into a SEF's electronic 
trading system or platform, as well as orders that are ``entered into 
an electronic trading system or platform,'' must be loaded and 
processed into the automated trade surveillance system. This proposed 
amendment reflects the Commission's recognition that no cost-effective 
and efficient means currently exists that would provide a SEF with the 
capability to load and process orders that are not initially entered 
into an electronic trading system or platform, e.g., orders entered by 
voice or certain other electronic communications, such as instant 
messaging and email, given that those orders are in different formats. 
The Commission notes that this proposed change is consistent with the 
proposed amendments to Sec. Sec.  37.205(b)(2)-(3), as discussed below, 
that would similarly limit a SEF's electronic transaction history 
database and electronic analysis capability requirements.\427\ The 
Commission, however, emphasizes that a SEF must continue to have the 
capability to load and process all executed trades, including those 
resulting from orders entered by voice or certain other electronic 
communications, such as instant messaging and email. The Commission 
also emphasizes that under proposed Sec.  37.205(a), a SEF must 
continue to capture all orders entered by voice (i.e., oral 
communications) or certain other electronic communications, such as 
instant messaging and email.
---------------------------------------------------------------------------

    \427\ See infra Section VII.D.2.a.--Sec.  37.205(b)(1)--Original 
Source Documents; Sec.  37.205(b)(2)--Transaction History Database; 
Sec.  37.205(b)(3)--Electronic Analysis Capability.
---------------------------------------------------------------------------

    Finally, the Commission proposes to clarify that the term ``trading 
day''--on which such data must be loaded into the automated trade 
surveillance system--means the day ``on which such trade was executed 
or such order was entered.''
Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.203(d).
5. Sec.  37.203(e)--Error Trade Policy \428\
---------------------------------------------------------------------------

    \428\ The Commission also proposes to retitle Sec.  37.203(e) to 
``Error trade policy'' from ``Real-time market monitoring'' based on 
the proposed changes described below.
---------------------------------------------------------------------------

    Section 37.203(e) currently requires a SEF to conduct real-time 
market monitoring of all trading activity on its system(s) or 
platform(s) to identify disorderly trading and any market or system 
anomalies.\429\ The regulation further requires a SEF to have the 
authority to adjust prices and cancel trades when needed to mitigate 
``market disrupting events'' caused by SEF trading system or platform 
malfunctions or errors in orders submitted by market participants. 
Further, any trade price adjustments or trade cancellations must be 
transparent to the market and subject to standards that are clear, 
fair, and publicly available.
---------------------------------------------------------------------------

    \429\ 17 CFR 37.203(e).
---------------------------------------------------------------------------

a. Error Trades--Swaps Submitted for Clearing
    In 2013, the Division of Clearing and Risk (``DCR'') and DMO 
(together, the ``Divisions'') issued guidance (the ``2013 Staff STP 
Guidance'') to address ``straight-through processing'' requirements 
that, among other things, expressed the view that SEFs should have 
rules stating that trades that are rejected from clearing are ``void ab 
initio.'' \430\ According to the Divisions, swap transactions that are 
executed and subsequently rejected by the DCO from clearing would be 
considered void, even where the rejection is attributable to an 
operational or clerical error from the SEF or market participants.\431\
---------------------------------------------------------------------------

    \430\ Staff Guidance on Swaps Straight-Through Processing at 5 
(Sept. 26, 2013) (``2013 Staff STP Guidance''). In addition to 
discussing the void ab initio concept, as discussed below, the 2013 
Staff STP Guidance also discussed ``straight-through processing'' 
for swap transactions. See infra Section XII.B.2.--Sec.  37.702(b) 
and Sec.  39.12(b)(7)--Time Frame for Clearing. The Commission notes 
that to the extent that error trades leading to a rejection from 
clearing could be corrected without the execution of a new trade, 
such methods would depart from the void ab initio concept 
articulated by the Divisions.
    \431\ As previously stated by Commission staff for purposes of 
granting time-limited no-action relief, an operational or clerical 
error is any type of error other than a rejection from clearing due 
to credit reasons. CFTC Letter No. 17-27, Re: No-Action Relief for 
Swap Execution Facilities and Designated Contract Markets in 
Connection with Swaps with Operational or Clerical Errors Executed 
on a Swap Execution Facility or Designated Contract Market (May 30, 
2017) at 1 n.2 (``NAL No. 17-27'').

---------------------------------------------------------------------------

[[Page 62000]]

    SEFs and market participants raised concerns that considering such 
transactions to be void ab initio under the guidance would impede their 
ability to correct trades that were rejected from clearing at the DCO 
on the basis of such errors. For example, some transactions submitted 
for clearing may fail to match a specified term due to a clerical 
error, e.g., counterparty names; as a result, the trades would be 
rejected from clearing and deemed void ab initio, even though the error 
would be readily correctable.\432\ The Divisions' view on void ab 
initio would compel counterparties to execute a new trade with the 
corrected terms, rather than allow a SEF to identify and correct the 
error through other established protocols and procedures.
---------------------------------------------------------------------------

    \432\ The Commission understands that when a swap trade that is 
intended to be cleared has an operational or clerical error, a DCO 
will reject that trade, even if it otherwise complies with the risk-
based limits established for the respective counterparties. As DCOs 
do not distinguish clearing rejections for credit reasons from 
clearing rejections due to clerical or operational errors, error 
trades are treated as void ab initio.
---------------------------------------------------------------------------

    For those SEFs that apply the concept of void ab initio, however, 
the Commission's current execution method requirements have inhibited 
the ability to correct errors through subsequent trades, where a swap 
has been rejected from clearing due to the error or where a swap 
containing an error has been accepted for clearing by a DCO. For swaps 
that are Required Transactions, market participants have been otherwise 
prohibited from determining how to resolve the error between themselves 
by entering into an offsetting trade or a new trade with the correct 
terms due to (i) the execution method requirements under Sec.  
37.9(a)(2), which requires that all Required Transactions be traded via 
either an Order Book or RFQ System; and (ii) the corresponding 
prohibition on pre-arranged trading under Sec.  37.203(a). In response 
to these concerns related to void ab initio, Commission staff has 
provided time-limited no-action relief.\433\
---------------------------------------------------------------------------

    \433\ CFTC Letter No. 13-66, Time-Limited No-Action Relief for 
Swap Execution Facilities from Compliance With Certain Requirements 
of Commission Regulation 37.9(a)(2) and 37.203(a) (Oct. 25, 2013) 
(``NAL No. 13-66''). In April 2015, staff issued additional no-
action relief, which reinstated the previous time-limited no-action 
relief from NAL No. 13-66 for SEFs from Sec.  37.9(a)(2) and Sec.  
37.203(a) for swaps rejected from clearing due to an operational or 
clerical error. Under the expanded no-action relief, SEF market 
participants have resolved error trades accepted for clearing at the 
DCO, among other types of transaction. CFTC Letter No. 15-24, Re: 
No-Action Relief for Swap Execution Facilities and Designated 
Contract Markets in Connection with Swaps with Operational or 
Clerical Errors Executed on a Swap Execution Facility or Designated 
Contract Market (Apr. 22, 2015) (``NAL No. 15-24''). Commission 
staff subsequently extended the relief provided in NAL No. 15-24 in 
June 2016. CFTC Letter No. 16-58, Re: No-Action Relief for Swap 
Execution Facilities and Designated Contract Markets in Connection 
with Swaps with Operational or Clerical Errors Executed on a Swap 
Execution Facility or Designated Contract Market (June 12, 2016). 
This relief has been most recently extended by NAL No. 17-27 in May 
2017.
---------------------------------------------------------------------------

    Based on this no-action relief, SEFs have allowed market 
participants to pre-arrange corrective trades for execution and 
submission to a DCO for clearing through means not prescribed under 
Sec.  37.9 for Required Transactions. Such trades include a new trade 
with the corrected terms, where an error trade has been rejected from 
clearing. Such trades also include a new trade to offset an error trade 
accepted for clearing and a second subsequent trade with the corrected 
terms, as originally intended between the counterparties. This relief 
has enabled counterparties to address error trades, but has required 
SEFs to adopt mechanisms to identify these corrective trades and 
additional related rules and procedures for their respective market 
participants.
    In light of the challenges described above, the Commission proposes 
clarifications and amendments to address the role of void ab initio 
with respect to error trades for SEFs as described below.\434\ The 
Commission notes that void ab initio is a determination made by a SEF, 
and not by a DCO, which merely accepts or rejects a trade from 
clearing. Additionally, consistent with the 2013 Staff STP 
Guidance,\435\ the Commission notes that void ab initio does not apply 
to back-loaded trades, i.e., trades originally executed without an 
intent to clear, which the parties subsequently decided to clear.
---------------------------------------------------------------------------

    \434\ The Commission notes that it is also proposing certain 
clarifications and amendments related to the 2013 Staff STP Guidance 
with respect to straight-through processing of swaps. See infra 
Section XII.B.2.b.--Proposed Approach to Straight-Through 
Processing.
    \435\ 2013 Staff STP Guidance at 5.
---------------------------------------------------------------------------

b. Current SEF Error Trade Policies
    SEFs have adopted rules and protocols to address other general 
aspects of correcting an error trade. These factors, among the many 
specified across all SEFs, include a definition of ``error trade''; the 
circumstances to which the SEF's error trade rules would apply; the 
process for a market participant to report an alleged error trade; the 
process through which a SEF may review and determine that an error 
trade has occurred; notification procedures; and the possible courses 
of action that a SEF may take (or allow its market participants to 
take) to correct the error trade. The Commission believes that the 
adoption of such error trade policies by SEFs reflects their 
understanding that such policies are a beneficial practice that 
promotes a fair and orderly trading market for their market 
participants.\436\
---------------------------------------------------------------------------

    \436\ The Commission notes that the guidance to Core Principle 4 
in Appendix B cites ``clear error-trade and order-cancellation'' 
policies as a type of trading risk control that could be part of an 
acceptable program for preventing market disruptions. 17 CFR part 37 
app. B (guidance to Core Principle 4--paragraph (a)(5)--``Risk 
controls for trading'').
---------------------------------------------------------------------------

    Notwithstanding the existence of error trade rules and protocols 
across different SEFs, market participants have stated that those rules 
and protocols, and the manner in which they are applied, have been 
inconsistent in some respects. Participants have cited a number of such 
examples, including inconsistent approaches to notifying SEFs of 
alleged error trades; the varying factors that SEFs consider in 
evaluating alleged error trades; and the level of notification provided 
to other market participants regarding alleged errors. Therefore, some 
market participants--particularly those that are participants of 
multiple SEFs--have recommended that the Commission adopt some general 
error trade policy requirements to promote a more consistent approach. 
Based on the feedback received and its own observations during the part 
37 implementation, the Commission proposes to refine its approach to 
SEF error trade policies in a manner that would benefit market 
participants.
c. Sec.  37.203(e)--Error Trade Policy \437\
---------------------------------------------------------------------------

    \437\ The Commission proposes to retitle Sec.  37.203(e) to 
``Error trade policy'' from ``Real-time market monitoring.''
---------------------------------------------------------------------------

    The Commission proposes to eliminate the real-time market 
monitoring requirement, which is duplicative of Core Principle 4, and 
adopt a refined approach to SEF error trade policies under proposed 
Sec.  37.203(e) that would allow a SEF to implement its own protocols 
and processes to correct error trades with respect to swaps (i) 
rejected by a DCO due to an operational or clerical error or (ii) 
accepted for clearing by a DCO that contains an operational or clerical 
error.\438\ Therefore, the Commission's

[[Page 62001]]

proposal would explicitly permit a SEF to establish its own rules 
regarding error trades rejected from clearing, which the Commission 
believes would facilitate a SEF's ability to establish its own error 
trade procedures that it believes is best suited to its particular 
market, including whether to maintain an approach based on the void ab 
initio concept for trades rejected from clearing due to non-credit 
related errors.
---------------------------------------------------------------------------

    \438\ The Commission notes that the real-time market monitoring 
requirement is duplicative of Core Principle 4, which requires a SEF 
to conduct real-time monitoring of trading and comprehensive and 
accurate trade reconstructions. To account for the minor difference 
between the real-time monitoring requirements under Sec.  37.203(e), 
which requires a SEF's monitoring to ``identify disorderly 
trading,'' and Sec.  37.401, which currently does not specify that 
requirement, the Commission is proposing to amend Sec.  37.401 to 
incorporate this requirement. See infra Section IX.A.--Sec.  
37.401--General Requirements.
---------------------------------------------------------------------------

    Consistent with proposed Sec.  37.702(b)(1),\439\ however, the 
Commission notes that SEFs would now be required to deem any swap 
submitted for clearing as void ab initio if a DCO rejects the trade 
from clearing due to credit reasons. Under this scenario, clearing 
members for the executing counterparties to the rejected trade must 
resolve the outstanding credit issue that prevented a DCO from 
accepting the trade for clearing. The ability for a clearing member to 
resolve credit issues, a process which is outside of a SEF's purview, 
is inconsistent with the SEF's ability to provide for the financial 
integrity of swaps entered into on the SEF in contravention of Core 
Principle 7 and proposed Sec.  37.702(b)(1), which would require a SEF 
to coordinate with a DCO to facilitate prompt, efficient, and accurate 
processing and routing of transactions to the DCO.\440\ In contrast, a 
SEF's role in this context is limited to controlling the process of 
correcting an operational or clerical error within the terms of a swap 
using the SEF's error trade-related rules and procedures. Therefore, a 
SEF should not rely upon a clearing member to resolve such credit 
issues, but instead must declare a swap that is rejected from clearing 
for credit reasons as void ab initio.
---------------------------------------------------------------------------

    \439\ The Commission proposes to renumber Sec.  37.702(b)(2) to 
Sec.  37.702(b)(1). See infra Section XII.B.2.b.(1)--Sec.  
37.702(b)(1) and Sec.  39.12(b)(7)(i)(A)--``Prompt, Efficient, and 
Accurate'' Standard.
    \440\ In some cases, clearing members and the DCO may not be 
able to resolve an outstanding credit issue, but the swap 
nevertheless remains void ab initio.
---------------------------------------------------------------------------

    In addition to allowing a SEF to configure an approach to 
correcting non-credit related error trade swaps submitted to a DCO for 
clearing, however, the Commission emphasizes that proposed Sec.  
37.203(e) would generally require a SEF to establish baseline 
procedural requirements for an error trade policy for all swaps 
executed on its facility. The proposed approach would permit a SEF to 
develop and adopt a more efficient approach based on the nature of the 
transaction and error, as well as the SEF's own operational and 
technological capabilities.\441\ Given that market participants often 
execute subsequent swaps to hedge the risk of an initial transaction, 
this approach would help mitigate the potential exposure to market and 
execution risk that arises if such hedge positions are established 
against a swap that has been deemed void ab initio. Accordingly, a SEF 
may reduce that risk by facilitating a more targeted and timely 
correction of errors in the initial transaction that would not 
necessitate the resubmission of an entire transaction that has been 
voided.\442\
---------------------------------------------------------------------------

    \441\ See 17 CFR part 37 app. B (guidance to Core Principle 4--
paragraph (a)(5)--``Risk controls for trading'') (noting that risk 
controls such as error trade policies should be adapted to the 
unique characteristics of the trading platform and of the markets to 
which they apply). The Commission notes that based on its proposal 
to adopt separate error trade policy rules under Sec.  37.205(e), it 
also proposes to eliminate the guidance to Core Principle 4 in 
Appendix B that specifies error trade policies as a type of risk 
control that a SEF may adopt. See infra Section IX.E.--Sec.  
37.405--Risk Controls for Trading.
    \442\ The Commission notes, however, that to the extent that a 
DCO has its own protocols and policies for resolving error trades--
both for error trades that are rejected for clearing due to non-
credit related errors and for error trades that have been accepted 
for clearing--a SEF should coordinate its own approach with the DCO, 
pursuant to the requirements of proposed Sec.  37.702(b)(1) 
(existing Sec.  37.702(b)(2)), which requires a SEF to coordinate 
with a DCO, to which it submits transactions for clearing, to 
develop rules and procedures to facilitate prompt and efficient 
transaction processing in accordance with Sec.  39.12(b)(7).
---------------------------------------------------------------------------

    The proposed approach, in conjunction with the proposed adoption of 
more flexible methods of execution, would also render the current no-
action relief unnecessary for those SEFs that choose to deem error 
trades as void ab initio.\443\ For example, if a SEF maintains an 
approach similar to the current no-action relief, then the elimination 
of the prescriptive execution methods under Sec.  37.9 would allow 
counterparties to execute a corrective trade via flexible methods of 
execution offered by the SEF.\444\ Under the proposed approach, 
however, a SEF also may not choose to follow the void ab initio 
approach for non-credit related errors and instead adopt operational 
protocols or procedures to resolve an error trade that do not require 
the execution or resubmission of a corrective trade. Relief from the 
pre-arranged trading prohibition under Sec.  37.203(a) would also be 
unnecessary; under the proposed approach, a SEF could allow 
counterparties to use flexible means of execution to execute a 
corrective trade.\445\
---------------------------------------------------------------------------

    \443\ NAL No. 17-27.
    \444\ To the extent that a SEF currently maintains a similar 
approach as set forth in the no-action relief, however, the 
Commission clarifies that a SEF could maintain those protocols and 
procedures, notwithstanding the adoption of the proposed version of 
Sec.  37.203(e).
    \445\ See infra note 319 and accompanying discussion (noting 
that the pre-arranged trading prohibition is intended to maintain 
the integrity of price competition and market risk that is incident 
to trading in the market).
---------------------------------------------------------------------------

    In conjunction with the proposed flexibility to correcting error 
trades, Sec.  37.203 would also set forth general requirements that are 
intended to create a baseline consistency among SEF error trade 
policies. Proposed Sec.  37.203(e)(1) defines an ``error trade'' as any 
swap transaction executed on a SEF that contains an error in any term, 
including price, size, or direction.\446\ Proposed Sec.  37.203(e)(2) 
would require a SEF to establish and maintain rules and procedures to 
help resolve error trades in a ``fair, transparent, consistent, and 
timely manner.'' At a minimum, such rules would be required to provide 
the SEF with the authority to adjust trade terms and cancel trades; and 
specify the rules and procedures for market participants to notify the 
SEF of an error trade, including any time limits for notification. 
While the Commission is providing SEFs with flexibility in designing 
their error trade policies, the Commission believes that fairness, 
transparency, consistency, and timeliness should be key principles in a 
SEF's error trade policy.
---------------------------------------------------------------------------

    \446\ This definition, however, would not include a swap trade 
that is rejected from clearing for credit reasons, as discussed 
above. Therefore, the Commission notes that proposed Sec.  37.203(e) 
would not apply to such trades.
---------------------------------------------------------------------------

    Further, proposed Sec.  37.203(e)(3) would establish a minimum set 
of notification requirements for a SEF. A SEF would be required to 
notify all of its market participants, as soon as practicable, of (i) 
any swap transaction that is under review pursuant to the SEF's error 
trade rules and procedures; (ii) a determination that the trade under 
review is or is not an error trade; and (iii) the resolution of any 
error trade, including any trade term adjustment or cancellation. The 
Commission proposes an ``as soon as practicable'' standard based on 
competing considerations, such as the need to maintain orderly trading 
versus the need for timely transparency. Under this proposed approach, 
a SEF may determine that making error trade information available at a 
particular point in time is not practicable, given the countervailing 
concerns of potential market disruptions caused by the announcement of 
a potentially erroneous trade that has been disseminated to the SEF's 
participants.
    Proposed Sec.  37.203(e)(4) would allow a SEF to establish non-
reviewable ranges.

[[Page 62002]]

The Commission has observed that in the interests of minimizing market 
disruption and maintaining orderly trading, many SEFs have established 
non-reviewable ranges during the course of trading. Therefore, the 
Commission believes that to allow SEFs to maintain existing beneficial 
market practices, a SEF should continue to be able to establish such 
ranges, which may be adjusted based on market conditions. Pursuant to 
proposed Sec.  37.203(e)(2), however, the Commission emphasizes that 
such ranges must be established and administered in a fair, 
transparent, consistent, and timely manner.
    The Commission recognizes that identifying and resolving error 
trades in a timely manner is important to promote market integrity and 
efficiency and ensure that trade data, which market participants rely 
upon to inform their swaps trading decisions, accurately reflects 
prevailing market pricing at any given time. The Commission believes 
that proposed Sec.  37.203(e) would accomplish these goals for market 
participants and the market as a whole.
Request for Comment
    The Commission requests comments on all aspects of proposed Sec.  
37.203(e). The Commission may consider alternatives to its proposed 
error trade policy requirements and requests comment on the following 
questions:
    (46) Does the lack of a void ab initio requirement for non-credit 
related errors create concerns about market risk with respect to error 
trades that have been executed, but have not been voided despite the 
rejection from clearing? If so, should a SEF be limited in the types of 
errors that may be corrected without void ab initio, e.g., errors that 
do not create market risk? Should the Commission adopt a mandatory void 
ab initio requirement that certain types of errors, e.g., those that do 
cause market risk, must be resolved via a corrective trade approach? Or 
should counterparties otherwise have the ability to maintain breakage 
agreements to address such risks?
    (47) Is the Commission's proposed definition of ``error trade'' 
overly broad or narrow? Should the definition or requirement 
specifically address certain types of errors, such as the wrong 
affiliate counterparty or the wrong product identified?
    (48) Is the Commission's proposed definition of ``error trade'' 
sufficient to include those trades where an incorrect term (e.g., 
incorrect notional amount) results in a rejection by a DCO ostensibly 
due to credit reasons, but where the DCO otherwise would have accepted 
the trade had the trade included the correct terms? If not, then how 
should the term ``error trade'' be defined to better discern this 
situation from a situation where a true rejection for credit reasons 
has occurred? Similarly, is the Commission's proposed definition of 
``error trade'' sufficiently clear so that the SEF knows which errors 
are required to be treated as error trades and which errors are 
required to be treated as void ab initio? If not, please explain. 
Should the Commission's definition of ``error trade'' specifically 
state that it does not include rejections from clearing for credit 
reasons?
    (49) Should trades that are rejected by a DCO for insufficient 
credit be required to be deemed to be void ab initio by SEFs? If so, 
should the Commission codify such a requirement under proposed Sec.  
37.203(e) or elsewhere in the Commission's regulations?
    (50) Are SEFs and DCOs able to distinguish between trades that are 
rejected from clearing due to insufficient credit from those trades 
that are rejected because they are error trades? Why or why not?
    (51) The proposed regulations require that error trades be resolved 
in a timely manner, recognizing that a SEF may not be in a position to 
resolve every error trade within a specific time frame. Would requiring 
resolution of an error trade ``as soon as practicable'' or within a 
specific time frame lead to quicker resolutions and reduce risk for 
market participants? If so, what time frame would be appropriate and 
should it vary based on other factors, such as the nature of the 
product or transaction type, whether the error was a participant error 
or system error, or whether the error was discovered before or after 
the trade was cleared?
    (52) Should a SEF be permitted to adjust or cancel an error trade 
without consulting with the parties to the trade in some or all 
circumstances, or should the Commission require a SEF to consult with 
or obtain the consent of the parties to an error trade in some or all 
circumstances?
    (53) Should market participants be required to report all errors to 
a SEF or are there certain errors that are immaterial and do not 
otherwise require correction?
    (54) What type of error trade policy should a SEF be required to 
adopt for swap transactions that are subject to an exception to the 
prohibition on pre-execution communications under proposed Sec.  
37.201(b), given that such swaps may be negotiated or arranged away 
from the SEF's trading system or platform?
    (55) Should a SEF be required to specify who may request a review 
of a trade as a potential error trade? Should the ability to request a 
review be limited to the parties to a trade or should market 
participants affected by the trade also have the ability to request a 
review?
    (56) Are there alternative requirements that would enhance 
efficiency and transparency in the error trade resolution process?
    (57) Should the Commission require SEFs to notify all market 
participants of an error trade and the resolution of such trade or only 
a smaller subset of participants? Should the Commission provide any 
time frame for such notice?
    (58) Should a DCO be required to notify a SEF of the reason why a 
trade was rejected from clearing? If so, what type of information 
should the Commission require the DCO to provide to the SEF in such a 
circumstance?
6. Sec.  37.203(f)--Investigations \447\
---------------------------------------------------------------------------

    \447\ The Commission proposes to retitle Sec.  37.203(f) to 
``Investigations'' from ``Investigations and investigation reports'' 
based on the proposed changes described below.
---------------------------------------------------------------------------

    Existing Sec.  37.203(f) currently sets forth requirements for SEFs 
with respect to conducting investigations of their market participants 
for potential rule violations.\448\ Existing Sec.  37.203(f)(1) 
requires a SEF to have procedures that require its compliance staff to 
conduct investigations of possible rule violations.\449\ The rule 
further requires that an investigation be commenced upon Commission 
staff's request or upon discovery of information by a SEF that 
indicates a reasonable basis for finding that a violation has occurred 
or will occur. Existing Sec.  37.203(f)(2) requires that investigations 
be completed in a timely manner, defined as twelve months after an 
investigation is opened, absent enumerated mitigating 
circumstances.\450\ Existing Sec.  37.203(f)(3) requires a SEF's 
compliance staff to submit an investigation report for disciplinary 
action any time staff determines that a reasonable basis exists for 
finding a rule violation,\451\ while existing Sec.  37.203(f)(4) 
requires compliance staff to prepare an investigation report upon 
concluding an investigation and determining that no reasonable basis 
exists for finding a rule violation.\452\ Existing Sec. Sec.  
37.203(f)(3)-(4) enumerate the items that must be included in the 
investigation report. Finally, existing Sec.  37.203(f)(5) prohibits a 
SEF from issuing more than one

[[Page 62003]]

warning letter to the same person or entity for the same rule violation 
during a rolling twelve-month period.\453\
---------------------------------------------------------------------------

    \448\ 17 CFR 37.203(f).
    \449\ 17 CFR 37.203(f)(1).
    \450\ 17 CFR 37.203(f)(2).
    \451\ 17 CFR 37.203(f)(2).
    \452\ 17 CFR 37.203(f)(4).
    \453\ 17 CFR 37.203(f)(5).
---------------------------------------------------------------------------

    The Commission proposes to amend existing Sec.  37.203(f) to 
simplify and streamline the procedures for SEFs to conduct 
investigations and prepare investigation reports. First, the Commission 
proposes to amend Sec.  37.203(f)(1) to state that each SEF must 
establish and maintain procedures requiring compliance staff to conduct 
investigations, including the commencement of an investigation upon the 
receipt of a request from Commission staff or upon the discovery or 
receipt of information by the SEF that indicates the existence of a 
reasonable basis for finding that a violation may have occurred or will 
occur (emphasis added). This proposed amendment reflects the 
Commission's view that SEFs may, and should have the right to, choose 
to initiate investigations under broader circumstances than the two 
instances identified in the existing provision.
    Second, the Commission proposes to amend Sec.  37.203(f)(2) to 
eliminate the twelve-month requirement for completing investigations 
and instead provide SEFs with the ability to complete investigations in 
a timely manner taking into account the facts and circumstances of the 
investigation. Based on its experience, the Commission recognizes that 
each investigation raises unique issues, facts, and circumstances that 
affect the time that it takes to complete the investigation. A SEF may 
complete some investigations in less than twelve months and complete 
some investigations in more than twelve months. The Commission also 
recognizes that the list of mitigating factors in the existing rule is 
not comprehensive, and other factors may affect the time of an 
investigation. Rather than prescribe a singular requirement, the 
Commission believes that it is more appropriate to establish general 
parameters for completing investigations. In conjunction with this 
amendment, the Commission also proposes guidance to Core Principle 2 in 
Appendix B to provide SEFs with reasonable discretion to determine that 
time frame.\454\
---------------------------------------------------------------------------

    \454\ The Commission proposes to add this guidance as paragraph 
(a)(2) to Core Principle 2 in Appendix B and eliminate the existing 
guidance, which currently states that a SEF should adopt and enforce 
any additional rules it believes are necessary to comply with Sec.  
37.203. The Commission views this guidance as unnecessary based on 
the proposed changes to Sec.  37.203(f).
---------------------------------------------------------------------------

    Third, the Commission proposes to streamline the requirements that 
apply to all SEF investigation reports, regardless of whether a 
reasonable basis exists for finding a violation, by consolidating the 
provisions under existing Sec.  37.203(f)(4) into a new proposed Sec.  
37.203(f)(3). Accordingly, proposed Sec.  37.203(f)(3) would require a 
SEF's compliance staff to prepare a written investigation report to 
document the conclusion of each investigation. The proposed rule would 
maintain the existing requirement that each investigation report 
contain the following information: (i) The reason the investigation was 
initiated; (ii) a summary of the complaint, if any; (iii) the relevant 
facts; (iv) the compliance staff's analysis and conclusions; and (v) a 
recommendation as to whether disciplinary action should be pursued. To 
provide further clarity regarding the actions that a SEF may take once 
the investigation report is completed, the Commission proposes adding 
guidance to Core Principle 2 in Appendix B to provide that compliance 
staff should submit all investigation reports to the CCO or other 
compliance department staff responsible for reviewing such reports and 
determining next steps in the process; and the CCO or other responsible 
staff should have reasonable discretion to decide whether to take any 
action, such as presenting the investigation report to a disciplinary 
panel for disciplinary action.\455\
---------------------------------------------------------------------------

    \455\ The Commission proposes to add this guidance as paragraph 
(a)(3) to Core Principle 2 in Appendix B. The Commission notes that 
it provided similar clarification in the preamble to the SEF Core 
Principles Final Rule. SEF Core Principles Final Rule at 33515. As 
discussed below, the Commission proposes to renumber the existing 
language in paragraph (a)(3) to paragraph (a)(6), see infra Section 
VII.E.1.--Sec.  37.206(a)--Enforcement Staff; and eliminate the 
existing language in paragraph (a)(6), see infra Section VII.E.2.--
Sec.  37.206(b)--Disciplinary Program.
---------------------------------------------------------------------------

    As part of the Commission's proposal to consolidate multiple 
existing warning letter requirements into a single provision under 
proposed Sec.  37.206(c)(2), the Commission also proposes to eliminate 
the warning letter requirement under existing Sec.  37.203(f)(5).\456\
---------------------------------------------------------------------------

    \456\ The Commission proposes to streamline and consolidate 
multiple existing provisions that address the SEF's use of warning 
letters--under existing Sec.  37.203(f)(5), existing Sec.  
37.205(c)(2) with respect to audit trail violations, and existing 
Sec.  36.206(f) with respect to rule violations--into a single 
provision under proposed Sec.  37.206(c)(2), as discussed below. See 
infra Section VII.E.3.--Sec.  37.206(c)--Hearings. Further, the 
Commission proposes to eliminate the existing language under 
paragraph (a)(1) of the guidance to Core Principle 2 in Appendix B, 
which states that a SEF's rules may authorize its compliance staff 
to issues warning letters or recommend that a disciplinary panel 
take such action. The Commission views this guidance as unnecessary 
based on the proposed changes to Sec.  37.203(f).
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.203(f) and the associated guidance to Core Principle 2 in Appendix 
B.
7. Sec.  37.203(g)--Additional Sources for Compliance
    The Commission is not proposing any amendments to Sec.  37.203(g).

C. Sec.  37.204--Regulatory Services Provided by a Third Party

    Section 37.204, among other things, permits a SEF to contract with 
an RFA, another registered entity, or the Financial Industry Regulatory 
Authority (``FINRA'') for the provision of regulatory services, subject 
to the requirement that the SEF supervises its regulatory service 
provider and retains exclusive authority over substantive decisions. As 
described below, the Commission proposes a series of amendments that 
would provide a SEF with further options in choosing and utilizing a 
regulatory service provider to assist with fulfilling its regulatory 
obligations, while still maintaining regulatory protections that relate 
to the use of an external services provider.
1. Sec.  37.204(a)--Use of Regulatory Service Provider Permitted
    Section 37.204(a) permits a SEF to contract with an RFA, another 
registered entity, or FINRA to assist the SEF in complying with the Act 
and Commission regulations, as approved by the Commission.\457\ A SEF 
that elects to use the services of a regulatory service provider must 
ensure that the provider has the capacity and resources to provide 
timely and effective regulatory services.\458\ A SEF remains 
responsible at all times for the performance of any regulatory services 
received, compliance with its obligations under the Act and Commission 
regulations, and the regulatory service provider's performance on its 
behalf.\459\
---------------------------------------------------------------------------

    \457\ 17 CFR 37.204(a).
    \458\ Id.
    \459\ Id.
---------------------------------------------------------------------------

    Based upon its experience with implementing part 37, the Commission 
is proposing to expand the scope of entities that may provide 
regulatory services under Sec.  37.204(a) to include any non-registered 
entity approved by the Commission.\460\ The Commission believes that 
this proposed expansion would be appropriate and notes that the Act 
does not address or proscribe the

[[Page 62004]]

types of entities that SEFs may use for the provision of regulatory 
services; for example, the Commission used this basis originally to 
include FINRA among the list of entities that could provide regulatory 
services. Therefore, consistent with the statute, SEFs would be allowed 
to choose from a greater number of potential third-party providers. The 
Commission believes that this change would potentially increase 
competition among existing and potential regulatory service providers 
and, thus, reduce operating costs for SEFs, encourage innovation and 
technological developments, and mitigate barriers to entry for new 
SEFs.
---------------------------------------------------------------------------

    \460\ The Commission proposes to amend ``Financial Industry 
Regulatory Authority'' in the text of Sec.  37.204(a) to ``any non-
registered entity.''
---------------------------------------------------------------------------

    Section 37.204(a), however, would also continue to be subject to 
important protections to ensure that a regulatory service provider 
provides effective regulatory services. To ensure each SEF's compliance 
with Sec. Sec.  37.203(c)-(d), among other provisions, the Commission 
would continue to evaluate the sufficiency of a provider's compliance 
staff and resources and the capabilities of its automated trade 
surveillance system, and other capabilities.\461\ Section 37.204(a) 
would still require each SEF to be responsible at all times for the 
performance of the regulatory services received, for compliance with 
the SEF's obligations under the Act and Commission regulations, and for 
the provider's performance on its behalf. Further, as discussed below, 
Sec.  37.204(b) would still impose a duty to supervise the provider. 
Accordingly, the Commission believes that these protections, combined 
with the Commission's prior evaluation of any provider, support the 
ability of a SEF to consider an entity outside of an RFA, a registered 
entity, or FINRA.
---------------------------------------------------------------------------

    \461\ The Commission would evaluate a provider with respect to 
these requirements prior to approving any arrangement between a SEF 
and the provider, or during the course of conducting routine 
oversight of a SEFs self-regulatory program.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.204(a).
2. Sec.  37.204(b)--Duty To Supervise Regulatory Service Provider
    Existing Sec. Sec.  37.204(b)-(c) generally set forth a SEF's 
oversight responsibilities with respect to a regulatory service 
provider. Existing Sec.  37.204(b) requires a SEF to retain sufficient 
compliance staff to supervise the quality and effectiveness of the 
services performed by a regulatory service provider; hold regular 
meetings with the regulatory service provider to discuss ongoing 
investigations, trading patterns, market participants, and any other 
matters of regulatory concern; and conduct and document periodic 
reviews of the adequacy and effectiveness of services provided on its 
behalf.\462\ Existing Sec.  37.204(c), however, requires a SEF to 
retain exclusive authority over all substantive decisions made by its 
regulatory service provider, such as decisions involving trade 
cancellations, issuance of disciplinary charges, and access 
denials.\463\ A SEF is also required to document any instance where its 
actions differ from those recommended by its regulatory service 
provider, including the reasons for the course of action recommended by 
the regulatory service provider and the reasons why the SEF chose a 
different course of action.\464\
---------------------------------------------------------------------------

    \462\ 17 CFR 37.204(b).
    \463\ 17 CFR 37.204(c).
    \464\ Id.
---------------------------------------------------------------------------

    The Commission proposes to combine and streamline the requirements 
of existing Sec. Sec.  37.204(b)-(c) into a new proposed Sec.  
37.204(b). The Commission further proposes to maintain a SEF's duty to 
supervise its regulatory service provider, but to eliminate the 
requirement that the SEF hold regular meetings and conduct periodic 
reviews of the provider. Instead, the Commission proposes that a SEF be 
able to determine the necessary processes for supervising their 
regulatory service providers. Consistent with this proposed change, the 
Commission also proposes to provide each SEF with the option to allow 
its regulatory service provider to make substantive decisions, provided 
that, at a minimum, the SEF is involved in such decisions. Therefore, a 
SEF would have the discretion to determine how they are involved in 
such decisions. The proposed rule would keep the existing examples of 
substantive decisions, including the adjustment or cancellation of 
trades, the issuance of disciplinary charges, and denials of access to 
the SEF for disciplinary reasons. Finally, the Commission proposes to 
eliminate the requirement that a SEF document where its actions differ 
from the regulatory service provider's recommendations, deferring 
instead to the SEF and its regulatory service provider to mutually 
agree on the method that they will use to document substantive 
decisions.
    Based on its experience implementing the SEF regulatory framework, 
the Commission believes that some of the specific requirements 
currently prescribed under existing Sec. Sec.  37.204(b)-(c) are 
unnecessary and overly prescriptive because SEFs, consistent with their 
position as self-regulatory organizations, remain ultimately 
responsible for the performance of any regulatory services received, 
for compliance with their obligations under the Act and Commission 
regulations, and for the regulatory service providers' performance on 
their behalf. Given a SEF's ultimate responsibility, the Commission 
believes that the SEF should be allowed to determine how best to 
supervise its regulatory service provider based on the services it 
receives and the nature of the SEF's operations and markets. The 
Commission also notes that this proposed approach is consistent with a 
SEF's discretion under Core Principle 1.\465\ The Commission further 
believes that the discretion that SEFs and their regulatory service 
providers would have under Sec.  37.204(b) to determine a mutually 
acceptable process may enable more timely decision making regarding 
substantive matters.\466\
---------------------------------------------------------------------------

    \465\ 7 U.S.C. 7b-3(f)(1)(B).
    \466\ The Commission notes that a commenter to the SEF Core 
Principles Final Rule stated that entrusting greater discretion to a 
regulatory service provider would provide for prompt decision-
making. SEF Core Principles Final Rule at 33517.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.204(b).
3. Sec.  37.204(c)--Delegation of Authority
    The Commission proposes a new Sec.  37.204(c) to delegate to DMO 
the authority to approve any regulatory service provider chosen by a 
SEF. This does not, however, prohibit the Commission from exercising 
authority to approve any third party regulatory service provider. The 
Commission anticipates that expanding the scope of entities that may 
provide regulatory services under proposed Sec.  37.204(a) may lead to 
a greater number of approval requests for such entities. Therefore, the 
Commission proposes to delegate this authority to ensure that such a 
review is conducted in an efficient manner. Such approval would 
require, at a minimum, that each regulatory service provider 
demonstrate that it has the capabilities and resources necessary to 
provide timely and effective regulatory services on behalf of the SEF, 
including adequate staff and automated surveillance systems, as 
required under proposed Sec.  37.204(a).
Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.204(c).

D. Sec.  37.205--Audit Trail

    Section 37.205 sets forth a SEF's audit trail requirements and 
generally requires a SEF to establish procedures to

[[Page 62005]]

capture and retain information that may be used in establishing whether 
rule violations have occurred. Specifically, Sec.  37.205(a) requires a 
SEF to have an audit trail; Sec.  37.205(b) prescribes the elements of 
an acceptable audit trail program; and Sec.  37.205(c) requires a SEF 
to enforce its audit trail requirements.\467\
---------------------------------------------------------------------------

    \467\ 17 CFR 37.205(a)-(c).
---------------------------------------------------------------------------

    Based on the Commission's experience with implementing part 37, 
including the SEF registration process, the Commission has observed 
that technology limitations have impacted SEFs' ability to comply with 
all of the audit trail requirements, particularly for orders submitted 
by voice and certain electronic communications that include instant 
messages and emails. Based on these observations, as well as the 
proposed ability for a SEF to offer flexible execution methods, the 
Commission proposes amendments to the audit trail requirements that 
seek to strike the appropriate balance between offering SEFs the 
ability to adopt such requirements that are best suited to their 
respective trading systems or platforms, while also ensuring that such 
programs enable SEFs to fulfill their self-regulatory obligations. The 
Commission believes that the proposed changes are consistent with Core 
Principle 2, which generally requires a SEF to capture information that 
may be used in establishing whether rule violations have occurred.\468\
---------------------------------------------------------------------------

    \468\ 7 U.S.C. 7b-3(f)(2).
---------------------------------------------------------------------------

1. Sec.  37.205(a)--Audit Trail Required
    Section 37.205(a) requires a SEF to capture and retain all audit 
trail data necessary to detect, investigate, and prevent customer and 
market abuses.\469\ Such audit trail data must be sufficient to 
reconstruct all indications of interest, requests for quotes, orders, 
and trades.\470\ The audit trail must also permit a SEF to track a 
customer order from the time of receipt through fill, allocation, or 
other disposition.\471\
---------------------------------------------------------------------------

    \469\ 17 CFR 37.205(a).
    \470\ Id.
    \471\ Id.
---------------------------------------------------------------------------

    The Commission proposes several amendments to streamline the 
existing requirements, account for different execution methods and 
swaps market practices, and eliminate redundancies with other part 37 
requirements. Notwithstanding the proposed changes described above, the 
Commission emphasizes that the type of execution method offered by a 
SEF does not alter the obligation to capture all audit trail data 
necessary to detect, investigate, and enforce its rules pursuant to 
Core Principle 2.
    First, the Commission proposes to clarify the existing language to 
specify that a SEF must capture and retain all audit trail data 
necessary to reconstruct all trading on its facility, detect and 
investigate customer and market abuses, and take appropriate 
disciplinary action (emphasis added).\472\ By replacing the requirement 
to ``prevent'' customer and market abuses with the requirement to 
``take appropriate disciplinary action'' and specifying that the data 
must enable the SEF to reconstruct all trading on its facility, the 
Commission believes that Sec.  37.205(a) would more accurately reflect 
the capabilities for which a SEF may use its audit trail data. The 
Commission notes that an audit trail cannot ``prevent'' customer and 
market abuses and the ability to ``reconstruct'' trading is already 
required under existing Sec.  37.205(a), as described below.
---------------------------------------------------------------------------

    \472\ The Commission proposes to eliminate the introductory 
sentence under Sec.  37.205, which states that a SEF shall establish 
procedures to capture and retain information that may be used in 
establishing whether rule violations have occurred, given that this 
language is duplicative of the audit trail requirements under Sec.  
37.205(a).
---------------------------------------------------------------------------

    Second, the Commission proposes to move the requirement that audit 
trail data shall be sufficient to reconstruct all indications of 
interest, requests for quotes, orders, and trades to the guidance to 
Core Principle 2 in Appendix B.\473\ Given the proposal to allow each 
SEF to offer flexible methods of execution, as well as continuing 
advances in technology, the Commission believes that enumerating 
specific audit trail data in the regulatory language may unnecessarily 
limit the universe of data relevant to a SEF's audit trail. The 
Commission emphasizes that a SEF must capture all audit trail data 
related to each offered execution method that is necessary to 
reconstruct all trading on its facility, detect and investigate 
customer and market abuses, and take disciplinary action as noted 
above. The Commission also believes that SEFs must capture such a data 
set to be able to detect, investigate and enforce its rules under Core 
Principle 2, to reconstruct all trading under Core Principle 4, and to 
comply with the audit trail reconstruction program under proposed 
37.205(c), as described below.
---------------------------------------------------------------------------

    \473\ The Commission proposes to add this guidance to paragraph 
(a)(4) to Core Principle 2 in Appendix B. As discussed below, the 
Commission proposes to eliminate the existing language in paragraph 
(a)(4), see infra Section VII.E.2.--Sec.  37.206(b)--Disciplinary 
Program.
---------------------------------------------------------------------------

    Third, the Commission proposes to eliminate the requirement that a 
SEF capture post-execution allocation information in its audit trail 
data. During the SEF registration process, numerous SEFs indicated that 
post-execution allocations normally occur between the clearing firm or 
the customer and the DCO, or at the middleware provider.\474\ 
Therefore, these SEFs represented that they typically do not have 
access to post-execution allocation information, and are unable to 
obtain such data from third parties, such as DCOs and SDRs, due to 
confidentiality concerns. Based on these representations, Commission 
staff has issued continuing no-action relief to SEFs from this 
requirement.\475\ Based on its experience, the Commission understands 
that SEFs are still routinely unable to obtain this information 
pursuant to the requirements of Sec. Sec.  37.205(a) and (b)(2).\476\ 
Accordingly, in lieu of requiring that the audit trail track a customer 
order through ``fill, allocation, or other disposition,'' the 
Commission proposes to require SEFs to capture the audit trail data 
only through execution on the SEF. The Commission understands that this 
proposed change is consistent with current swap market practices.
---------------------------------------------------------------------------

    \474\ CFTC Letter No. 17-54, Re: No-Action Relief for Swap 
Execution Facilities from Certain Audit Trail Requirements in 
Commission Regulation 37.205 Related to Post-Execution Allocation 
Information at 2 (Oct. 31, 2017).
    \475\ Id.
    \476\ The Commission notes that Sec.  37.205(b)(2) also requires 
a SEF's audit trail to include an electronic transaction history 
database that captures, among other elements, the identity of each 
account to which fills are allocated. 17 CFR 37.205(b)(2). As 
discussed below, the Commission proposes to eliminate this 
requirement. See infra note 484 and accompanying discussion.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.205(a). In particular, the Commission requests comment on the 
following questions:
    (59) Is the scope of the proposed audit trail requirements 
sufficiently clear? If not, then please explain. Is the scope overly 
broad or narrow to enable a SEF to comply with its obligations under 
the Act? If so, please explain. Would a SEF's audit trail obligations 
be impacted by the Commission's proposed approach to pre-execution 
communications? If so, then how?
    (60) What challenges, if any, do SEFs encounter in capturing or 
retaining audit trail data?
    (61) Are there any specific audit trail data points that are too 
costly or burdensome for a SEF to capture or maintain?
    (62) Is the proposed guidance to this section appropriate? Are SEFs 
currently capturing all indications of interest, requests for quotes, 
orders, and trades? Is the meaning of ``indications of

[[Page 62006]]

interest'' sufficiently clear? If not, please provide suggestions on 
how to clarify this term. Should a SEF be required to capture all 
indications of interest and requests for quotes to enable it to comply 
with its obligations under the Act? Are there other data points that 
should be added to the guidance?
2. Sec.  37.205(b)--Elements of an Acceptable Audit Trail Program
    Section 37.205(b) requires, among other things, that SEFs retain 
all original source documents; maintain a transaction history database; 
conduct electronic analysis; and safely store all audit trail 
data.\477\ Section 37.205(b)(1) requires that a SEF's audit trail 
include original source documents and specifies the nature and content 
of such documents.\478\ Section 37.205(b)(2) requires a SEF's audit 
trail program to include an electronic transaction history database and 
specifies the required elements of an adequate database.\479\ Section 
37.205(b)(3) requires a SEF's audit trail program to include electronic 
analysis capability with respect to all audit trail data in the 
transaction history database.\480\ Section 37.205(b)(4) requires a 
SEF's audit trail program to safely store all audit trail data retained 
in the transaction history database.\481\
---------------------------------------------------------------------------

    \477\ 17 CFR 37.205(b).
    \478\ 17 CFR 37.205(b)(1).
    \479\ 17 CFR 37.205(b)(2).
    \480\ 17 CFR 37.205(b)(3).
    \481\ 17 CFR 37.205(b)(4).
---------------------------------------------------------------------------

a. Sec.  37.205(b)(1)--Original Source Documents; Sec.  37.205(b)(2)--
Transaction History Database; Sec.  37.205(b)(3)--Electronic Analysis 
Capability
    The Commission proposes to eliminate certain elements of the 
original source documents requirement under Sec.  37.205(b)(1) that 
specify the nature and content of the original source documents,\482\ 
as such requirements may not capture the appropriate universe of 
content. The Commission also believes that the detailed requirements 
are not necessary; as discussed above, the general requirement that a 
SEF must capture all audit trail data necessary to reconstruct all 
trading on its facility, detect and investigate customer and market 
abuses, and take disciplinary action is sufficient to guide a SEF as to 
the content of its original source documents, which would be based on 
the SEF's execution methods, trading operations, and markets. Section 
37.205(b)(1), however, would maintain that the SEF's audit trail must 
include original source documents, including unalterable, sequentially-
identified records on which trade execution information is originally 
recorded, whether recorded manually or electronically.
---------------------------------------------------------------------------

    \482\ Section 37.205(b)(1) requires, among other things, that 
records for customer orders (whether filled, unfilled, or cancelled, 
each of which shall be retained or electronically captured) shall 
reflect the terms of the order, an account identifier that relates 
back to the account(s) owner(s), the time of order entry, and the 
time of trade execution. A SEF must also require that all orders, 
indications of interest, and requests for quotes be immediately 
captured in the audit trail. 17 CFR 37.205(b)(1).
---------------------------------------------------------------------------

    The Commission further proposes to amend Sec.  37.205(b)(2) to 
revise the scope of audit trail data that must be captured in a SEF's 
electronic transaction history database. Specifically, the Commission 
proposes to eliminate the requirement that the database include all 
indications of interest, requests for quotes, orders, and trades 
entered into a SEF's trading system or platform. Instead, the SEFs 
would be required to include (i) trades executed by voice or by entry 
into a SEF's electronic trading system or platform; and (ii) orders 
that are entered into its electronic trading system or platform. 
Similar to proposed Sec.  37.203(d), this proposed amendment recognizes 
that a SEF may not have a cost-effective and efficient method for 
inputting orders submitted by voice or certain other electronic 
communications, such as instant messaging and email, into an electronic 
transaction history database, given that they are not in the same 
format as orders and trades that are entered into a SEF's electronic 
trading system or platform.\483\ As noted above, the Commission 
emphasizes that a SEF must continue to keep a record of all orders 
entered by voice (i.e., oral communications) or certain other 
electronic communications, such as instant messaging and email. Such a 
record, however, would not need to be included in the SEF's electronic 
transaction history database given the formatting challenges.
---------------------------------------------------------------------------

    \483\ See supra Section VII.B.4.--Sec.  37.203(d)--Automated 
Trade Surveillance System.
---------------------------------------------------------------------------

    The Commission additionally proposes to eliminate the remaining 
requirements of Sec.  37.205(b)(2) that detail the information that 
must be included in transaction history database, given that these 
requirements are already captured in other audit trail requirements or 
do not comport with existing swaps market practices.\484\ Consistent 
with the proposed amendments to Sec.  37.205(b)(2), the Commission 
further proposes to amend Sec.  37.205(b)(3) to clarify that a SEF's 
electronic analysis capability must enable the SEF to reconstruct ``any 
trade executed by voice or by entry into a swap execution facility's 
electronic trading system or platform and any order entered into its 
electronic trading system or platform'' rather than ``indications of 
interest, requests for quotes, orders, and trades.''
---------------------------------------------------------------------------

    \484\ For example, customer type indicator code (``CTI'') is 
used in futures trading to designate the capacity in which the 
person was executing a trade--for the person's own account; for a 
proprietary account; on behalf of another member; or for a customer. 
Many DCM-based automated trade surveillance systems are programmed 
to detect aberrations in CTI code usage that may indicate potential 
rule violations. The Commission understands, however, that a SEF's 
automated trade surveillance system does not use CTI codes to detect 
potential rule violations. Therefore, the Commission proposes to 
eliminate this requirement. Further, as discussed above, since SEFs 
cannot routinely obtain post-execution allocation information, it is 
not possible to identify ``each account to which fills are 
allocated.'' See supra note 476 and accompanying discussion. 
Therefore, the proposed amendment to Sec.  37.205(b)(2) would also 
eliminate the requirement to include post-execution allocation 
information in a SEF's transaction history database.
---------------------------------------------------------------------------

    These proposed amendments are consistent with feedback received 
regarding the audit trail requirements during the SEF registration 
process. Some SEFs that offer voice-based trading systems or platforms 
stated that they do not have the requisite technology to conduct an 
electronic analysis of audit trail data that is not entered into a 
SEF's electronic trading system or platform, such as oral 
communications, electronic instant messages, and emails. The Commission 
understands that during that time, such technology, if available, would 
have been costly for SEFs to adopt and would not have been fully 
capable of digitizing oral communications in a sufficiently accurate 
manner to conduct effective surveillance.
    While the Commission is aware that promising technologies are 
developing in this area, it does not believe that a viable, cost-
effective automated technology solution currently exists. Currently, 
SEFs that offer any form of voice-based trading system or platform are 
required, as a condition to their registration, to establish voice 
audit trail surveillance programs to ensure that they can reconstruct a 
sample of voice trades and review such trades for possible trading 
violations. The proposed amendments to Sec. Sec.  37.205(b)(2)-(3) 
would relieve a SEF from establishing or maintaining such a program, 
but the proposed audit trail reconstruction requirement under Sec.  
37.205(c), as discussed below, would apply instead. Nonetheless, a SEF 
must continue to conduct electronic analysis, using an automated trade 
surveillance system that meets the requirements of proposed Sec.  
37.203(d).

[[Page 62007]]

    The Commission further proposes to eliminate the safe storage 
requirement under Sec.  37.205(b)(4), given that it is generally 
duplicative of the requirements under Core Principle 14 and related 
regulations.\485\ As discussed below, however, the Commission proposes 
a non-substantive amendment to move the requirement that a SEF must 
protect audit trail data from unauthorized alteration, accidental 
erasure, or other loss to Sec.  37.1401(c), which addresses system 
safeguard requirements.\486\
---------------------------------------------------------------------------

    \485\ 7 U.S.C. 7b-3(f)(14); 17 CFR 37.1401.
    \486\ See infra Section XIX.A.--Sec.  37.1401(c).
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed 
Sec. Sec.  37.205(b)(1)-(3).
3. Sec.  37.205(c)--Audit Trail Reconstruction \487\
---------------------------------------------------------------------------

    \487\ The Commission proposes to retitle Sec.  37.205(c) to 
``Audit trail reconstruction'' from ``Enforcement of audit trail 
requirements'' based on the proposed changes described below.
---------------------------------------------------------------------------

    Section 37.205(c) generally requires a SEF to enforce its audit 
trail and recordkeeping requirements.\488\ Section 37.205(c)(1) 
requires enforcement through annual reviews and prescribes the minimum 
components that must be included in such reviews.\489\ Section 
37.205(c)(2) requires that a SEF establish an enforcement program and 
to impose meaningful sanctions against persons and firms where 
deficiencies are found.\490\
---------------------------------------------------------------------------

    \488\ 17 CFR 37.205(c).
    \489\ 17 CFR 37.205(c)(1).
    \490\ 17 CFR 37.205(c)(2). The Commission notes that Sec.  
37.205(c)(2) also imposes a warning letter requirement for audit 
trail violations. As discussed below, the Commission proposes to 
streamline and consolidate this provision into proposed Sec.  
37.206(c)(2). See infra Section VII.E.6.--Sec.  37.206(f)--Warning 
Letters.
---------------------------------------------------------------------------

    The Commission proposes to eliminate the existing audit trail 
enforcement requirements under Sec.  37.205(c) and adopt an audit trail 
reconstruction requirement instead.\491\ The Commission believes that 
the primary goal of audit trail enforcement is to ensure that a SEF's 
audit trail enables it to reconstruct trading and conduct effective 
surveillance to fulfill its Core Principle 2 obligations. To that end, 
audit trail enforcement focuses on reviewing certain components of the 
audit trail data to ensure that a SEF's audit trail data is complete 
and accurate. Existing audit trail reviews include a (1) review of 
randomly selected samples of front-end audit trail data; (2) review of 
the process by which user identifications are assigned and records 
relating to user identifications are maintained; (3) review of the 
usage patterns of user identifications to identify violations of user 
identification rules; and (4) review of account numbers and CTI codes 
for accuracy and proper use. The Commission understands that these 
reviews focus on components of the audit trail that are generally not 
relevant to SEFs. For example, SEFs have represented that there is 
little, if any, ``front-end audit trail data'' that is not already 
captured by the SEF, and that many of the data points for review, such 
as user identifications, account numbers, and CTI codes, are not used 
in the same manner as they are for DCMs. Therefore, the Commission 
believes that requiring SEFs to conduct an audit trail enforcement 
program based on the requirements of existing Sec.  37.205(c) serves a 
limited purpose.
---------------------------------------------------------------------------

    \491\ Notwithstanding these proposed changes, the Commission 
notes that to comply with the general audit trail requirement under 
proposed Sec.  37.205(a), which requires a SEF to capture all audit 
trail data related to each offered execution method that is 
necessary to reconstruct all trading on its facility, detect and 
investigate customer and market abuses, and take disciplinary 
action, the SEF must ensure that market participants are submitting 
accurate and complete audit trail data.
---------------------------------------------------------------------------

    The Commission believes that ensuring a SEF's audit trail is 
accurate and sufficient to conduct effective surveillance--the primary 
goals of audit trail enforcement--would be better served through an 
audit trail reconstruction program that focuses on verifying the 
accuracy of audit trail data and a SEF's ability to comprehensively and 
accurately reconstruct all trading on its facility in a timely manner. 
As discussed above, the Commission is aware that SEFs that offer any 
form of a voice-based trading system or platform do not currently have 
cost-effective solutions for consolidating certain types of data, such 
as oral communications, electronic instant messages, and emails, 
inputting them into an electronic transaction history database, and 
loading and processing them into an automated system to reconstruct 
trading. Given that the ability to reconstruct all trading is an 
essential component to conducting effective surveillance and is 
currently not being conducted in a routine, automated manner for 
certain key data, the Commission proposes to require that a SEF 
establish a program to verify its ability to comprehensively and 
accurately reconstruct all trading on its facility in a timely manner. 
The Commission also proposes to adopt guidance to Core Principle 2 in 
Appendix B specifying that an effective audit trail reconstruction 
program should annually review an adequate sample of executed and 
unexecuted orders and trades from each execution method offered to 
verify compliance with Sec.  37.205(c).\492\
---------------------------------------------------------------------------

    \492\ The Commission proposes to add this guidance to paragraph 
(a)(5) to Core Principle 2 in Appendix B. 17 CFR part 37 app. B. As 
discussed below, the Commission proposes to eliminate the existing 
language in paragraph (a)(5). See infra Section VII.E.2.---Sec.  
37.206(b)--Disciplinary Program.
---------------------------------------------------------------------------

    Since SEFs that offer only electronic trading systems or platforms 
can use their automated trade surveillance systems to reconstruct 
trading, the reconstructions under proposed Sec.  37.205(c) would serve 
to verify the accuracy of their audit trail data. A SEF that offers any 
form of voice-based trading could comply with proposed Sec.  37.205(c) 
by conducting manual reconstructions, including orders entered by oral 
communications, instant messages, and email, and trades executed by 
voice that are captured by the SEF's electronic transaction history 
database. In addition to verifying the accuracy of the audit trail data 
for SEFs that offer electronic trading systems or platforms, these 
reconstructions would help ensure that in the absence of such an 
automated solution, a SEF that offers voice-based trading is able to 
reconstruct trading as necessary, including when they are investigating 
problematic trading activity.
Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.205(c) and the associated guidance to Core Principle 2 in Appendix 
B. In particular, the Commission requests comment on the following 
questions:
    (63) What factors should a SEF consider in selecting an adequate 
sample of orders and trades for reconstruction?
    (64) Should SEFs be required to annually reconstruct a minimum 
number or orders and trades? If so, what is the minimum number?
    (65) Should SEFs be required to conduct annual audit trail reviews 
of their members and firms that are subject to recordkeeping 
requirements? If so, what should these reviews include?

E. Sec.  37.206--Disciplinary Procedures and Sanctions

    Section 37.206 generally requires a SEF to establish rules that 
deter abuses and have the capacity to enforce those rules though prompt 
and effective disciplinary action. The disciplinary rules that 
implement this requirement require a SEF to maintain sufficient 
enforcement staff, establish disciplinary panels, follow certain 
disciplinary

[[Page 62008]]

procedures that afford respondents procedural safeguards, and impose 
sanctions that are commensurate to the violations committed.\493\ The 
rules prescribe the use of various sanctions, including suspension or 
expulsion of members or market participants; customer restitution; and 
issuance of warning letters.\494\
---------------------------------------------------------------------------

    \493\ 17 CFR 37.206(a)-(f).
    \494\ 17 CFR 37.206(e)-(f).
---------------------------------------------------------------------------

    Since the adoption of Sec.  37.206, the Commission has considered 
whether alternative cost-effective methods exist for complying with 
Core Principle 2's requirement to establish and enforce trading, trade 
processing, and participation rules that deter abuses, and have the 
capacity to investigate and enforce such abuses.\495\ Based on its 
experience with the part 37 implementation, the Commission believes 
that alternative disciplinary methods exist that would ensure that SEFs 
maintain robust disciplinary structures necessary to enforce compliance 
with their rules and deter abusive trading to promote market integrity. 
The Commission acknowledges that Sec.  37.206 is a limited approach 
that is based in many respects on its experience with oversight of DCM 
disciplinary programs.\496\ While the Commission believes that all SEFs 
should be subject to certain threshold requirements, it also believes 
that SEFs should be able to use their experience and knowledge to 
establish disciplinary procedures that are appropriate for their own 
markets and market participants. The Commission notes that this 
approach is consistent with the reasonable discretion afforded to SEFs 
under Core Principle 1.\497\ Therefore, the Commission proposes to 
streamline the SEF disciplinary program rules, discussed further 
below.\498\
---------------------------------------------------------------------------

    \495\ 7 U.S.C. 7b-3(f)(2)(B).
    \496\ See SEF Core Principles Final Rule at 33520-21 (noting 
that the disciplinary procedures in the part 37 proposed rules 
paralleled the procedures for DCMs).
    \497\ 7 U.S.C. 7b-3(f)(1)(B).
    \498\ The Commission proposes to eliminate the introductory 
sentence under Sec.  37.206, which states that a SEF shall establish 
trading, trade processing, and participation rules that will deter 
abuses and have the capacity to enforce such rules through prompt 
and effective disciplinary action, including suspension or expulsion 
of members or market participants who violate the rules of the swap 
execution facility, given that this language is duplicative of 
requirements elsewhere in this part, including Core Principle 2 and 
various provisions under Sec.  37.206.
---------------------------------------------------------------------------

1. Sec.  37.206(a)--Enforcement Staff
    Section 37.206(a) requires a SEF to establish and maintain 
sufficient enforcement staff and resources to effectively and promptly 
prosecute possible rule violations within the disciplinary jurisdiction 
of the SEF.\499\
---------------------------------------------------------------------------

    \499\ 17 CFR 37.206(a).
---------------------------------------------------------------------------

    The Commission proposes to change the word ``prosecute'' to 
``enforce'' to more accurately describe the requirements under Sec.  
37.206(a), given that every rule violation may not lead to a 
prosecution.
    The Commission also proposes to amend the guidance to Core 
Principle 2 in Appendix B that addresses a SEF's enforcement 
staff.\500\ The Commission proposes eliminating the language stating 
that a SEF's enforcement staff may operate as part of the SEF's 
compliance staff. The Commission no longer believes this language is 
necessary, given that SEFs should have the option to determine the 
appropriate structure for their disciplinary programs, including their 
enforcement staff, discussed further below with respect to Sec.  
37.206(b).
---------------------------------------------------------------------------

    \500\ The Commission proposes to renumber paragraph (a)(3) to 
paragraph (a)(6) of the guidance to Core Principle 2 in Appendix B 
and adopt the amendments described above. 17 CFR part 37 app. B.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.206(a) and the associated guidance to Core Principle 2 in Appendix 
B.
2. Sec.  37.206(b)--Disciplinary Program \501\
---------------------------------------------------------------------------

    \501\ The Commission proposes to retitle Sec.  37.206(b) to 
``Disciplinary program'' from ``Disciplinary panels'' based on the 
proposed changes described below.
---------------------------------------------------------------------------

    Section 37.206(b) currently requires SEFs to establish one or more 
disciplinary panels that meet the composition requirements of part 40 
and do not include a SEF's compliance staff or any person involved in 
adjudicating any other stage of the same proceeding.\502\
---------------------------------------------------------------------------

    \502\ 17 CFR 37.206(b). The Commission proposed composition 
requirements for disciplinary panels, but has not adopted those 
requirements in a final rule. Requirements for Derivatives Clearing 
Organizations, Designated Contract Markets, and Swap Execution 
Facilities Regarding the Mitigation of Conflicts of Interest, 75 FR 
63732, 63752 (Oct. 18, 2010).
---------------------------------------------------------------------------

    The Commission proposes to amend Sec.  37.206(b) to permit a SEF to 
administer its disciplinary program through not only one or more 
disciplinary panels, as currently allowed, but also through its 
compliance staff. As discussed above, this amendment provides SEFs with 
the ability to adopt a cost-effective disciplinary structure that best 
suits their markets and market participants, while still effectuating 
the requirements and protections of Core Principle 2 through compliance 
staff, disciplinary panels, or some combination of both.\503\
---------------------------------------------------------------------------

    \503\ While the participation of SEF compliance staff could 
present a possible conflict of interest, the Commission believes 
that this concern is adequately addressed through the SEF's CCO. 
Under proposed Sec.  37.1501(c)(2), a CCO would be required to take 
reasonable steps to resolve any material conflicts of interest. See 
infra Section XX.A.3.--Sec.  37.1501(c)--Duties of Chief Compliance 
Officer. Further, a CCO would be required to conduct an annual 
assessment of the SEF's policies on the handling of conflicts of 
interest. See infra Section XX.A.4.--Sec.  37.1501(d)--Preparation 
of Annual Compliance Report. The Commission also notes that the 
SEF's disciplinary practices are within the scope of the 
Commission's examinations.
---------------------------------------------------------------------------

    The Commission also proposes other amendments to Sec.  37.206(b), 
including non-substantive revisions, to streamline certain existing 
composition requirements for disciplinary panels.\504\ For SEFs that 
elect to administer their disciplinary program though compliance staff, 
the Commission proposes to amend Sec.  37.206(b) to exclude compliance 
staff from the requirements under Sec.  1.64(c)(4). Section 1.64, among 
other things, prescribes rules that govern the composition of an SRO's 
major disciplinary committee.\505\ The Commission recognizes that a 
SEF's compliance staff could qualify as a ``[m]ajor disciplinary 
committee'' \506\ under Sec.  1.64(a)(2) when imposing sanctions under 
the proposed rule; therefore, the staff would otherwise be subject to 
the composition requirement of Sec.  1.64(c)(4), which requires 
``sufficient different membership

[[Page 62009]]

interests.'' \507\ Accordingly, the Commission believes these 
amendments are necessary to effectuate the proposed rule of allowing 
compliance staff to administer a SEF's disciplinary program.
---------------------------------------------------------------------------

    \504\ The Commission proposes to amend the panel composition 
language by replacing the reference to part 40 with ``applicable 
Commission regulations.'' Additionally, paragraph (a)(11)(ii) of the 
guidance to Core Principle 2 in Appendix B currently specifies that 
the composition of the appellate panels should be consistent with 
part 40 and should not include any members of the SEF's compliance 
staff or any person involved in adjudicating any other stage of the 
same proceeding. 17 CFR part 37 app. B. To avoid duplicative 
language, the Commission proposes to consolidate these provisions 
under Sec.  37.206(b) to require that any disciplinary panel or 
appellate panel established by a SEF must meet the composition 
requirements of applicable Commission regulations, and shall not 
include any member of the SEF's compliance staff or any person 
involved in adjudicating any other stage of the same proceeding 
(emphasis added). The Commission also proposes to eliminate 
paragraph (a)(11) of the guidance to Core Principle 2 in Appendix B 
as noted below. 17 CFR part 37 app. B.
    \505\ 17 CFR 1.64.
    \506\ Section 1.64(a)(2) defines ``major disciplinary 
committee'' as a committee of persons authorized by a self-
regulatory organization to conduct disciplinary hearings, settle 
disciplinary charges, or impose disciplinary sanctions. Such a 
committee may also hear appeals of cases involving any violation of 
a SRO's rules, except for rules related to decorum or attire; 
financial requirements; reporting or recordkeeping; and violations 
that do not involve fraud, deceit or conversion. 17 CFR 1.64(a)(2). 
Under Sec.  37.2, SEFs are subject to all applicable Commission 
regulations, including Sec.  1.64.
    \507\ Section 1.64(c)(4) requires that each major disciplinary 
committee, or hearing panel thereof, include sufficient different 
membership interests so as to ensure fairness and prevent special 
treatment or preference for any person in the conduct of a 
committee's or panel's responsibilities. 17 CFR 1.64(c)(4).
---------------------------------------------------------------------------

    Consistent with the Commission's intention to streamline 
requirements while still effectuating the Core Principle 2 
requirements, the Commission proposes to eliminate the guidance to Core 
Principle 2 in Appendix B that specifies protocols for the SEF to 
handle charges and settlement offers.\508\ Given that proposed Sec.  
37.206(b) would permit SEFs to administer their disciplinary program 
through compliance staff, the Commission does not believe that this 
detailed guidance is necessary. Instead, the Commission proposes new 
guidance to specify that a SEF's rules governing the adjudication of a 
matter by the SEF's disciplinary panel should be fair, equitable, and 
publicly available.\509\
---------------------------------------------------------------------------

    \508\ The Commission proposes to eliminate paragraphs (a)(4)-(9) 
of the guidance to Core Principle 2 in Appendix B. 17 CFR part 37 
app. B.
    \509\ The Commission proposes to add this guidance as paragraph 
(a)(7) to Core Principle 2 in Appendix B. 17 CFR part 37 app. B.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.206(b) and the associated guidance to Core Principle 2 in Appendix 
B.
3. Sec.  37.206(c)--Hearings
    Section 37.206(c) requires a SEF to adopt rules that provide 
certain minimum procedural safeguards for any hearing. In general, the 
rule requires a fair hearing, promptly convened after reasonable notice 
to the respondent; and a copy of the hearing to be made and be a part 
of the record of the proceeding if the respondent requested the 
hearing.\510\
---------------------------------------------------------------------------

    \510\ 17 CFR 37.206(c).
---------------------------------------------------------------------------

    The Commission proposes to eliminate Sec.  37.206(c). First, the 
detailed hearing procedures under existing Sec.  37.206(c) are not 
necessary, as SEFs that choose to establish a disciplinary panel have 
reasonable discretion to do so pursuant to Core Principle 1.\511\ 
Second, the Commission notes that requirements for hearings under Sec.  
37.206(c) would not apply to SEFs that choose to administer their 
disciplinary program through compliance staff. Third, as noted above, 
the Commission proposes to add guidance to Core Principle 2 in Appendix 
B that a SEF's rules relating to disciplinary panel procedures should 
be fair, equitable, and publicly available.\512\ The Commission 
believes this guidance adequately captures the principal procedural 
objectives when SEFs are conducting disciplinary hearings and obviates 
the need for the otherwise prescriptive regulatory requirements. 
Consistent with the Commission's elimination of Sec.  37.206(c), the 
Commission also proposes to eliminate the guidance to Core Principle 2 
in Appendix B that specifies detailed guidelines for disciplinary 
hearing protocols.\513\
---------------------------------------------------------------------------

    \511\ 7 U.S.C. 7b-3(f)(1)(B).
    \512\ See supra note 509.
    \513\ The Commission proposes to eliminate paragraph (a)(10) of 
the guidance to Core Principle 2 in Appendix B. 17 CFR part 37 app. 
B.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of the proposed 
elimination of Sec.  37.206(c) and the associated guidance to Core 
Principle 2 in Appendix B.
4. Sec.  37.206(d)--Decisions
    Section 37.206(d) requires a disciplinary panel to render a written 
decision promptly following a hearing.\514\ The rule also provides 
detailed items to be included in the decision, such as a notice or 
summary of charges, the answer, and a statement of finding and 
conclusions with respect to each charge.\515\
---------------------------------------------------------------------------

    \514\ 17 CFR 37.206(d).
    \515\ Id.
---------------------------------------------------------------------------

    The Commission proposes to eliminate the prescriptive requirements 
under Sec.  37.206(d). This proposed elimination is consistent with 
other proposed amendments to Sec.  37.206 that would allow a SEF to 
exercise discretion in establishing its disciplinary procedures 
pursuant to Core Principle 2. The Commission, however, also proposes to 
add guidance to Core Principle 2 in Appendix B to specify that a SEF's 
rules should require the disciplinary panel to promptly issue a written 
decision following a hearing or the acceptance of a settlement 
offer.\516\ Consistent with the Commission's elimination of the 
requirements under Sec.  37.206(d), the Commission also proposes to 
eliminate the guidance to Core Principle 2 in Appendix B that specifies 
guidelines for a SEF's ability to provide rights of appeal to 
respondents and issue a final decision.\517\
---------------------------------------------------------------------------

    \516\ The Commission proposes to add this guidance as part of 
paragraph (a)(7) to Core Principle 2 in Appendix B. 17 CFR part 37 
app. B.
    \517\ The Commission proposes to eliminate paragraphs (a)(11)-
(12) of the guidance to Core Principle 2 in Appendix B. 17 CFR part 
37 app. B.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of the proposed 
elimination of Sec.  37.206(d) and the associated guidance to Core 
Principle 2 in Appendix B.
5. Sec.  37.206(e)--Disciplinary Sanctions
    Existing Sec.  37.206(e) requires that all disciplinary sanctions 
imposed by a SEF must be commensurate with the violations committed and 
must be clearly sufficient to deter recidivism or similar violations by 
other market participants.\518\ A SEF is also required to consider a 
respondent's disciplinary history when evaluating appropriate 
sanctions.\519\ In the event of demonstrated customer harm, any 
disciplinary sanction must include full customer restitution, except 
where the amount of restitution, or to whom it should be provided, 
cannot be reasonably determined.\520\
---------------------------------------------------------------------------

    \518\ 17 CFR 37.206(e).
    \519\ Id.
    \520\ Id.
---------------------------------------------------------------------------

    The Commission proposes to consolidate the requirements that apply 
to disciplinary sanctions and warning letters, under existing Sec.  
37.206(e) and existing Sec.  37.206(f),\521\ respectively, into a new 
proposed Sec.  37.206(c).\522\ Consistent with the Commission's goal to 
provide SEFs with a greater ability to develop cost-effective 
approaches to administer their disciplinary programs based on their 
markets and market participants, the Commission believes that a SEF 
should have greater discretion to choose between taking disciplinary 
action or issuing a warning letter. Accordingly, as discussed below, 
the Commission proposes under Sec.  37.206(c)(2) to expand the current 
use of warning letters by allowing a SEF to issue more than one warning 
letter over a rolling twelve-month period for violations that involve 
minor recordkeeping or reporting infractions. To balance the expanded 
authority to issue warning letters and ensure their proper use by SEFs, 
the Commission also proposes under Sec.  37.206(c)(1) to extend the 
existing criteria for issuing disciplinary sanctions to warning 
letters. Specifically, proposed

[[Page 62010]]

Sec.  37.206(c)(1) would require that all warning letters and sanctions 
imposed by a SEF must be commensurate with the violations committed and 
shall be clearly sufficient to deter recidivism or similar violations 
by other market participants. Further, all warning letters and 
sanctions, including summary fines and sanctions imposed pursuant to an 
accepted settlement offer, must take into account the respondent's 
disciplinary history.\523\
---------------------------------------------------------------------------

    \521\ Existing Sec.  37.206(f) states that where a rule 
violation is found to have occurred, no more than one warning letter 
may be issued per rolling twelve-month period for the same 
violation.
    \522\ The Commission proposes to retitle Sec.  37.206(c) to 
``Warning letters and sanctions'' from ``Hearings'' based on the 
proposed changes described below.
    \523\ The Commission proposes to add the term ``summary fine'' 
to clarify that summary fines are among the types of disciplinary 
sanctions that may be issued and would be subject to the 
requirements of the proposed rule.
---------------------------------------------------------------------------

    The Commission also proposes several amendments to related guidance 
to Core Principle 2 in Appendix B that are consistent with the proposed 
changes and are intended to allow a SEF to determine how to issue 
warning letters and sanctions. First, the Commission proposes to adopt 
guidance to Core Principle 2 in Appendix B to state that SEFs should 
have reasonable discretion in determining when to issue warning letters 
and apply sanctions.\524\ Second, the Commission also proposes to 
eliminate detailed guidance regarding the procedures for taking 
emergency disciplinary action. The guidance, however, would maintain 
that a SEF may impose a sanction or take summary action as necessary to 
protect the best interest of the marketplace.\525\
---------------------------------------------------------------------------

    \524\ The Commission proposes to add this guidance as paragraph 
(a)(9) to Core Principle 2 in Appendix B. 17 CFR part 37 app. B.
    \525\ The Commission proposes to renumber paragraph (a)(14) to 
paragraph (a)(8) to Core Principle 2 in Appendix B. 17 CFR part 37 
app. B.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.206(c)(1) and the associated guidance to Core Principle 2 in 
Appendix B. In particular, the Commission requests comment on the 
following question:
    (66) Should the Commission provide further explanation regarding 
the meaning of ``minor'' recordkeeping or reporting infractions?
6. Sec.  37.206(f)--Warning Letters
    Existing Sec.  37.206(f) states that where a rule violation is 
found to have occurred, no more than one warning letter may be issued 
per rolling twelve-month period for the same violation.\526\
---------------------------------------------------------------------------

    \526\ 17 CFR 37.206(f).
---------------------------------------------------------------------------

    As part of a new proposed Sec.  37.206(c)(2) noted above, the 
Commission proposes to amend this provision to establish a more 
practical approach to the use of warning letters. Under the proposed 
approach, a SEF would be allowed to issue more than one warning letter 
over a rolling twelve-month period for violations that involve minor 
recordkeeping or reporting infractions. Given the de minimis nature of 
such infractions, the Commission believes that a SEF should have the 
ability to determine whether they merit the issuance of a warning 
letter or sanction. The Commission also proposes to clarify that the 
twelve-month limitation on warning letters applies to the same 
individual who is found to have committed the same rule violation, 
rather than an entity. The Commission acknowledges that applying the 
limitation to subject entities is not practical because many of them 
have hundreds of employees trading on behalf of the entity.\527\ 
Further, the Commission notes that the rolling twelve-month period 
begins tolling once the SEF finds that a violation occurred, rather 
than the date that the subject activity occurred.
---------------------------------------------------------------------------

    \527\ The Commission notes, however, that this provision would 
be evaluated in conjunction proposed Sec.  37.206(c)(1).
---------------------------------------------------------------------------

    The Commission also proposes to eliminate guidance to Core 
Principle 2 in Appendix B that currently specifies that a SEF may adopt 
summary fines for violations of rules related to the failure to timely 
submit accurate records required for clearing or verifying each day's 
transactions.\528\ The Commission notes that Sec.  37.206(c)(1) as 
proposed would already specify that a SEF may issue summary fines as a 
sanction.
---------------------------------------------------------------------------

    \528\ The Commission proposes to eliminate paragraph (a)(13) of 
the guidance to Core Principle 2 in Appendix B. 17 CFR part 37 app. 
B.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.206(c)(2) and the associated guidance to Core Principle 2 in 
Appendix B. In particular, the Commission requests comment on the 
following question:
    (67) Is the Commission's approach to warning letters appropriate? 
Should the Commission allow SEFs to issue more than one warning letter 
to the same individual within a rolling twelve-month period for other 
rule violations in addition to minor recordkeeping or reporting 
infractions? If so, should the Commission specify which rule 
violations? If so, identify those rule violations and explain why.
7. Sec.  37.206(g)--Additional Sources for Compliance
    The Commission is not proposing any amendments to Sec.  
37.206(g).\529\
---------------------------------------------------------------------------

    \529\ The Commission proposes to renumber Sec.  37.206(g) to 
Sec.  37.206(d) based on the proposed changes described above.
---------------------------------------------------------------------------

F. Part 9--Rules Relating to Review of Exchange Disciplinary, Access 
Denial or Other Adverse Actions

    Part 9 of the Commission's regulations details the process and 
procedures for the Commission's review of exchange disciplinary, access 
denial, or other adverse actions.\530\ The rules also address the 
procedures and standards governing filing and service, motions, and 
settlement; the process that exchanges must follow in providing notice 
of a final disciplinary action to the subject of the action and to the 
Commission; and the publication of such notice.\531\
---------------------------------------------------------------------------

    \530\ 17 CFR part 9. For these purposes, the Commission 
interprets references to ``exchange'' to part 9 to mean DCMs and 
SEFs.
    \531\ Id.
---------------------------------------------------------------------------

    The Commission is proposing several non-substantive amendments to 
part 9 that correspond to certain proposed amendments to the Core 
Principle 2 regulations under part 37.\532\ As discussed above, the 
Commission proposes to eliminate various disciplinary procedures under 
proposed Sec.  37.206 and the applicable guidance to Core Principle 2 
in Appendix B to part 37 to streamline existing Core Principle 2 
requirements and provide SEFs with discretion in administering their 
disciplinary programs.\533\ These proposed changes include eliminating 
requirements concerning disciplinary decisions under Sec.  37.206(d) 
and eliminating various procedures detailed in guidance to Core 
Principle 2 concerning settlement offers; \534\ sanctions upon persons 
who impede the progress of disciplinary hearings; \535\ the right to 
appeal adverse actions; \536\ and summary fines for violations of rules 
regarding the timely submission of records.\537\ To the extent that the 
part 9 regulations contain cross-references to these part 37 
provisions, the Commission proposes to eliminate those references.\538\
---------------------------------------------------------------------------

    \532\ The Commission also proposes to renumber Sec.  9.1(b)(4) 
to Sec.  9.1(c) and Sec.  9.1(c) to Sec.  9.1(d).
    \533\ See supra Section VII.E.--Sec.  37.206--Disciplinary 
Procedures and Sanctions.
    \534\ See supra note 508 (elimination of paragraph (a)(9)).
    \535\ See supra note 513 (elimination of paragraph (a)(10)(vi)).
    \536\ See supra note 517 (elimination of in paragraph 
(a)(11)(iv)).
    \537\ See supra note 528 (elimination of paragraph (a)(13)).
    \538\ The Commission also proposes to renumber the cross-
references under Sec.  9.2(k), Sec.  9.12(a)(1), and Sec.  
9.24(a)(2) from paragraph (a)(14) to paragraph (a)(8) of the 
guidance to Core Principle 2 in Appendix B. See supra note 525.
---------------------------------------------------------------------------

    Specifically, the Commission proposes to eliminate those references 
under Sec.  9.11(b)(2), which govern the content requirements for SEF

[[Page 62011]]

disciplinary and access denial notices that must be filed with the 
person subject to the action. Currently, the notice of such actions 
must be provided as a copy of a written decision, which accords with 
Sec.  37.206(d) and guidance to Core Principle 2 in Appendix B relating 
to the use of written decisions where a disciplinary panel accepts a 
settlement offer; \539\ and paragraph (a)(11)(iv), where an appellate 
panel responds to appeals of adverse decisions by a disciplinary 
panel.\540\ Alternatively, Sec.  9.11(b)(2) provides that SEFs may file 
a written notice that includes the items listed under Sec. Sec.  
9.11(b)(3)(i)-(vi).\541\ Given the proposed elimination of Sec.  
37.206(d) and associated guidance to Core Principle 2, the Commission 
proposes that the contents of the SEF disciplinary or access denial 
notice be limited to the information specified under Sec. Sec.  
9.11(b)(3)(i)-(vi).
---------------------------------------------------------------------------

    \539\ 17 CFR part 37 app. B (guidance to Core Principle 2--
paragraph (a)(9)(iii)--``Settlement offers'').
    \540\ 17 CFR part 37 app. B (guidance to Core Principle 2--
paragraph (a)(11)(iv)--``Right to appeal'').
    \541\ Section 9.11(b)(3) requires that the notice of a 
disciplinary action or access denial action include the following: 
(i) The name of the person against whom the disciplinary action or 
access denial action was taken; (ii) a statement of the reasons for 
the disciplinary action or access denial action, detailing the 
exchange product which was involved, as applicable, and whether the 
violation that resulted in the action also resulted in financial 
harm to any customers together with a listing of any rules which the 
person who was the subject of the disciplinary action or access 
denial action was charged with having violated or which otherwise 
serve as the basis of the exchange action; (iii) a statement of the 
conclusions and findings made by the exchange with regard to each 
rule violation charged or, in the event of settlement, a statement 
specifying those rule violations which the exchange has reason to 
believe were committed; (iv) the terms of the disciplinary action or 
access denial action; (v) the date on which the action was taken and 
the date the exchange intends to make the disciplinary or access 
denial action effective; and (vi) except as otherwise provided under 
Sec.  9.1(b), a statement informing the party subject to the 
disciplinary action or access denial action of the availability of 
Commission review of the exchange action pursuant to section 8c of 
the Act and this part. 17 CFR 9.11(b)(3).
---------------------------------------------------------------------------

    Under Sec.  9.1(b)(2), Sec.  9.2(k), and Sec.  9.12(a)(3), the 
Commission also proposes to eliminate references to paragraph (a)(13) 
of the guidance to Core Principle 2 in Appendix B, which addresses the 
issuance of summary fines for failing to submit certain records in a 
timely manner. To replace those references, the Commission proposes to 
add new regulatory language that accounts for summary fines being 
permitted under the rules of the SEF for recordkeeping or reporting 
violations.
    Under Sec.  9.2(k) and Sec.  9.12(a)(2), the Commission further 
proposes to eliminate references to paragraph (a)(10)(vi) of the 
guidance to Core Principle 2 in Appendix B, which addresses the use of 
sanctions for persons who impede the progress of disciplinary hearings. 
To replace those references, the Commission proposes new regulatory 
language that accounts for SEFs imposing disciplinary action on a 
person for impeding the progress of a hearing under the rules of the 
SEF.

VIII. Part 37--Subpart D: Core Principle 3 (Swaps Not Readily 
Susceptible to Manipulation)

    Core Principle 3 specifies that a SEF shall permit trading only in 
swaps that are not readily susceptible to manipulation.\542\
---------------------------------------------------------------------------

    \542\ The Commission codified Core Principle 3 under Sec.  
37.300. 17 CFR 37.300.
---------------------------------------------------------------------------

A. Sec.  37.301--General Requirements

    Section 37.301 further implements Core Principle 3 by requiring a 
SEF, at the time that it submits a new swap contract to the Commission, 
to demonstrate that the swap is not readily susceptible to manipulation 
by providing the information required in Appendix C to part 38.\543\ 
Section 37.301 also states that in addition to referring to Appendix C 
to part 38, a SEF may refer to the guidance to Core Principle 3 in 
Appendix B.\544\ With respect to swaps, this guidance is similar in 
scope to the guidance to Appendix C to part 38.
---------------------------------------------------------------------------

    \543\ Appendix C to part 38--``Demonstration of Compliance That 
a Contract Is Not Readily Susceptible to Manipulation''--provides 
guidance regarding (i) the information that a new futures contract 
submission should include; (ii) estimations of deliverable supplies; 
(iii) contract terms and conditions that should be specified for 
physically-delivered contracts; (iv) demonstration that a cash-
settled contract is reflective of the underlying cash market and is 
not readily subject to manipulation or distortion; (v) contract 
terms and conditions that should be specified for cash-settled 
contracts; (vi) requirements for options on futures contracts; (vii) 
the terms and conditions for non-price based futures contracts; and 
(vii) the terms and conditions for swap contracts. 17 CFR part 38 
app. C (``Appendix C to part 38''). The Commission amended and 
updated this guidance to address swap transactions in 2012 as part 
of a part 38 rulemaking for designated contract markets. Core 
Principles and Other Requirements for Designated Contract Markets, 
77 FR 36612 (Jun. 19, 2012).
    \544\ 17 CFR 37.301.
---------------------------------------------------------------------------

    Appendix C to part 38 for DCMs, as applied by Sec.  37.301 to SEFs, 
provides guidance regarding the relevant considerations for evaluating 
if a new or existing swap contract is readily susceptible to 
manipulation.\545\ The objective of this guidance, which applies the 
guidance for futures contracts to swaps as applicable, is intended to 
ensure that a given contract is not readily susceptible to manipulation 
and will provide a reliable pricing basis, as well as promote cash and 
swaps price convergence. Among other things, the guidance states that a 
swap contract submitted under part 40 should conform to prevailing 
commercial practices, such that the settlement or delivery procedures 
adopted for a swap contract should reflect the underlying cash 
market.\546\ For cash-settled swap contracts, the guidance explains 
that the cash settlement index should be based on a reliable price 
reference series that accurately reflects the underlying market value, 
is not readily susceptible to manipulation, and is highly regarded by 
industry/market participants.\547\ For physically-settled swap 
contracts, the guidance explains that the terms and conditions should 
provide for adequate deliverable supply and be designed to avoid 
impediments to the delivery of the commodity.\548\
---------------------------------------------------------------------------

    \545\ See generally Appendix C to part 38.
    \546\ See paragraph (g)(4) of Appendix C to part 38, which 
references various provisions related to contract terms and 
conditions requirements for futures contracts.
    \547\ See paragraph (g)(1) of Appendix C to part 38.
    \548\ Paragraph (g)(4) of Appendix C to part 38, which applies 
to swaps, refers to paragraph (b)(2), which specifies contract term 
and condition requirements for futures contracts settled by physical 
delivery. Paragraph (b)(2) specifies various criteria related to 
quality standards of the underlying commodity, delivery point/area 
specifications, and specification of the delivery period. The 
Commission notes that paragraph (b)(1) generally specifies that the 
terms and conditions should be designed to avoid any impediments to 
delivery so as to promote convergence between the price of the 
futures contract and the cash market value of the commodity at the 
expiration of the contract. Paragraph (b)(1)(i)(A) specifies that 
the terms and conditions should result in a deliverable supply that 
is sufficient to ensure that the contract is not susceptible to 
price manipulation or distortion.
---------------------------------------------------------------------------

1. Appendix C to Part 37--Demonstration of Compliance That a Swap 
Contract Is Not Readily Susceptible to Manipulation
    The Commission proposes to eliminate the existing cross-reference 
to Appendix C to part 38 under Sec.  37.301 and establish a separate 
Appendix C to part 37 to provide specific guidance to SEFs for 
complying with the requirements of Core Principle 3.\549\ In 
conjunction with the Commission's proposal to create a separate 
Appendix C to part 37, the Commission also proposes to adopt conforming 
changes to the guidance to Core Principle 3 in Appendix B.\550\
---------------------------------------------------------------------------

    \549\ The Commission also proposes a conforming non-substantive 
amendment to Sec.  37.301 to update the reference to Appendix C to 
part 37.
    \550\ The proposed amendments to Appendix B would eliminate the 
existing explanatory guidance to Core Principle 3, which the 
Commission is proposing to address in the proposed Appendix C to 
part 37; and replace the existing cross-reference to sections of 
Appendix C to part 38 with a general reference to Appendix C to part 
37.

---------------------------------------------------------------------------

[[Page 62012]]

    Specifically, proposed Appendix C to part 37 specifies (1) measures 
that a SEF should take to determine that a cash-settled swap contract 
is reflective of the underlying cash market, is not readily subject to 
manipulation or distortion, and is based on a cash price series that is 
reliable, acceptable, publicly available, and timely; (2) terms and 
conditions that should be specified for cash-settled swap contracts; 
(3) terms and conditions that should be specified for physically-
settled swap contracts; (4) methodologies that should be utilized in 
estimating deliverable supplies; (5) terms and conditions that should 
be specified for options on swap contracts; and (6) guidance for 
options on physicals contracts.\551\
---------------------------------------------------------------------------

    \551\ ``Options on physicals'' refers to option contracts that 
do not provide for exercise into an underlying futures contract. 
Upon exercise, options on physicals can be settled via physical 
delivery of the underlying commodity or by a cash payment. See 
proposed Appendix C to part 37--paragraph (d)--``Guidance for 
options on physicals contracts.''
---------------------------------------------------------------------------

    The Commission believes that the proposed amendments would 
streamline the guidance to Core Principle 3 in a single appendix that 
is dedicated to part 37. A separate appendix for SEFs and swaps trading 
from the guidance provided in Appendix C to part 38, which primarily 
applies to DCMs and futures trading, reflects good regulatory practice 
that provides greater clarity and certainty. The proposed Appendix C to 
part 37 would serve as a streamlined source of guidance for new and 
existing SEFs when developing new swap products to list for trading and 
when monitoring their existing swap products.\552\ Based on the number 
of swap contracts that SEFs currently list for trading and will likely 
submit in the future, the Commission believes that a separate guidance 
in part 37 is appropriate for SEFs.
---------------------------------------------------------------------------

    \552\ The guidance in Appendix C to this part is based on best 
practices that were developed over the past three decades by the 
Commission and other market regulators in their review of product 
submissions. See Core Principles and Other Requirements for 
Designated Contract Markets, 75 FR 80572, 80582 (proposed Dec. 22, 
2010).
---------------------------------------------------------------------------

    The Commission believes that the proposed Appendix C to part 37 
also clarifies a SEF's obligations pursuant to Core Principle 3 because 
the guidance specifically addresses swap contracts and reflects the 
diverse and non-standardized nature of the swaps market, including 
swaps traded on SEFs. In particular, the guidance provides SEFs with 
additional flexibility for certain terms and conditions for non-
standardized swap contracts.\553\ This flexibility reflects the 
negotiated nature of non-standardized swap contracts. Similarly, the 
proposed Appendix C includes specific guidance for options on swap 
contracts. This guidance is not currently included in Appendix C to 
part 38, which focuses primarily on futures products. This proposed 
guidance, however, is consistent with previous Commission expectations 
with respect to contract design and transparency of option contract 
terms.
---------------------------------------------------------------------------

    \553\ The Commission notes that for purposes of establishing the 
terms and conditions of a swap that it lists for trading, a SEF has 
discretion to determine whether the swap is standardized or non-
standardized in nature. For example, the Commission understands that 
the swaps subject to the current trade execution requirement are 
generally standardized swaps. See supra notes 33-34 (describing the 
characteristics of the swaps that have been submitted as ``available 
to trade'').
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comments on all aspects of the proposed 
guidance to Core Principle 3 in Appendix C to part 37. In particular, 
the Commission requests comment on the following questions:
    (68) Is the scope and content of the proposed guidance 
appropriately tailored for swap contracts? If not, then please explain 
any changes.
    (69) Is the additional flexibility for certain terms and conditions 
for non-standardized swap contracts appropriate? If not, please explain 
why.

IX. Part 37--Subpart E: Core Principle 4 (Monitoring of Trading and 
Trade Processing)

    Core Principle 4 requires a SEF to establish and enforce rules or 
terms and conditions that define, or specifications that detail, the 
trading procedures to be used in entering and executing orders traded 
on or through the facilities of the SEF and procedures for trade 
processing of swaps on or through the facilities of the SEF.\554\ Core 
Principle 4 also requires a SEF to monitor trading in swaps to prevent 
manipulation, price distortion, and disruptions of the delivery or cash 
settlement process through surveillance, compliance, and disciplinary 
practices and procedures.\555\ As part of its monitoring 
responsibilities, a SEF must establish methods for conducting real-time 
monitoring of trading and comprehensive and accurate trade 
reconstructions.\556\ As described below, Sec. Sec.  37.401-408 further 
implement Core Principle 4 by establishing requirements that a SEF 
monitor trading activity on its facility and beyond its own market in 
certain circumstances.
---------------------------------------------------------------------------

    \554\ 7 U.S.C. 7b-3(f)(4). The Commission codified Core 
Principle 4 under Sec.  37.400. 17 CFR 37.400.
    \555\ Id.
    \556\ Id.
---------------------------------------------------------------------------

    The Commission received feedback from SEFs during the part 37 
implementation that certain Core Principle 4 requirements are 
unnecessarily broad and create impracticable monitoring burdens upon 
SEFs, especially those requiring a SEF to monitor activity beyond its 
own markets. Based on its experience, the Commission has assessed this 
feedback and proposes amendments that would establish more practical 
monitoring requirements. These amendments, which in many cases would 
narrow a SEF's monitoring obligations to trading activity on its own 
facility, allow a SEF greater discretion to devise its own monitoring 
systems and protocols to suit the products that it offers for trading 
in a manner compliant with Core Principle 4. The Commission also 
proposes several amendments to the regulations under Core Principle 4 
to conform to the proposed Appendix C to part 37, which sets forth 
guidance for SEFs to mitigate a swap contract's susceptibility to 
manipulation when developing new products and monitoring existing 
products.\557\
---------------------------------------------------------------------------

    \557\ See supra Section VIII.A.1.--Appendix C--Demonstration of 
Compliance that a Swap Contract is Not Readily Susceptible to 
Manipulation.
---------------------------------------------------------------------------

A. Sec.  37.401--General Requirements

    Section 37.401 currently implements Core Principle 4 by setting 
forth requirements for SEFs to monitor market activity for the purpose 
of detecting manipulation, price distortions, and disruptions.\558\ 
Existing Sec.  37.401(a) creates an ongoing obligation for a SEF to 
collect and evaluate data on its market participants' market activity 
to detect and prevent, among other things, disruptions to the physical-
delivery or cash-settlement process where possible.\559\ Existing Sec.  
37.401(b) requires a SEF to examine general market data in order to 
detect and prevent manipulative activity that would result in the 
failure of market prices to reflect the normal forces of supply and 
demand.\560\ Existing Sec.  37.401(c) requires a SEF to demonstrate an 
effective program for conducting real-time monitoring of trading for 
the purpose of detecting and resolving abnormalities.\561\ Existing

[[Page 62013]]

Sec.  37.401(d) requires a SEF to demonstrate the ability to 
comprehensively and accurately reconstruct daily trading activity.\562\
---------------------------------------------------------------------------

    \558\ 17 CFR 37.401.
    \559\ 17 CFR 37.401(a).
    \560\ 17 CFR 37.401(b).
    \561\ 17 CFR 37.401(c). The guidance to Core Principle 4 in 
Appendix B provides that an acceptable program may include some 
monitoring on a T+1 basis. 17 CFR part 37 app. B (guidance to Core 
Principle 4--paragraph (a)(1)--``General requirements'').
    \562\ 17 CFR 37.401(d).
---------------------------------------------------------------------------

    In the preamble to the SEF Core Principles Final Rule, the 
Commission clarified that Sec.  37.401(a) requires a SEF to monitor its 
market participants' trading activity and reference data beyond its own 
market on an ongoing basis in certain instances.\563\ The Commission 
also clarified that Sec.  37.401(b) requires a SEF to monitor and 
evaluate ``general market data,'' such as the pricing of the underlying 
commodity or a third-party index or instrument used as a reference 
price of its swaps.\564\ The Commission further clarified that the 
requirements with respect to ``general market data'' means that a SEF 
shall monitor and evaluate general market conditions related to its 
swaps.\565\ Despite commenters' concerns about the lack of available 
information to meet the scope of these requirements, the Commission 
stated that such monitoring would be necessary to comply with Core 
Principle 4.\566\
---------------------------------------------------------------------------

    \563\ SEF Core Principles Final Rule at 33528, 33530.
    \564\ Id. at 33528.
    \565\ Id.
    \566\ Id. at 33527-28. See also ISDA, Path Forward for 
Centralized Execution of Swaps 6 (2015) (explaining that a SEF 
should not be required to monitor other markets for manipulation 
because SEFs do not have, and cannot be expected to obtain, 
sufficient information about other marketplaces).
---------------------------------------------------------------------------

    The Commission proposes to amend Sec.  37.401 to establish more 
practical trade monitoring requirements that are based on information 
about trading activity that is actually accessible to SEFs and, 
therefore, are more consistent with current practice in swaps and other 
derivatives markets. First, the Commission proposes to clarify under 
proposed Sec.  37.401(a) that a SEF must conduct real-time market 
monitoring of ``trading activity'' on its own facility to identify (i) 
disorderly trading; (ii) any market or system anomalies; and (iii) 
instances or threats of manipulation, price distortion, and 
disruption.\567\ This proposed amendment, among other things, 
incorporates the existing requirement under Sec.  37.203(e) that 
requires a SEF to conduct real-time market monitoring.\568\ Second, the 
Commission proposes to specify under proposed Sec.  37.401(b) that a 
SEF has discretion to determine when to collect and evaluate data on 
its market participants' trading activity beyond its own market, i.e., 
as necessary to detect and prevent manipulation, price distortion, and, 
where possible, disruptions of the physical-delivery or cash-settlement 
process, rather than on an ``ongoing basis.'' \569\ This data would 
include market participants' trading in (i) the index or instrument 
used as a reference price; (ii) the underlying commodity for the listed 
swap; and (iii) any related derivatives markets.
---------------------------------------------------------------------------

    \567\ The Commission also proposes to renumber subsection (c) to 
subsection (a) and amend the requirement as described.
    \568\ The Commission notes that existing Sec.  37.203(e) 
specifies that a SEF must conduct real-time market monitoring of all 
trading activity on its system(s) or platform(s) to identify 
``disorderly trading and any market or system anomalies.'' As 
discussed above, the Commission is proposing to eliminate this 
provision and establish those requirements under proposed Sec.  
37.401(a) to streamline the existing regulations. See supra note 
438.
    \569\ The Commission proposes to renumber existing subsection 
(a) to subsection (b) and amend the requirement as described. In the 
adopting part 37, the Commission also clarified that ``market 
activity'' in existing Sec.  37.401(a) means the ``trading 
activity'' of a SEF's market participants. SEF Core Principles Final 
Rule at 33528. The Commission proposes a non-substantive revision to 
replace ``market activity'' with ``trading activity.''
---------------------------------------------------------------------------

    In proposing these changes, the Commission recognizes that Core 
Principle 4 does not explicitly mandate the existing requirements under 
Sec. Sec.  37.401(a)-(b) and has also learned that requiring a SEF to 
monitor trading activity beyond its own market on an ``ongoing basis'' 
has imposed impractical burdens, particularly given that many swaps 
trade both on multiple SEFs and on an OTC basis. For a swap subject to 
the trade execution requirement, a SEF is currently required to 
continually monitor trading for the same or similar swap listed on 
multiple SEFs. For a listed swap not subject to the requirement, the 
SEF must additionally monitor trading for the same swap or similar swap 
traded bilaterally away from a SEF.\570\ Given that many SEFs list the 
same or similar swaps that are traded bilaterally--with a large amount 
of related trading activity occurring away from a SEF's own market--
expecting each SEF to maintain an ongoing collection and monitoring 
program for these elements is impractical and not consistent with 
current practice in other derivatives markets.\571\ SEFs have also 
demonstrated that this scope and frequency of monitoring is difficult 
because they currently lack the capability to obtain sufficient trading 
information. Accordingly, the Commission's proposed changes are 
intended to align a SEF's obligation to monitor beyond its own market 
more closely with current practice and obligations in other derivatives 
markets, where there is not an ongoing monitoring requirement.
---------------------------------------------------------------------------

    \570\ For example, the Commission notes that multiple SEFs offer 
the same fixed-to-floating USD-denominated IRS in standard benchmark 
tenors that are currently subject to the trade execution 
requirement.
    \571\ For example, a SEF offering an FX non-deliverable forward 
cannot reasonably monitor over a dozen SEFs that offer equivalent 
non-deliverable forward products and the market participants 
engaging in hundreds of equivalent bilateral transactions away from 
a SEF.
---------------------------------------------------------------------------

    Given the practical challenges discussed above in complying with 
the existing Core Principle 4 monitoring requirements, the Commission 
believes that a SEF should monitor beyond its own market as necessary 
to detect and prevent manipulation, price distortion, and, where 
possible, disruptions of the physical-delivery or cash-settlement 
processes. Further, such monitoring should be conducted when necessary 
to detect manipulative activity that would result in the failure of the 
market price to reflect the normal forces of supply and demand. In such 
cases, the SEF should be able to determine the instances in which it 
needs to collect and evaluate data related to that activity. As 
proposed, the scope of this data corresponds to the existing 
requirements of Sec.  37.404, which require a SEF to have the ability 
to obtain this trading information.\572\ These amendments would ensure 
that SEFs can still collect additional information based on a 
legitimate need, but would also reduce the significant and otherwise 
duplicative effort among SEFs to collect and evaluate trading and other 
information on an ongoing basis. The Commission believes that these 
revised monitoring requirements not only reflect current practice in 
other markets, but also would continue to protect the integrity of the 
swaps markets.
---------------------------------------------------------------------------

    \572\ The Commission notes that a SEF may collect this data on 
market participants' trading activity directly from its market 
participants pursuant to Core Principle 5, which requires a SEF to 
establish and enforce rules that provide the authority to obtain 
information from its participants. 17 CFR 37.501. Further, Sec.  
37.503 requires a SEF to share information, as required by the 
Commission or as necessary and appropriate, to fulfill its 
regulatory responsibilities. 17 CFR 37.503. The Commission notes 
that it is proposing various amendments to the Core Principle 5 
regulations, as discussed below, but is maintaining these 
requirements. See infra Section X.--Part 37--Subpart F: Core 
Principle 5 (Ability to Obtain Information).
---------------------------------------------------------------------------

    The Commission also proposes to amend Sec.  37.401(c) to establish 
more practical monitoring requirements with respect to a SEF's 
obligation to monitor general market data. The Commission proposes to 
clarify that a SEF has the discretion to determine when to monitor and 
evaluate such data beyond its own market, i.e., as necessary to detect 
and prevent manipulative activity that would result in the failure of 
the market

[[Page 62014]]

price to reflect the normal forces of supply and demand.\573\ The 
Commission notes that the existing provision does not specify the 
required scope or frequency of monitoring such data, which is used to 
evaluate market conditions and includes, among other things, pricing in 
a third-party index or instrument used as a reference price. As noted 
further below with respect to monitoring requirements for cash-settled 
swaps, the Commission has observed that SEFs do not have full access to 
certain types of data, such as the pricing of proprietary third-party 
indexes.\574\ Therefore, providing a SEF with the discretion to monitor 
and evaluate general market data on an as-needed basis would align the 
requirement to SEF capabilities and current market practices.
---------------------------------------------------------------------------

    \573\ The Commission proposes to renumber existing subsection 
(b) to subsection (c) and amend the requirement as described.
    \574\ See infra Section IX.C.--Sec.  37.403--Additional 
Requirements for Cash-Settled Swaps (discussing the proposed 
elimination of the requirement to monitor the pricing of the 
reference price where a third-party index or instrument is used).
---------------------------------------------------------------------------

    Finally, the Commission proposes to consolidate the trade 
reconstruction requirements under existing Sec.  37.401(d) and existing 
Sec.  37.406 into a new proposed Sec.  37.401(d), which would require a 
SEF to have the ability to comprehensively and accurately reconstruct 
all trading activity on its facility for the purpose of detecting 
instances or threats of manipulation, price distortion, and 
disruptions.
    The Commission also proposes certain non-substantive changes to 
eliminate demonstration-based requirements under existing Sec. Sec.  
37.401(c)-(d). As noted above, the Commission proposes to set forth an 
affirmative monitoring requirement, rather than a demonstration 
requirement. The Commission notes that demonstration of compliance 
could otherwise be required upon Commission request under Sec.  
37.5(b), which requires a SEF to provide a written demonstration that 
it is in compliance with its obligations under the Act.\575\
---------------------------------------------------------------------------

    \575\ 17 CFR 37.5(b).
---------------------------------------------------------------------------

    The Commission further proposes to eliminate duplicative language 
and adopt various conforming changes to the guidance to Core Principle 
4 in Appendix B.\576\
---------------------------------------------------------------------------

    \576\ The Commission proposes these changes in paragraph (a)(1) 
to the guidance to Core Principle 4 in Appendix B. 17 CFR part 37 
app. B.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.401 and the associated guidance to Core Principle 4 in Appendix B. 
In particular, the Commission requests comment on the following 
question:
    (70) The Commission has observed that SEFs may provide input into 
market pricing information, such as third-party indexes, that is 
available to market participants, which includes executed prices, 
prices from executable or indicative bids and offers, views of trading 
specialists, or prices from related instruments in other markets. 
Should the Commission's general market monitoring requirements require 
SEFs to monitor this type of information--for example, pricing provided 
by its own trading specialists?

B. Sec.  37.402--Additional Requirements for Physical-Delivery Swaps

    For swaps settled by physical delivery, Sec.  37.402 requires that 
a SEF monitor each swap's terms and conditions as they relate to the 
underlying commodity market and monitor the ``availability of supply'' 
of the underlying commodity, as specified by the swap's delivery 
requirements.\577\ The Commission also provided additional guidance to 
Core Principle 4 in Appendix B to specify that a SEF should monitor the 
general ``availability'' of the commodity specified by the swap; the 
commodity's characteristics; the delivery locations; and if available, 
information related to the size and ownership of deliverable 
supplies.\578\ In the SEF Core Principles Final Rule, the Commission 
explained that using the phrase ``availability of supply'' and 
providing the associated guidance was intended to provide a SEF with 
additional flexibility in response to commenter feedback that the 
proposed regulation was, among other things, duplicative, unmanageable, 
and created the risk of conflicting conclusions.\579\
---------------------------------------------------------------------------

    \577\ 17 CFR 37.402.
    \578\ 17 CFR part 37 app. B (guidance to Core Principle 4--
paragraph (a)(2)--``Physical-delivery swaps'').
    \579\ See SEF Core Principles Final Rule at 33529 (explaining 
the Commission's revision of the proposed requirement that a SEF 
monitor whether the supply is ``adequate'' to the ``availability'' 
of the supply; and replacing detailed proposed requirements to 
monitor the supply, marketing, and ownership of the commodity to be 
physically delivered with similar guidance in Appendix B).
---------------------------------------------------------------------------

    The Commission proposes to clarify a SEF's monitoring obligations 
with respect to physical-delivery swaps under Sec.  37.402 to be 
consistent with the guidance in proposed Appendix C to part 37 and 
ensure that the SEF can comply with Core Principles 3 and 4.\580\ Among 
other things, a swap contract's terms and conditions should assure the 
availability of adequate deliverable supplies, such that the contract 
is not readily susceptible to price manipulation.\581\ To ensure that a 
swap contract's terms and conditions remain appropriately designed, 
Sec.  37.402 would require a SEF to (i) monitor the swap's terms and 
conditions as they relate to the underlying commodity market by 
reviewing the convergence between the swap's price and the price of the 
underlying commodity, and make a good-faith effort to resolve 
conditions that are interfering with convergence or notify the 
Commission of such conditions; and (ii) monitor the availability of the 
supply of the commodity specified by the delivery requirements of the 
swap, and make a good-faith effort to resolve conditions that threaten 
the adequacy of supplies or the delivery process or notify the 
Commission of such conditions.\582\
---------------------------------------------------------------------------

    \580\ Proposed Appendix C to part 37, among other things, 
provides related guidance on the design of physically-settled swap 
contracts that should be adopted by a SEF to minimize their 
susceptibility to manipulation. See paragraph (b) of the proposed 
Appendix C to part 37--``Guidance for physically-settled swaps.'' 17 
CFR part 37 app. C.
    \581\ Proposed Appendix C to part 37 specifies that a SEF should 
estimate the deliverable supply for which the swap is not readily 
susceptible to price manipulation. To assure the availability of 
adequate deliverable supplies, the swap contract terms and 
conditions, in particular, should be designed based upon an adequate 
assessment of the potential range of deliverable supplies and should 
account for variations in the patterns of production, consumption, 
and supply over a period of at least three years. See id. (paragraph 
(b)(iii)--``Accounting for variations in deliverable supplies'').
    \582\ The Commission also proposes to (i) amend the guidance to 
Core Principle 4 in Appendix B to define ``price convergence'' as 
the process whereby the price of a physically-delivered swap 
converges to the spot price of the underlying commodity as the swap 
nears expiration; and (ii) make conforming changes. 17 CFR part 37 
app. B.
---------------------------------------------------------------------------

    The Commission notes that Core Principles 3 and 4 place affirmative 
obligations on SEFs to permit trading only in swaps that are not 
readily susceptible to manipulation and prevent manipulation, price 
distortion, and disruptions of the delivery or cash-settlement process, 
respectively. As such, proposed Sec.  37.402 places affirmative 
obligations on a SEF to make a good-faith effort to resolve conditions 
that are interfering with convergence or that threaten the adequacy of 
supplies or the delivery process. The Commission recognizes, however, 
that a SEF may not always be able to resolve these conditions; 
therefore, proposed Sec.  37.402 allows the SEF to notify the 
Commission of such conditions.\583\
---------------------------------------------------------------------------

    \583\ A SEF should provide electronic notification to the 
Commission at [email protected] and DMO at 
[email protected].
---------------------------------------------------------------------------

    The Commission further proposes corresponding amendments to the 
associated guidance to Core Principle 4

[[Page 62015]]

in Appendix B.\584\ The Commission proposes a non-substantive revision 
to clarify that a SEF should monitor physical-delivery swaps listed on 
its facility. To conform to Core Principle 4, the Commission also 
proposes to clarify that a SEF should monitor for conditions that may 
cause a swap to become susceptible to manipulation, price distortion, 
or disruptions; \585\ such conditions would include those that 
influence the convergence between the swap's price and the price of the 
underlying commodity. This proposed language would conform to the 
proposed guidance for physically-settled swaps in the proposed Appendix 
C to part 37, which states that a physically-settled swap contract's 
terms and conditions should be designed to avoid any impediments to the 
delivery of the commodity so as to promote convergence between the 
value of the swap contract and the cash market value of the commodity 
at the expiration of the swap contract.\586\
---------------------------------------------------------------------------

    \584\ 17 CFR part 37 app. B (guidance to Core Principle 4--
paragraph (a)(2)--``Physical-delivery swaps'').
    \585\ Id.
    \586\ See 17 CFR part 37 app. C (paragraph (b)(iv) of the 
proposed Appendix C to part 37--``Contract terms and conditions'').
---------------------------------------------------------------------------

    The Commission also proposes a non-substantive change to eliminate 
the demonstration-based requirement under Sec.  37.402. As noted above, 
the Commission proposes to set forth an affirmative monitoring 
requirement for SEFs, rather than a demonstration requirement. The 
Commission notes that demonstration of compliance could otherwise be 
required upon Commission request under Sec.  37.5(b), which requires a 
SEF to provide a written demonstration that it is in compliance with 
its obligations under the Act.\587\
---------------------------------------------------------------------------

    \587\ 17 CFR 37.5(b).
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.402 and the associated guidance to Core Principle 4 in Appendix B.

C. Sec.  37.403--Additional Requirements for Cash-Settled Swaps

    For cash-settled swaps, Sec.  37.403(a) requires that a SEF monitor 
the pricing of the reference price used to determine cash flows or 
settlement of a swap.\588\ Where the reference price is formulated or 
computed by the SEF, Sec.  37.403(b) requires a SEF to demonstrate that 
it monitors the continued appropriateness of its methodology for 
deriving that price.\589\ Where the reference price relies on a third-
party index or instrument, Sec.  37.403(c) requires a SEF to 
demonstrate that it monitors the continued appropriateness of the index 
or instrument.\590\ The Commission provided additional guidance to Core 
Principle 4 in Appendix B to specify that a SEF should monitor pricing 
abnormalities in the index or instrument used to calculate the 
reference price to avoid manipulation, price disruptions, or market 
distortions.\591\ For self-formulated or self-computed reference 
prices, the SEF should amend the existing methodology or impose new 
methodologies where such threats exist. For pricing based on a third-
party index or instrument, a SEF should conduct due diligence to ensure 
that the contract is not susceptible to manipulation.\592\
---------------------------------------------------------------------------

    \588\ 17 CFR 37.403(a).
    \589\ 17 CFR 37.403(b).
    \590\ 17 CFR 37.403(c).
    \591\ 17 CFR part 37 app. B (guidance to Core Principle 4--
paragraph (a)(3)--``Cash-settled swaps''). See SEF Core Principles 
Final Rule at 33529 (stating that market participants may have 
incentives to disrupt or manipulate reference prices for cash-
settled swaps and stating that SEFs must monitor the pricing of the 
reference price in order to comply with Core Principle 4's 
requirement to prevent manipulation, price distortion, and 
disruptions of the cash settlement process).
    \592\ Id.
---------------------------------------------------------------------------

    Based on its experience, the Commission acknowledges that the 
requirement imposed by Sec.  37.403(a) to monitor the methodologies 
behind third-party indexes or instruments is not realistic due to the 
proprietary nature of these indexes and instruments. The Commission has 
observed that many SEFs offer swaps for which pricing is based on 
benchmark prices or benchmark indices owned or administered by third 
parties, such as the Intercontinental Exchange, Inc. (``ICE''),\593\ 
IHS Markit Ltd. (``IHS Markit''),\594\ and the European Money Markets 
Institute (``EMMI'').\595\ For example, many SEFs offer IRS for trading 
that rely on LIBOR or EURIBOR as the underlying benchmark, which are 
based upon submissions from panel banks. The Commission believes that 
requiring a SEF to monitor the inputs and calculations involved in 
ICE's or EMMI's methodologies when calculating their respective 
benchmarks on an ongoing basis is impractical.\596\ The Commission 
understands that as a general matter, certain aspects of these 
benchmarks remain proprietary in nature. Therefore, the Commission 
acknowledges that SEFs do not necessarily have full access to the 
information to monitor trading to detect disruptions or manipulations 
of indexes or reference rates administered by other industry 
participants. Further, the Commission notes that these entities are 
subject to their own monitoring and oversight mechanisms.\597\
---------------------------------------------------------------------------

    \593\ ICE serves as the current administrator for ICE Swap Rate 
(formerly known as ISDAFix), which serves as a benchmark for swap 
rates and spreads for IRS. ICE, About ICE Swap Rate, https://www.theice.com/iba/ice-swap-rate. ICE also serves as the current 
administrator for ICE LIBOR (formerly known as BBA LIBOR), which is 
a widely-adopted benchmark for short-term interest rates that is 
used to specify the floating rate for fixed-to-floating IRS. ICE, 
ICE Libor-Overview, https://www.theice.com/iba/libor.
    \594\ IHS Markit owns and operates several tradeable CDS indices 
that are based on a basket of single-name CDS. IHS Markit, Indices, 
https://ihsmarkit.com/products/indices.html.
    \595\ EMMI, a non-profit making association whose members are 
national banking associations in the EU-member states, serves as the 
current administrator for Euribor and EONIA, which are widely-
adopted benchmarks for euro-denominated IRS. EMMI, 2 Benchmarks, 
https://www.emmi-benchmarks.eu.
    \596\ The Commission notes, however, that ICE and EMMI offer 
general information on the methodologies for calculating their 
respective benchmarks. For example, ICE states that it determines 
the ICE Swap Rate benchmark, which represents the mid-price for the 
fixed leg of IRS, based on tradeable quotes from regulated, 
electronic, multilateral trading venues. See ICE, Calculation of ICE 
Swap Rate from Tradeable Quotes, available at https://www.theice.com/publicdocs/ICE_Swap_Rate_Full_Calculation_Methodology.pdf; see also EMMI, 
Euribor Code of Conduct, available at https://www.emmi-benchmarks.eu/assets/files/D2712J-2014-Euribor%20Code%20of%20Conduct%2001Oct2013%20-%20Revised%201%20June%202016-%20final%20new.pdf.
    \597\ ICE maintains an oversight committee for LIBOR, which is 
responsible for reviewing the methodology, scope, and definition of 
the benchmark (including assessing its underlying market and usage); 
overseeing any changes to the benchmark; and overseeing and 
reviewing an associated code of conduct. ICE, Governance & 
Oversight, https://www.theice.com/iba/libor#methodology. EMMI 
maintains a Steering Committee, which is responsible for similar 
functions with respect to Euribor. EMMI, Steering Committee, https://www.emmi-benchmarks.eu/euribor-org/steering-committee.html.
---------------------------------------------------------------------------

    Based on these considerations, the Commission proposes to eliminate 
the requirement under Sec.  37.403(a) that SEFs monitor the ``pricing'' 
of the reference price used to determine cash flows or settlement.\598\ 
Where the reference price relies on a third-party index or instrument, 
a SEF would continue to be required under proposed Sec.  37.403(b) 
(existing Sec.  37.403(c)) to monitor the ``appropriateness'' of the 
index or instrument; the Commission, however, proposes to amend this 
requirement to additionally require a SEF to take appropriate action, 
including selecting an alternate index or instrument for deriving the 
reference price, where there is a threat of manipulation, price

[[Page 62016]]

distortion, or market disruption.\599\ The Commission believes that 
sufficient information is generally available to SEFs to comply with 
this proposed requirement. Based on this proposed requirement, the 
Commission expects that a SEF would take action with respect to its use 
of a third-party index or instrument for a listed swap contract that 
would inhibit the SEF's ability to prevent manipulation pursuant to 
Core Principles 3 and 4. Where a SEF formulates and computes the 
reference price, the Commission proposes to amend Sec.  37.403(b) to 
require a SEF to take appropriate action, including amending the 
methodology, where there is a threat of manipulation, price distortion, 
or market disruption.\600\ In contrast to the circumstances where a SEF 
relies on a third-party index or instrument, the SEF could monitor its 
own methodology for deriving the reference price.
---------------------------------------------------------------------------

    \598\ The Commission notes, however, that a SEF would be 
required under proposed Sec.  37.401(b) to monitor trading in the 
index or instrument used as a reference price.
    \599\ The Commission proposes to renumber existing subsection 
(c) to subsection (b) and amend the language as described.
    \600\ The Commission proposes to renumber existing subsection 
(b) to subsection (a) and amend the language as described.
---------------------------------------------------------------------------

    The Commission believes that these proposed amendments would 
provide greater clarity and establish more practical requirements for 
SEFs to monitor the reference prices, including the index or instrument 
used to calculate them, in a manner that is consistent with Core 
Principle 4. Further, the Commission believes that these proposed 
amendments are consistent with the proposed guidance in Appendix C to 
part 37 regarding the design of cash-settled swap contracts. Among 
other things, that guidance specifies that the SEF should ensure that 
the reference price used for its contract is not readily susceptible to 
manipulation by assessing its reliability as an indicator of cash 
market values in the underlying commercial market.\601\
---------------------------------------------------------------------------

    \601\ See 17 CFR part 37 app. C (paragraph (a)(ii) of the 
proposed Appendix C to part 37--``Reference price susceptibility to 
manipulation'').
---------------------------------------------------------------------------

    The Commission also proposes a non-substantive change to eliminate 
the demonstration-based requirements under Sec.  37.403. As noted 
above, the Commission proposes to set forth an affirmative monitoring 
requirement, rather than a demonstration requirement. The Commission 
notes that demonstration of compliance could otherwise be required upon 
Commission request under Sec.  37.5(b), which requires a SEF to provide 
a written demonstration that it is in compliance with its obligations 
under the Act.\602\
---------------------------------------------------------------------------

    \602\ 17 CFR 37.5(b).
---------------------------------------------------------------------------

    Given the changes to Sec.  37.403 proposed above, the Commission 
proposes to delete the existing associated guidance in Core Principle 4 
in Appendix B.\603\
---------------------------------------------------------------------------

    \603\ The Commission proposes to eliminate paragraph (a)(3).
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.403 and the elimination of the associated guidance to Core Principle 
4 in Appendix B.

D. Sec.  37.404--Ability To Obtain Information

    Section 37.404(a) provides that a SEF must demonstrate that it has 
access to sufficient information to assess whether trading in swaps 
listed on its market, in the index or instrument used as a reference 
price, or in the underlying commodity for its listed swaps is being 
used to affect prices on its market.\604\ Section 37.404(b) requires a 
SEF to have rules that require its market participants to keep records 
of their trading, including records of their activity in the index or 
instrument used as a reference price, the underlying commodity, and 
related derivatives markets; and make those records available to the 
SEF, its regulatory service provider if applicable, and the 
Commission.\605\ The Commission specified in the guidance to Core 
Principle 4 in Appendix B that a SEF may limit the application of these 
requirements to market participants who conduct ``substantial trading'' 
on its facility.\606\
---------------------------------------------------------------------------

    \604\ 17 CFR 37.404(a).
    \605\ 17 CFR 37.404(b).
    \606\ 17 CFR part 37 app. B (guidance to Core Principle 4--
paragraph (a)(4)--``Ability to obtain information'').
---------------------------------------------------------------------------

    The Commission proposes several amendments to the associated 
guidance to Core Principle 4 in Appendix B. In particular, the 
Commission proposes to eliminate a SEF's ability to limit the 
application of proposed Sec.  37.404(a) and proposed Sec.  37.404(b) to 
only those market participants who conduct ``substantial trading'' on 
its facility. The Commission notes that it has not provided SEFs with 
any additional guidance, e.g., volume-based metrics or similar factors, 
as to what constitutes ``substantial trading'' by a market participant. 
Eliminating this guidance would not only remove an ambiguity as to whom 
Sec.  37.404 applies, but also promote a more comprehensive and 
effective monitoring requirement that would require a SEF to have the 
ability to obtain information from all of its market participants, 
thereby better fulfilling the objectives of Core Principle 4.\607\ In 
addition, based on its experience, the Commission believes that market 
participants are keeping records of their related trading, so 
eliminating the ``substantial'' requirement should not impose 
additional burdens. In addition to this amendment, the Commission also 
proposes several non-substantive amendments to the guidance.\608\
---------------------------------------------------------------------------

    \607\ The Commission notes, however, that the scope of this 
requirement would be based on the proposed definition of ``market 
participant'' under Sec.  37.2(b), which would limit Sec.  37.404 to 
persons who access the SEF directly or through a third-party 
functionality, or otherwise direct an intermediary to trade on their 
behalf. See supra Section IV.B.2.a.--Applicability of Sec.  
37.404(b) to Market Participants.
    \608\ The Commission proposes to streamline and move the 
guidance that currently specifies that a SEF can adopt information-
sharing agreements with other trading venues or a third-party 
regulatory service provider where position and trading information 
is not available directly from market participants. The Commission 
proposes to move this guidance to paragraph (a) of the guidance to 
Core Principle 5 because the applicable requirements for a SEF to 
adopt information-sharing practices are addressed under proposed 
Sec.  37.503, as discussed below.
---------------------------------------------------------------------------

    The Commission also proposes a non-substantive change to eliminate 
the demonstration-based requirement under Sec.  37.404(a).\609\ As 
noted above, the Commission proposes to set forth an affirmative 
monitoring requirement, rather than a demonstration requirement. The 
Commission notes that demonstration of compliance could otherwise be 
required upon Commission request under Sec.  37.5(b), which requires a 
SEF to provide a written demonstration that it is in compliance with 
its obligations under the Act.\610\
---------------------------------------------------------------------------

    \609\ The Commission also proposes to eliminate similar 
associated guidance to Core Principle 4 in Appendix B.
    \610\ 17 CFR 37.5(b).
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.404 and the associated guidance to Core Principle 4 in Appendix B.

E. Sec.  37.405--Risk Controls for Trading

    Section 37.405 requires that a SEF establish and maintain risk 
control mechanisms to prevent and reduce the potential risk of market 
disruptions, including, but not limited to, market restrictions that 
pause or halt trading in market conditions prescribed by the SEF.\611\ 
The associated guidance to Core Principle 4 in Appendix B, among other 
things, provides examples of the different types of risk controls that 
a SEF may adopt based on whether or not they are appropriate to the 
characteristics of the trading platform or

[[Page 62017]]

market offered by the SEF.\612\ Among those types of controls, the 
guidance specifies that a SEF may establish clear error-trade and order 
cancellation policies.
---------------------------------------------------------------------------

    \611\ 17 CFR 37.405.
    \612\ 17 CFR part 37 app. B (guidance to Core Principle 4--
paragraph (a)(5)--``Risk controls for trading'').
---------------------------------------------------------------------------

    The Commission proposes two amendments to Sec.  37.405 to align the 
existing requirement with the proposed amendments to other Core 
Principle 4 regulations. First, the Commission proposes to clarify that 
a SEF is required to have risk control mechanisms to prevent and reduce 
market disruptions, as well as price distortions on their facility. 
This proposed change is consistent with Core Principle 4, which 
requires a SEF to monitor trading to prevent price distortions and 
disruptions to the delivery or cash settlement process.\613\ Second, 
the Commission proposes to limit this requirement to swaps trading 
activity occurring on a SEF's own facility, which would be consistent 
with the proposed changes to Sec.  37.401(a).
---------------------------------------------------------------------------

    \613\ 7 U.S.C. 7b-3(f)(4)(b).
---------------------------------------------------------------------------

    The Commission also proposes several amendments to the associated 
guidance to Core Principle 4 in Appendix B. First, the Commission 
proposes to eliminate the reference to intraday position limit risk 
controls, which generally do not apply to a SEF because the Commission 
has yet to establish position limit rules for swaps. Second, the 
Commission proposes to clarify that a SEF's risk controls should be 
adapted to the swap contracts that it lists for trading; this amendment 
does not reflect a substantive change, but rather would be consistent 
with the proposed guidance in Appendix C to part 37, which provides 
that a SEF may adapt certain risk controls for swap contracts based on 
whether they are standardized or non-standardized.\614\ Third, the 
Commission proposes to eliminate the language specifying that a SEF may 
adopt an error trade policy; the Commission notes that, as described 
above, proposed Sec.  37.203(e) would require a SEF to adopt an error 
trade policy for trading on its facility. The Commission also proposes 
to make several other non-substantive conforming and clarifying 
amendments to the guidance.
---------------------------------------------------------------------------

    \614\ See supra Section VIII.A.1.--Appendix C--Demonstration of 
Compliance that a Swap Contract is Not Readily Susceptible to 
Manipulation.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.405 and the associated guidance to Core Principle 4 in Appendix B.

F. Sec.  37.406--Trade Reconstruction

    Section 37.406 requires that a SEF have the ability to 
comprehensively and accurately reconstruct all trading on its facility, 
and that audit-trail data and reconstructions be made available to the 
Commission in a form, manner, and time that is acceptable to the 
Commission.\615\
---------------------------------------------------------------------------

    \615\ 17 CFR 37.406.
---------------------------------------------------------------------------

    Given the proposed consolidation with Sec.  37.401(d), as described 
above, the Commission proposes to eliminate Sec.  37.406.\616\ The 
Commission also notes that the requirement to make information 
available to the Commission is already addressed under Core Principle 5 
regulations, discussed further below.\617\
---------------------------------------------------------------------------

    \616\ As discussed above, proposed Sec.  37.401(d) would require 
a SEF to have the ability to comprehensively and accurately 
reconstruct all trading activity on its facility for the purpose of 
detecting instances or threats of manipulation, price distortion, 
and disruptions.
    \617\ See infra Section X.B.--Sec.  37.502--Provide Information 
to the Commission.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of the proposed 
elimination of Sec.  37.406.

G. Sec.  37.407--Regulatory Service Provider; Sec.  37.408--Additional 
Sources for Compliance 618
---------------------------------------------------------------------------

    \618\ The Commission proposes to renumber Sec. Sec.  37.407-408 
to Sec. Sec.  37.406-407, given the proposed elimination of existing 
Sec.  37.406.
---------------------------------------------------------------------------

    The Commission is not proposing any amendments to Sec. Sec.  
37.407-408.

X. Part 37--Subpart F: Core Principle 5 (Ability To Obtain Information)

    Core Principle 5 requires a SEF to establish and enforce rules that 
allow the facility to obtain any ``necessary information'' to perform 
any of the functions described in CEA section 5h; provide the 
information to the Commission upon request; and have the capacity to 
carry out international information-sharing agreements as the 
Commission may require.\619\ The Commission further implemented Core 
Principle 5 under Sec. Sec.  37.501-504. Based on the Commission's 
understanding of current SEF operational practices, the Commission is 
proposing several amendments, including non-substantive changes, to 
these implementing regulations, as described below.
---------------------------------------------------------------------------

    \619\ 7 U.S.C. 7b-3(f)(5). The Commission codified Core 
Principle 5 under Sec.  37.500. 17 CFR 37.500.
---------------------------------------------------------------------------

A. Sec.  37.501--Establish and Enforce Rules

    Section 37.501 specifies that a SEF's rules must allow it to obtain 
sufficient information to fulfill its functions and obligations under 
part 37, including the capacity to carry out such international 
information-sharing agreements as the Commission may require.\620\ The 
Commission proposes a non-substantive amendment to eliminate the 
duplicative language under Sec.  37.501 regarding a SEF's capacity to 
carry out international information-sharing agreements. The Commission 
notes that this requirement is already established under Core Principle 
5.
---------------------------------------------------------------------------

    \620\ 17 CFR 37.501.
---------------------------------------------------------------------------

B. Sec.  37.502--Provide Information to the Commission

    Existing Sec.  37.502 requires a SEF to adopt rules that allow it 
to collect information on a routine basis, allow for the collection of 
non-routine data from its market participants, and allow for its 
examination of books and records kept by its market participants.\621\
---------------------------------------------------------------------------

    \621\ 17 CFR 37.502.
---------------------------------------------------------------------------

    The Commission proposes to eliminate existing Sec.  37.502.\622\ 
The Commission notes that the language of this requirement is 
duplicative of the general requirement that SEFs have the ability to 
obtain information from their market participants, as already set forth 
in Core Principle 5 and Sec.  37.501. Eliminating the requirement that 
a SEF must have rules to allow it to examine books and records is also 
consistent with the Commission's proposed amendment to Sec.  37.203(b), 
which would replace a similar existing requirement with a more general 
rule that would allow a SEF to tailor its rules for collecting books 
and records from market participants.\623\
---------------------------------------------------------------------------

    \622\ The Commission proposes to renumber existing Sec.  37.503 
to Sec.  37.502 and retitle the provision to ``Provide information 
to the Commission'' from ``Collection of information'' based on the 
proposed changes described below.
    \623\ See supra Section VII.B.2.--Sec.  37.203(b)--Authority to 
Collect Information (proposing an amendment to require that a SEF 
have the authority to collect information required to be kept by 
persons subject to the SEF's recordkeeping rules).
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of the proposed 
elimination of existing Sec.  37.502.

C. Sec.  37.503--Information-Sharing 624
---------------------------------------------------------------------------

    \624\ The Commission proposes to renumber existing Sec.  37.504 
to Sec.  37.503 and retitle the provision to ``Information-sharing'' 
from ``Provide information to the Commission'' based on the proposed 
changes described below.
---------------------------------------------------------------------------

    Existing Sec.  37.504 requires a SEF to share information with 
other regulatory organizations, data repositories, and third-party data 
reporting services as required by the Commission or as otherwise 
necessary and appropriate to fulfill its self-regulatory and reporting

[[Page 62018]]

responsibilities.\625\ Section 37.504 also states that appropriate 
information-sharing agreements can be established with the specified 
entities or the Commission can act in conjunction with the SEF to carry 
out such information sharing.
---------------------------------------------------------------------------

    \625\ 17 CFR 37.504.
---------------------------------------------------------------------------

    The Commission proposes to establish a more straightforward and 
streamlined information-sharing requirement by eliminating the 
specifically enumerated list of entities with which a SEF must share 
information and adopting conforming amendments. Instead, a SEF would be 
required to generally share information, as required by the Commission, 
or as appropriate to fulfill its self-regulatory and reporting 
responsibilities. Rather than limiting the types of entities that a SEF 
may share information with, however, a SEF would have the flexibility 
to share information with third parties that it may utilize to carry 
out those responsibilities, including affiliated entities. This broader 
and more adaptive approach to information-sharing practices would 
better accommodate, for example, a SEF's ability to use different types 
of regulatory service providers pursuant to the proposed amendments 
under Sec.  37.204. The Commission emphasizes, however, that SEFs would 
not be required to share information with competitor entities. In 
relevant situations where information or data may need to be shared 
across different markets to help identify manipulation, price 
distortions or other disruptions, for example, the Commission 
anticipates that it will continue working in conjunction with SEFs to 
help establish such information-sharing arrangements.
    The Commission also proposes a non-substantive revision by moving 
certain provisions from the existing guidance to Core Principle 4 to 
the guidance to Core Principle 5 in Appendix B.\626\ This proposed 
guidance would specify that if position and trading information is 
available through information-sharing agreements with other trading 
venues or a third-party regulatory service provider, then the SEF 
should cooperate, to the extent practicable, in such information-
sharing agreements.
---------------------------------------------------------------------------

    \626\ The Commission proposes to move this guidance from 
paragraph (a)(4) to Core Principle 4 to paragraph (a) to Core 
Principle 5 in Appendix B.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.503 and the associated guidance to Core Principle 5 in Appendix B.

D. Sec.  37.504--Prohibited Use of Data Collected for Regulatory 
Purposes \627\
---------------------------------------------------------------------------

    \627\ The Commission proposes to retitle Sec.  37.504 to 
``Prohibited use of data collected for regulatory purposes'' from 
``Information-sharing agreements'' based on the proposed changes 
described below.
---------------------------------------------------------------------------

    Section 37.7--``Prohibited use of data collected for regulatory 
purposes''--prohibits a SEF from using, for business or marketing 
purposes, any proprietary data or personal information it collects or 
receives, from or on behalf of any person, for the purpose of 
fulfilling its regulatory obligations, unless the person clearly 
consents to the SEF's use of such data or information in such 
manner.\628\ The purpose of this provision is to protect customer 
privacy and prevent a SEF from using information, obtained for 
compliance purposes, to otherwise advance its commercial 
interests.\629\ Section 37.7 also provides that a SEF, where necessary 
for regulatory purposes, may share such data or information with one or 
more SEFs or DCMs registered with the Commission.\630\
---------------------------------------------------------------------------

    \628\ 17 CFR 37.7.
    \629\ SEF Core Principles Final Rule at 33492.
    \630\ 17 CFR 37.7.
---------------------------------------------------------------------------

    The Commission proposes to create a more cohesive rule with respect 
to information-sharing practices under Core Principle 5 by moving 
existing Sec.  37.7 to a new proposed Sec.  37.504 and amending the 
current language of the requirement. Consistent with the existing 
prohibition, the Commission proposes that a SEF that shares such 
proprietary data or personal information with a third party shall 
ensure that that third party does not use the data or information for 
business or marketing purposes, unless the person from whom such data 
or information was obtained clearly consents to its use for business or 
marketing purposes (including consent to use by those third parties 
with whom the SEF may share such information). This proposed amendment 
corresponds to the Commission's other proposed amendments that would 
expand the scope of entities with whom a SEF may share information, 
including Sec.  37.503, which would provide a SEF with greater 
flexibility in selecting a third-party provider to fulfill its self-
regulatory and reporting responsibilities; and Sec.  37.204, which 
would allow the SEF to utilize a broader scope of third-party entities, 
including non-registered affiliates to provide regulatory services, 
subject to Commission approval.\631\
---------------------------------------------------------------------------

    \631\ In this regard, the Commission notes that under its 
proposed amendments to Sec.  37.204, a SEF would be permitted to 
contract with any entity for the provision of services to assist in 
complying with the Act and Commission regulations, subject to 
Commission approval. See supra Section VII.C.1.--Sec.  37.204(a)--
Use of Regulatory Service Provider Permitted.
---------------------------------------------------------------------------

    In the course of using such a provider, a SEF may need to share 
proprietary data or personal information with that third party. To the 
extent that Sec.  37.504 would continue to limit SEFs from using this 
type of information for non-regulatory purposes, the Commission 
believes that the objective of protecting customer privacy and 
preventing the use of data for commercial purposes should also equally 
apply to third parties that obtain access to such data or information 
from a SEF for regulatory purposes. The Commission believes that the 
proposed amendments achieve this objective.
Request for Comment
    The Commission requests comments on all aspects of proposed Sec.  
37.504.

XI. Part 37--Subpart G: Core Principle 6 (Position Limits or 
Accountability)

    Core Principle 6 requires a SEF that is a trading facility to 
adopt, as is necessary and appropriate, position limits or position 
accountability levels for each swap contract to reduce the potential 
threat of market manipulation or congestion.\632\ For contracts that 
are subject to a federal position limit under CEA section 4a(a), the 
SEF must set its position limits at a level that is no higher than the 
limit established by the Commission; and monitor positions established 
on or through the SEF for compliance with the Commission's limit and 
the limit, if any, set by the SEF.\633\
---------------------------------------------------------------------------

    \632\ 7 U.S.C. 7b-3(f)(6). The Commission codified Core 
Principle 6 under Sec.  37.600. 17 CFR 37.600.
    \633\ Id.
---------------------------------------------------------------------------

A. Sec.  37.601--Additional Sources for Compliance; Guidance to Core 
Principle 6 in Appendix B

    Section 37.601 further implements Core Principle 6 and specifies 
that until such time that compliance is required under part 151 of the 
Commission's regulations, a SEF may refer to the associated guidance 
and/or acceptable practices set forth in Appendix B to part 37.\634\ 
The guidance to Core Principle 6 in Appendix B provides a SEF with 
reasonable discretion to comply with Core Principle 6 and sets forth 
how a SEF may demonstrate compliance for trading that occurs on its own 
market.\635\ The Commission notes that it has proposed new language for 
Sec.  37.601 and new corresponding guidance to Core Principle 6 in 
Appendix B in a re-proposal of a position limits

[[Page 62019]]

rulemaking, pending further Commission action.\636\
---------------------------------------------------------------------------

    \634\ 17 CFR 37.601.
    \635\ 17 CFR part 37 app. B (guidance to Core Principle 6--
paragraph (a)--``Guidance'').
    \636\ Position Limits for Derivatives, 81 FR 96704 (proposed 
Dec. 30, 2016).
---------------------------------------------------------------------------

    The Commission proposes to eliminate the language of Sec.  37.601 
and the existing corresponding guidance to Core Principle 6, based on 
its intent to address this issue in a separate rulemaking. Until that 
time, the Commission clarifies that SEFs have reasonable discretion to 
determine how to comply with Core Principle 6 pursuant to Core 
Principle 1.\637\ This approach is consistent with the existing 
approach under Sec.  37.601 and the associated guidance to Core 
Principle 6.
---------------------------------------------------------------------------

    \637\ 7 U.S.C. 7b-3(f)(1).
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of the proposed 
elimination of Sec.  37.601 and the associated guidance to Core 
Principle 6 in Appendix B.

XII. Part 37--Subpart H: Core Principle 7 (Financial Integrity of 
Transactions); Sec.  39.12--Participant and Product Eligibility

    Core Principle 7 requires a SEF to establish and enforce rules and 
procedures for ensuring the financial integrity of swaps entered on or 
through the facilities of the SEF, including the clearance and 
settlement of the swaps pursuant to CEA section 2(h)(1).\638\ As 
described further below, Sec. Sec.  37.700-703 implement Core Principle 
7 by establishing requirements for SEFs to facilitate the processing 
and routing of swap transactions to a DCO for clearing. Section 
39.12(b)(7), which implements Core Principle C for DCOs, sets forth 
corresponding requirements for registered DCOs that specify the time 
frame for acceptance or rejection of transactions submitted to the 
registered DCO from DCMs and SEFs.\639\
---------------------------------------------------------------------------

    \638\ The Commission codified Core Principle 7 under Sec.  
37.700. 17 CFR 37.700.
    \639\ 17 CFR 39.12(b)(7). Core Principle C for DCOs, among other 
things, requires that each DCO establish appropriate standards for 
determining the eligibility of agreements, contracts, or 
transactions submitted to the DCO for clearing. 7 U.S.C. 7a-
1(c)(2)(C)(i)(II). Section 39.12(b) implements Core Principle C for 
DCOs by setting forth product eligibility requirements. 17 CFR 
39.12(b).
---------------------------------------------------------------------------

    As described further below, the Commission is proposing several 
amendments to the implementing regulations and Sec.  39.12(b)(7), 
including amendments to certain ``straight-through processing'' 
obligations that apply to SEFs, DCMs, and DCOs.\640\
---------------------------------------------------------------------------

    \640\ The Commission notes that Sec.  39.12(b)(7) also applies 
to the acceptance or rejection for clearing by a DCO of (i) futures 
and options on futures transactions and (ii) swaps submitted by a 
DCM. Accordingly, the Commission's proposed amendments to Sec.  
39.12(b)(7) would also apply to those transactions. See infra 
Section XII.B.2.b.(2)--Sec.  39.12(b)(7)(ii)--AQATP Standard for 
Registered DCOs.
---------------------------------------------------------------------------

A. Sec.  37.701--Required Clearing

    Section 37.701 requires that transactions executed on or through a 
SEF that are subject to the clearing requirement, or are voluntarily 
cleared by the counterparties, must be cleared through a registered DCO 
or an exempt DCO.\641\
---------------------------------------------------------------------------

    \641\ 17 CFR 37.701.
---------------------------------------------------------------------------

    The Commission proposes to amend Sec.  37.701 to require a SEF to 
establish a direct and independent clearing agreement with each 
registered DCO or exempt DCO to which the SEF submits swap transactions 
for clearing.\642\ During the part 37 implementation, the Commission 
observed that some SEFs would route swap transactions to certain exempt 
DCOs for clearing without having established a direct clearing 
agreement with those DCOs. Rather than enter a direct agreement with 
the exempt DCO, the SEF would establish the capacity to route 
transactions through the use of a third-party service provider. Such 
routing arrangements occurred pursuant to a services agreement between 
the SEF and the provider; the provider, in turn, maintained a separate 
agreement with the exempt DCO.
---------------------------------------------------------------------------

    \642\ The Commission proposes to renumber the existing 
requirement under Sec.  37.701 as subsection (a) based on a new 
requirement proposed under subsection (b), described below.
---------------------------------------------------------------------------

    A SEF's use of a third-party service provider to route swap 
transactions to a DCO for clearing may generally be appropriate, but 
the Commission believes that the indirect routing of transactions for 
clearing must occur pursuant to a direct and independent clearing 
services agreement between the SEF and each DCO utilized by the SEF. 
The Commission believes that maintaining a direct agreement between a 
SEF and DCO, notwithstanding the use of a third-party provider, is 
consistent with Sec.  37.702(b), which requires each SEF to coordinate 
with a DCO to develop rules and procedures to facilitate prompt and 
efficient processing of transactions in accordance with the DCO's 
obligations under Sec.  39.12(b)(7)(i)(A).\643\ Such an agreement would 
provide greater certainty to market participants that the SEF has the 
appropriate processes to facilitate swaps clearing. The Commission also 
believes that the terms established in a direct clearing agreement 
between the SEF and DCO would help the SEF and DCO resolve any problems 
that arise at the DCO that could diminish the SEF's ability to submit 
transactions for clearing.
---------------------------------------------------------------------------

    \643\ Section 39.12(b)(7)(i)(A) requires each DCO to coordinate 
with DCMs and SEFs to develop rules and procedures to facilitate 
prompt, efficient, and accurate processing of transactions to the 
DCO for clearing. 17 CFR 39.12(b)(7)(i)(A). As discussed below, 
Sec.  39.12(b)(7)(i)(A), as amended, would apply to both the 
processing and routing of transactions to the DCO for clearing. See 
infra Section XII.B.2.b.(1)--Sec.  37.702(b)(1) and Sec.  
39.12(b)(7)(i)(A)--``Prompt, Efficient, and Accurate'' Standard.
---------------------------------------------------------------------------

    The Commission also proposes a non-substantive amendment to Sec.  
37.701 to eliminate ``or through'' from the language of the existing 
requirement. The Commission notes that this proposed amendment is a 
conforming change to other part 37 regulations and does not affect the 
scope of transactions that are required to be cleared pursuant to the 
clearing requirement in CEA section 2(h)(1)(A).\644\
---------------------------------------------------------------------------

    \644\ The Commission notes that Core Principle 7 refers to swaps 
``entered on or through'' the SEF, but notes that the existing 
requirement under Sec.  37.701 specifically applies to ``executed'' 
transactions, which are submitted for clearing.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.701.

B. Sec.  37.702--General Financial Integrity

1. Sec.  37.702(a)
    Section 37.702(a) requires a SEF to establish minimum financial 
standards for its members, which include at a minimum a requirement 
that each member qualifies as an ECP pursuant to CEA section 
1a(18).\645\ The Commission proposes a non-substantive amendment to 
Sec.  37.702(a) to replace the term ``member'' with ``market 
participant.'' The Commission notes that its proposed definition of 
``market participant'' under Sec.  37.2(b) would capture the universe 
of persons and entities that participate on SEFs and would be subject 
to minimum financial requirements, including a SEF's members.\646\
---------------------------------------------------------------------------

    \645\ 17 CFR 37.702(a).
    \646\ See supra Section IV.B.2.--Sec.  37.2(b)--Definition of 
``Market Participant.'' The Commission notes that CEA section 2(e) 
limits swaps trading to ECPs, as defined by section 1a(18) of the 
Act. 7 U.S.C. 2(e).
---------------------------------------------------------------------------

2. Sec.  37.702(b) and Sec.  39.12(b)(7)--Time Frame for Clearing
    Existing Sec.  37.702(b) and Sec.  39.12(b)(7) require SEFs and 
registered DCOs, respectively, to coordinate with one another to 
facilitate the clearing of swap transactions executed on or through the 
SEF.\647\ The two provisions are intended to ensure that SEFs and 
registered DCOs coordinate and work together to

[[Page 62020]]

facilitate the ``straight-through processing'' of transactions from 
execution through clearing,\648\ which the Divisions have described as 
the ``near[-]instantaneous acceptance or rejection of each trade. . . 
.'' \649\ In order for a DCO to clear a SEF swap transaction, existing 
Sec.  37.702(b)(1) requires a SEF to ensure that it has the capacity to 
route transactions to the DCO in a manner acceptable to the registered 
DCO for purposes of clearing.\650\ Existing Sec.  37.702(b)(2) requires 
a SEF to coordinate with each registered DCO to which it submits 
transactions for clearing to develop rules and procedures to facilitate 
``prompt and efficient'' transaction processing in accordance with the 
requirements of Sec.  39.12(b)(7).\651\ Section 39.12(b)(7)(i)(A) 
requires each registered DCO to coordinate with a relevant SEF or DCM 
to develop rules and procedures to facilitate ``prompt, efficient, and 
accurate'' processing of all transactions, including swaps submitted to 
the registered DCO for clearing by the SEF or DCM (emphasis 
added).\652\
---------------------------------------------------------------------------

    \647\ The Commission notes that part 39 only applies to 
registered DCOs and does not apply to exempt DCOs. Accordingly, the 
Commission notes that Sec.  37.702(b) only refers to registered 
DCOs.
    \648\ Customer Clearing Documentation, Timing of Acceptance for 
Clearing, and Clearing Member Risk Management, 77 FR 21278, 21283 
(Apr. 9, 2012) (``Timing of Acceptance for Clearing Final Rule'').
    \649\ 2013 Staff STP Guidance at 2. See also infra notes 658-659 
and accompanying discussion. The Commission has previously stated 
that the ``acceptance or rejection for clearing in close to real 
time is crucial for both effective risk management and for the 
efficient operation of trading venues.'' Timing of Acceptance for 
Clearing Final Rule at 21285. The Commission notes that Sec.  
39.12(b)(7) applies to a DCO with respect to (i) futures and options 
on futures transactions and (ii) swaps submitted by a DCM for 
clearing. To the extent that the Commission is addressing the 
proposed amendments to Sec.  39.12(b)(7), as discussed further 
below, in conjunction with proposed amendments to Sec.  
37.702(b)(2), the discussion focuses on swaps routed by a SEF to a 
DCO for clearing. See also infra note 673 (noting that at this time 
the Commission is not proposing corresponding amendments to Sec.  
38.601(b), which establishes analogous processing and routing 
requirements for DCMs). As discussed below, however, the proposed 
amendments to Sec.  39.12(b)(7) would also apply to those 
transactions, including swaps, futures, and options on futures, 
submitted by a DCM to a DCO for clearing. See infra Section 
XII.B.2.b.(2)--Sec.  39.12(b)(7)(ii)--AQATP Standard for Registered 
DCOs.
    \650\ 17 CFR 37.702(b)(1).
    \651\ 17 CFR 37.702(b)(2).
    \652\ 17 CFR 39.12(b)(7)(i)(A). The Commission notes that 
``transactions'' refers to swaps submitted by a SEF or DCM, as well 
as futures and options on futures submitted by a DCM.
---------------------------------------------------------------------------

    Sections 39.12(b)(7)(ii)-(iii) each further require a registered 
DCO to establish standards to accept or reject transactions for 
clearing as quickly as would be technologically practicable as if fully 
automated systems were used (the ``AQATP'' standard).\653\ Section 
39.12(b)(7)(ii) applies this standard to registered DCOs for 
transactions, including swaps, that are ``executed competitively on or 
subject to the rules'' of a SEF or DCM and requires the registered DCO 
to accept or reject a transaction for clearing pursuant to the AQATP 
standard ``after execution'' of the transaction.\654\ For swaps ``not 
executed on or subject to the rules'' of a SEF or DCM or ``executed 
non-competitively on or subject to the rules'' of a SEF or DCM, Sec.  
39.12(b)(7)(iii) requires a registered DCO to accept or reject a swap 
for clearing pursuant to the AQATP standard ``after submission'' of the 
swap to the DCO.\655\ In adopting the AQATP standard, the Commission 
noted that it intended for the requirement to track the evolving 
industry standard, based on technological developments.\656\
---------------------------------------------------------------------------

    \653\ 17 CFR 39.12(b)(7).
    \654\ 17 CFR 39.12(b)(7)(ii).
    \655\ 17 CFR 39.12(b)(7)(iii).
    \656\ Timing of Acceptance for Clearing Final Rule at 21285-86.
---------------------------------------------------------------------------

    The Divisions subsequently issued the 2013 Staff STP Guidance to 
further clarify the application of ``straight-through processing'' 
obligations for swaps that apply to SEFs, DCMs, and DCOs under Sec.  
37.702(b), Sec.  38.601(b),\657\ and Sec.  39.12(b)(7), 
respectively.\658\ The Divisions stated that the standard for straight-
through processing, i.e., the ``near instantaneous acceptance or 
rejection'' of a transaction by a DCO, is critical to providing 
certainty of execution and clearing, which in turn would reduce costs 
and reduce risk.\659\ To achieve that standard, the guidance expressed 
the view that SEFs, DCMs, and registered DCOs must facilitate swap 
transaction processing through several requirements. With respect to 
SEFs, the guidance expressed the view that a SEF must ensure that a 
clearing FCM has been identified in advance for each party on an order-
by-order basis; and facilitate the mandatory pre-execution screening of 
orders by each clearing FCM for compliance with risk-based limits, 
i.e., ``pre-execution credit screening,'' in accordance with a clearing 
FCM's obligations under Sec.  1.73.\660\ The guidance also expressed 
the view that a DCO must meet a specific time frame, i.e., ten seconds, 
to satisfy its obligation under the AQATP standard.\661\
---------------------------------------------------------------------------

    \657\ Section 38.601(b) applies to DCMs and establishes 
processing and routing requirements that are analogous to Sec.  
37.702(b) for SEFs. 17 CFR 38.601.
    \658\ 2013 Staff STP Guidance at 2. The 2013 Staff STP Guidance 
also specified straight-through processing requirements for FCMs 
under Sec.  1.74. Id. at 2-3. See infra note 660.
    \659\ 2013 Staff STP Guidance at 2.
    \660\ 2013 Staff STP Guidance at 3. Section 1.74 applies similar 
straight-through processing requirements to FCMs, including the 
requirement that a FCM to coordinate with any DCO to which it is a 
clearing member to establish systems that enable the FCM, or the DCO 
acting on its behalf, to accept or reject each trade submitted to 
the DCO for clearing as quickly as would be technologically 
practicable if fully automated systems were used. 17 CFR 1.74.
    \661\ 2013 Staff STP Guidance at 5.
---------------------------------------------------------------------------

a. ``Prompt and Efficient'' Standard and AQATP Standard
    Based on data received by DCR, the 2013 Staff STP Guidance 
expressed the view that compliance with the AQATP standard under Sec.  
39.12(b)(7)(ii) means that a registered DCO must accept or reject such 
trades for clearing within ten seconds after submission to the 
DCO.\662\ Given that existing Sec.  37.702(b)(2) and Sec.  38.601(b) 
require SEFs and DCMs, respectively, to coordinate with DCOs in 
processing transactions for clearing, the 2013 Staff STP Guidance 
accordingly expressed the view that a SEF or DCM must route swaps to a 
DCO in compliance with the AQATP standard.\663\
---------------------------------------------------------------------------

    \662\ Id.
    \663\ Id. at 4.
---------------------------------------------------------------------------

    The 2013 Staff STP Guidance also expressed the view that the AQATP 
standard applies to swap transactions that are routed to a DCO through 
a SEF's or DCM's use of a post-execution, third-party manual 
affirmation hub (``affirmation hub'').\664\ The Divisions further 
explained in a follow-up letter to the 2013 Staff STP Guidance (the 
``2015 Supplementary Staff Letter'') that a SEF or DCM may send 
executed trade terms to such a hub to be manually affirmed by the 
counterparties prior to routing the transaction to the DCO for 
clearing.\665\ According to market participants, this process may take 
minutes or hours, or occasionally may occur overnight.\666\ The 
Divisions acknowledged that such affirmation hubs can promote prompt 
and efficient processing by helping counterparties identify and correct 
potential errors in a transaction's terms prior to routing to a DCO for 
clearing.\667\ The Divisions also stated their belief, however, that 
the Commission intended the AQATP standard to account for the need to

[[Page 62021]]

refine and reduce errors to facilitate prompt and efficient 
processing.\668\
---------------------------------------------------------------------------

    \664\ Id.
    \665\ Straight Through Processing and Affirmation of SEF Cleared 
Swaps, CFTC Letter No. 15-67 (Dec. 21, 2015) (``2015 Supplementary 
Staff Letter'').
    \666\ Id. at 2.
    \667\ The Divisions noted that if an erroneous swap is cleared 
immediately after execution, the counterparties would have to 
address the errors after clearing, which may be difficult and 
costly. Additionally, counterparties may have to bear significant 
margin costs until an error is corrected because the swap may have 
been cleared at the wrong DCO; the swap terms may contain the wrong 
counterparty; or the swap may contain incorrect economic terms. Id.
    \668\ Id. at 3. The Commission previously stated that the use of 
an affirmation hub for routing a swap to a DCO for clearing would be 
permissible, provided that such routing complies with Sec.  
37.702(b) and the trade is processed in accordance with Sec.  39.12, 
among other related Commission requirements. SEF Core Principles 
Final Rule at 33535.
---------------------------------------------------------------------------

    The 2015 Supplementary Staff Letter expressed the view that the 
AQATP standard for transactions routed to an affirmation hub would be 
satisfied if the transactions were routed to and received by the 
relevant DCO no more than ten minutes after execution.\669\ In 
establishing this standard, the Divisions noted the interaction between 
a DCO's requirements under Sec.  39.12(b)(7) with a SEF's or a DCM's 
requirements under Sec.  37.702(b) and Sec.  38.601(b), 
respectively.\670\ Accordingly, based on the interaction between these 
respective requirements, the staff letter expressed the view that a SEF 
or DCM is also obligated under the AQATP standard--at least to the 
extent that the SEF uses a third-party affirmation hub acting as its 
agent--to ensure that the DCO receives the transaction no later than 
ten minutes after execution.\671\ The Divisions stated, however, that 
they would continue to review this standard and take further action as 
necessary, based in part on industry developments.\672\
---------------------------------------------------------------------------

    \669\ 2015 Supplementary Staff Letter at 3.
    \670\ Id. at 1-2.
    \671\ Id. at 3.
    \672\ Id. The Commission also previously stated that it would 
monitor the implementation of the AQATP standard and propose 
amendments in the future. Timing of Acceptance for Clearing Final 
Rule at 21286.
---------------------------------------------------------------------------

b. Proposed Approach to Straight-Through Processing
    The Commission notes that the Divisions provided views regarding 
several aspects of straight-through processing in the 2013 Staff STP 
Guidance and the 2015 Supplementary Staff Letter. The Commission also 
understands that certain aspects of the guidance and staff letter may 
be unclear when read in conjunction with existing regulations. 
Therefore, the Commission seeks to provide clarity under the proposed 
regulatory framework with respect to the straight-through processing 
requirements for SEFs and DCOs through the proposed clarifications and 
amendments described below.\673\
---------------------------------------------------------------------------

    \673\ Notwithstanding the fact that Sec.  39.12(b)(7), the 2013 
Staff STP Guidance, and the 2015 Supplementary Letter also apply to 
DCMs as described above, the scope of this proposed rule does not 
include a similar proposed amendment to Sec.  38.601(b) for DCMs 
that submit (i) futures and options on futures; and (ii) swaps to a 
DCO for clearing. The Commission may propose a conforming amendment 
in a future proposed rulemaking that applies to DCMs. As discussed 
herein, however, a DCO's obligations under the proposed amendments 
to Sec.  39.12(b)(7) would apply equally to futures and options on 
futures and swaps executed on a SEF or DCM, or executed pursuant to 
the rules of a DCM. See supra note 640.
---------------------------------------------------------------------------

(1) Sec.  37.702(b)(1) and Sec.  39.12(b)(7)(i)(A)--``Prompt, 
Efficient, and Accurate'' Standard
    The Commission proposes several amendments to streamline and align 
the straight-through processing requirements between SEFs and 
DCOs.\674\ First, the Commission proposes to eliminate the duplicative 
requirement under existing Sec.  37.702(b)(1) that requires SEFs to 
have the capacity to route transactions to the DCO for purposes of 
clearing. Accordingly, the Commission proposes to renumber existing 
Sec.  37.702(b)(2) to a new proposed Sec.  37.702(b)(1) and revise the 
existing ``prompt and efficient'' standard for SEFs to ``prompt, 
efficient, and accurate'' to conform to the requirement for DCOs 
(emphasis added). The Commission notes that this proposed amendment 
would establish the same requirement for both SEFs and DCOs, 
respectively, to coordinate with one another to facilitate the 
processing of swaps for clearing. To clarify the functions that are 
subject to straight-through processing requirements, the Commission 
also proposes to specify under proposed Sec.  37.702(b)(1) that this 
standard applies to the ``routing'' of swaps by a SEF to a DCO for 
clearing.\675\ Further, the Commission proposes a non-substantive 
amendment to specify that a SEF's obligation to coordinate with DCOs 
should be in accordance with the DCOs' obligations under Sec.  
39.12(b)(7)(i)(A).\676\
---------------------------------------------------------------------------

    \674\ To the extent that the Commission is addressing the 
proposed amendments to Sec.  39.12(b)(7)(i)(A) in conjunction with 
the proposed amendments to Sec.  37.702(b)(1), the discussion 
focuses on swaps routed by a SEF to a DCO for clearing. See also 
supra note 673 (noting that the Commission is not proposing 
corresponding amendments to Sec.  38.601(b), which establishes 
analogous processing and routing requirements for DCMs, at this 
time). The proposed amendments to Sec.  39.12(b)(7)(i)(A), however, 
would also apply to those transactions, including swaps, futures, 
and options on futures submitted by a DCM to a DCO for clearing.
    \675\ The Commission acknowledges that the term ``processing'' 
in the existing requirement may encompass the routing of swaps from 
a SEF to a DCO, but proposes to amend the language to include 
``routing'' for greater clarity and the avoidance of doubt.
    \676\ The current language under Sec.  37.702(b)(2) requires 
SEFs to work with each DCO in accordance with the requirements of 
Sec.  39.12(b)(7). The Commission's proposal would amend the 
requirement to specify Sec.  39.12(b)(7)(i)(A), which imposes a 
corresponding obligation on DCOs to work with SEFs to develop rules 
to facilitate the ``prompt, efficient, and accurate processing'' of 
transactions.
---------------------------------------------------------------------------

    The Commission also notes that some uncertainty exists about the 
interaction between the ``prompt, efficient, and accurate'' standard 
\677\ and the AQATP standard for registered DCOs, based in part on the 
2013 Staff STP Guidance and 2015 Supplementary Staff Letter. 
Accordingly, the Commission proposes that the ``prompt, efficient, and 
accurate'' standard applies to (i) each SEF, under proposed Sec.  
37.702(b)(1), with respect to the processing and routing of 
transactions to a DCO; and (ii) each registered DCO, under Sec.  
39.12(b)(7)(i)(A), with respect to any coordination needed to assist a 
SEF with implementing any procedures or systems to facilitate the 
processing and routing of swaps to the DCO. For the avoidance of doubt, 
the Commission proposes that the AQATP standard does not apply to the 
processing and routing of transactions. As discussed further below, the 
Commission proposes that the AQATP standard set forth under Sec. Sec.  
39.12(b)(7)(ii)-(iii) specifically applies to a registered DCO's 
acceptance or rejection of a transaction from a SEF or DCM, i.e., when 
the DCO receives the transaction.\678\ The Commission believes that 
this proposed approach establishes a requirement for a SEF that 
addresses its functions--to process and route swaps to the DCO--that is 
appropriately distinct from a DCO's functions--to accept or reject a 
swap from clearing upon submission of the swap to the DCO, among other 
things. For further clarity, the Commission specifies that the SEF's 
requirement to process and route swaps in a prompt, efficient, and 
accurate manner also includes the SEF's transmission and delivery of 
the swap to the DCO; accordingly, the ``submission'' of a swap by the 
SEF to the DCO is deemed to have occurred upon the DCO's receipt of the 
swap.
---------------------------------------------------------------------------

    \677\ As noted above, the Commission is proposing to amend the 
existing standard for SEFs under Sec.  37.702(b)(2) (renumbered as 
Sec.  37.702(b)(1)) to ``prompt, efficient, and accurate.''
    \678\ The Commission notes that it is proposing amendments to 
streamline Sec.  39.12(b)(7)(ii)-(iii), as discussed below. See 
infra Section XII.B.2.b.(2)--Sec.  39.12(b)(7)(ii)--AQATP Standard 
for Registered DCOs.
---------------------------------------------------------------------------

    In particular, the Commission proposes that the ``prompt, 
efficient, and accurate'' standard also applies to the processing and 
routing of swaps from a SEF to a DCO via affirmation hubs.\679\ The 
Commission acknowledges

[[Page 62022]]

the beneficial role of these mechanisms and intends to facilitate their 
use to reduce error rates and related costs prior to routing a swap to 
the DCO. Instead of the ten-minute time frame set forth in the 2015 
Supplementary Staff Letter, however, the Commission proposes that the 
``prompt, efficient, and accurate'' standard would allow swaps subject 
to affirmation via third-party hubs to be processed and routed to the 
DCO in a manner that accounts for existing market practices and 
technology, as well as market conditions at the time of execution.
---------------------------------------------------------------------------

    \679\ The Commission notes that the 2015 Supplementary Staff 
Letter expresses the view that the AQATP standard applies to a SEF's 
use of affirmation hubs to process and route trades to a DCO. 2015 
Supplementary Staff Letter at 3. As discussed further below, 
however, the Commission proposes that the AQATP standard applies to 
a registered DCO after submission of the trade to the DCO for 
clearing. Proposed Sec.  37.702(b)(1) and Sec.  39.12(b)(7)(i)(A), 
as amended, would require SEFs and DCOs to respectively coordinate 
and work together to effect the ``prompt, efficient, and accurate'' 
standard.
---------------------------------------------------------------------------

    Based on the Divisions' experience with the ten-minute time frame, 
the Commission believes that a qualitative interpretation of ``prompt, 
efficient, and accurate'' is more appropriate than imposing a specific 
time standard upon SEFs for processing and routing transactions to the 
DCO. The Commission has observed that many SEFs, particularly those 
that offer voice-based or voice-assisted trading systems or platforms, 
have not been able to meet the time frame when using manual affirmation 
hubs. Further, the Commission believes that maintaining a specific time 
standard would be inconsistent with the proposed expansion of the trade 
execution requirement and the availability of flexible execution 
methods under the proposed framework. In particular, the expansion of 
the trade execution requirement will lead to the trading of a broader 
array of swaps on SEFs, many of which are likely more complex in nature 
and require more time for affirmation to occur. The inability to comply 
with a specific time frame could hinder the anticipated growth of 
trading in additional products on SEFs and impede the ability to 
utilize flexible means of execution. Further, a specific time frame may 
also limit the use--and therefore the benefits--of affirmation hubs. 
Therefore, the Commission believes that a rigid time frame for 
processing and routing trades from a SEF to a DCO is inappropriate 
under the proposed regulatory framework.
    The ``prompt, efficient, and accurate'' standard may result in 
varying lengths of time for transactions to be processed and routed to 
a DCO, including some longer instances, e.g., a time period that 
exceeds ten minutes. The Commission, however, expects that market and 
technological developments will enable processing and routing through 
affirmation hubs to occur in increasingly shorter time intervals. 
Further, the Commission notes that under the qualitative standard, 
transactions that can be reasonably affirmed on a fully automatic basis 
after execution should be affirmed in that manner.\680\ In such cases, 
the Commission believes that ``prompt, efficient, and accurate'' 
processing and routing would occur in a much shorter time frame, e.g., 
less than ten minutes.
---------------------------------------------------------------------------

    \680\ The Commission notes that this statement is consistent 
with the views expressed by the Divisions in the 2015 Supplementary 
Staff Letter. Id. at 3.
---------------------------------------------------------------------------

    Where affirmation hubs are not utilized, the Commission believes 
that the ``prompt, efficient, and accurate'' standard would also result 
in a trade being processed and routed from a SEF to a DCO in a much 
shorter time frame. As noted above, that exact time frame would depend 
on swap market practices and technology, as well as market conditions 
at the time of execution. The Commission expects that the industry will 
continue to reduce time frames for transaction processing and routing 
to a DCO. The Commission emphasizes that it will continue to monitor 
time frames and industry developments with respect to transaction 
processing to ensure that SEFs and DCOs facilitate prompt, efficient, 
and accurate transaction processing and routing.
(2) Sec.  39.12(b)(7)(ii)--AQATP Standard for Registered DCOs
    In addition to specifying that the ``prompt, efficient, and 
accurate'' standard applies to SEFs with respect to processing and 
routing transactions, the Commission proposes to clarify that the AQATP 
standard applies to a DCO's acceptance or rejection of a transaction 
for clearing upon submission to the DCO, i.e., when the DCO receives 
the transaction. The Commission also proposes to delete existing Sec.  
39.12(b)(7)(iii) as unnecessary.\681\ The Commission notes that this 
approach is generally consistent with the 2013 Staff STP Guidance with 
respect to swaps, but this proposal specifies that the AQATP standard 
applies exclusively to the DCO and is triggered upon submission of the 
agreement, contract, or transaction \682\ to the DCO from a SEF, a DCM, 
or counterparties that submit swaps directly to the DCO for clearing. 
Therefore, a DCO's ability to comply with the AQATP standard for 
accepting or rejecting a trade is distinct from the length of time it 
takes an entity such as a SEF or DCM to process and route a trade to 
the DCO.\683\ As discussed below, the DCO's obligation to comply with 
the AQATP standard is also independent from the method of execution or 
venue by which counterparties execute an agreement, contract, or 
transaction, given that the DCO's obligation to accept or reject that 
executed agreement, contract, or transaction only begins from the point 
after which it has been submitted to the DCO, i.e., when the DCO 
receives the transaction. If a SEF, DCM, or counterparty to a 
bilaterally-executed agreement, contract, or transaction delays the 
submission of a cleared swap to a DCO for clearing, then it would not 
impact the DCO's obligation to accept or reject on an AQATP basis after 
it has received the transaction.
---------------------------------------------------------------------------

    \681\ As discussed below, the Commission notes that it is 
proposing amendments to streamline Sec. Sec.  39.12(b)(7)(ii)-(iii) 
into a single provision.
    \682\ The Commission notes that both CEA section 1a(15), which 
defines a DCO, and Sec.  39.12(b)(1), which establishes product 
eligibility for DCOs, refer to ``agreements, contracts, or 
transactions.'' Similarly, CEA section 1a(47), which defines a 
``swap,'' also refers to an ``agreement, contract, or transaction.'' 
To conform to these provisions, the Commission proposes non-
substantive amendments to Sec. Sec.  39.12(b)(7)(i)-(ii) to apply to 
all ``agreements, contracts, and transactions.'' The Commission 
notes that this conforming change does not alter the substantive 
scope of a DCO's obligations under proposed Sec.  39.12(b)(7). Core 
Principle 7 and its implementing regulations, however, refer to 
``swaps'' and ``transactions'' interchangeably without intending to 
impose a substantive distinction on a SEF's obligations. For 
example, Sec.  37.700 refers to ``swaps'' while Sec. Sec.  37.701-
702 refer to ``transactions,'' but the Commission's use of 
``transaction'' is intended to refer generally to transactions of 
swaps on the SEF and not intended to differentiate among agreements, 
contracts, or transactions that constitute swaps (emphasis added).
    \683\ Under proposed Sec.  37.702(b)(1), a SEF's obligation to 
submit swaps for clearing to the DCO includes the SEF's obligation 
to process and route swaps and is subject to the prompt, efficient, 
and accurate standard.
---------------------------------------------------------------------------

    In conjunction with clarifying that the AQATP standard applies to 
registered DCOs, the Commission proposes to streamline and consolidate 
Sec. Sec.  39.12(b)(7)(ii)-(iii) to establish one AQATP standard for 
registered DCOs under a new proposed Sec.  39.12(b)(7)(ii) for all 
agreements, contracts, and transactions, regardless of whether they (i) 
are executed competitively or non-competitively; (ii) are executed on 
or pursuant to the rules of a SEF or DCM; or (iii) are swaps, futures 
contracts, or options on futures contracts.\684\ The Commission also 
proposes that this AQATP standard would apply to all such agreements, 
contracts, and transactions after submission to the DCO, rather than 
after execution, as currently required for competitively executed 
transactions on or subject to

[[Page 62023]]

the rules of a DCM or SEF under existing Sec.  39.12(b)(7)(ii) 
(emphasis added). The Commission believes that a DCO should be able to 
accept or reject a trade for clearing in a similar AQATP standard time 
frame after receiving the transaction, regardless of the manner of 
execution--competitive or non-competitive--or whether the trade has 
been processed and routed by a SEF or DCM, a third-party affirmation 
hub, or the counterparties themselves on a direct basis. As applied to 
swaps, a DCO would be subject to the same AQATP standard, regardless of 
whether the swap is subject to the trade execution requirement or 
otherwise voluntarily cleared.
---------------------------------------------------------------------------

    \684\ Based on this consolidation, the Commission proposes to 
eliminate the existing language of Sec.  39.12(b)(7)(iii).
---------------------------------------------------------------------------

    The AQATP standard reflects the Commission's belief that acceptance 
or rejection for clearing in close to real time is crucial both for 
effective risk management and for the efficient operation of trading 
venues.\685\ While the Commission did not prescribe a rigid time frame 
for acceptance or rejection for clearing when adopting existing 
Sec. Sec.  39.12(b)(7)(ii)-(iii), the Commission did note that the 
performance standard would require action in a matter of milliseconds 
or seconds, or at most, a few minutes, not hours or days.\686\ The 
Commission notes that Commission staff continues to monitor reports 
from DCOs about their ability to accept or reject trades for clearing 
in a timely matter. To date, the Commission has not been made aware of 
significant delays or difficulties meeting the ten-second standard 
articulated in the 2013 Staff STP Guidance. Accordingly, as DCOs have 
been able to accept or reject trades within ten seconds after 
submission by the SEF for the past five years, the Commission proposes 
that this standard continue for registered DCOs under the AQATP 
standard under proposed Sec.  39.12(b)(7)(ii).
---------------------------------------------------------------------------

    \685\ See Timing of Acceptance for Clearing Final Rule at 21285. 
In recognizing that some trading venues may not be fully automated, 
the Commission stated that the use of manual steps would be 
permitted, as long as the process could operate within the same 
timeframes as the automated systems. Id. The Commission also noted 
that the timeframe for acceptance by clearing FCMs (outlined under 
Sec.  1.74) and DCOs is stricter than the timeframes for submission 
by SDs and MSPs. Id. The Commission noted that ``where execution is 
bilateral and clearing is voluntary, the delay between execution and 
submission to clearing is, of necessity, within the discretion of 
the parties to some degree. The Commission believes, however, that 
prudent risk management dictates that once a trade has been 
submitted to a clearing member or a DCO, the clearing member or DCO 
must accept or reject it as quickly as possible.'' Id.
    \686\ See id. For example, IRS were executed and cleared with an 
average time of 1.9 seconds on CME platforms in early 2012. Id.
---------------------------------------------------------------------------

(3) Sec. Sec.  37.702(b)(2)-(3)--Pre-Execution Credit Screening
    With respect to the pre-execution credit screening of orders for 
compliance with risk-based limits, the 2013 Staff STP Guidance 
expressed the view that (i) a clearing FCM must be identified in 
advance for each counterparty on an order-by-order basis for trades 
intended for clearing; and (ii) a SEF must facilitate pre-execution 
screening by each clearing FCM in accordance with Sec.  1.73 on an 
order-by-order basis.\687\ To facilitate such screening in practice, 
SEFs have provided their respective clearing FCMs with a ``pre-trade 
credit screening'' functionality that allows them to screen orders 
executed on the facility.\688\ The Divisions have viewed pre-trade 
credit screening functionalities as beneficial to facilitate ``prompt 
and efficient'' transaction processing in accordance with straight-
through processing requirements.\689\
---------------------------------------------------------------------------

    \687\ 2013 Staff STP Guidance at 3.
    \688\ SEFs have been able to facilitate the use of their pre-
trade credit screening functionalities by clearing FCMs for swap 
block trades pursuant to time-limited no-action relief provided by 
Commission staff, which allows market participants to execute swap 
block trades on the SEF that are intended to be cleared. See infra 
Section XXII.A.--Sec.  43.2--Definition--Block Trade; Sec.  
37.203(a)--Elimination of Block Trade Exception to Pre-Arranged 
Trading. As discussed below, the Commission is proposing to amend 
the definition of ``block trade'' under Sec.  43.2 to continue to 
allow clearing FCMs to comply with Sec.  1.73 by using pre-execution 
credit screenings on the SEF.
    \689\ 2013 Staff STP Guidance at 2-3. With respect to 
establishing pre-execution credit screenings, the 2013 Staff STP 
Guidance expressed the view that SEFs and FCMs should work together 
to effect the risk-based limits to ensure straight-through 
processing of swaps. Id.
---------------------------------------------------------------------------

    With respect to pre-execution screening by each clearing FCM, the 
2013 Staff STP Guidance viewed Sec. Sec.  1.73(a)(2)(i)-(ii) as 
requiring a clearing FCM to conduct pre-execution screening of orders 
for execution on a SEF or DCM for compliance with risk-based 
limits.\690\ The 2013 Staff STP Guidance further expressed the view 
that Sec.  1.73 provides FCMs with the ability to reject orders before 
execution; as a result, orders that have satisfied clearing FCMs' pre-
execution limits are deemed accepted for clearing and thereby subject 
to a guarantee by the clearing FCM upon execution.\691\ Accordingly, 
the 2013 Staff STP Guidance expressed the view that a clearing FCM may 
not reject a trade that has passed its pre-execution credit screening 
filter because this would violate the AQATP standard, under which 
trades should be accepted or rejected for clearing as soon as 
technologically practicable as if fully automated systems were 
used.\692\
---------------------------------------------------------------------------

    \690\ 2013 Staff STP Guidance at 1-2. Section 1.73(a)(1) 
requires each clearing FCM to establish risk-based limits for each 
proprietary account and each customer account that are based on 
position size, order size, margin requirements, or similar factors. 
17 CFR 1.73(a)(1). Similarly, Sec.  1.73(a)(2)(i) states that when a 
clearing FCM provides electronic market access or accepts orders for 
automated execution, the FCM must use automated means to screen 
orders for compliance with such risk-based limits. 17 CFR 
1.73(a)(2)(i). Section 1.73(a)(2)(ii) states that when a clearing 
FCM accepts orders for non-automated execution, the FCM must 
establish and maintain systems of risk controls reasonably designed 
to ensure compliance with the limits. 17 CFR 1.73(a)(2)(ii). Section 
1.73(a)(2)(iii) states that when a clearing FCM accepts transactions 
that were executed bilaterally and then submitted for clearing, the 
FCM must establish and maintain systems of risk controls reasonably 
designed to ensure compliance with the limits. 17 CFR 
1.73(a)(2)(iii). The Commission notes that paragraph (a)(2)(i)-(ii) 
apply to ``orders,'' while paragraph (a)(2)(iii) applies to 
``transactions.'' In addition, paragraph (a)(2)(iii) is limited to 
transactions executed ``bilaterally.'' In contrast, the Commission 
stated in the final rule adopting Sec.  1.73 that paragraph 
(a)(2)(i) refers to ``automated trading systems,'' such as CME's 
Globex, while paragraph (a)(2)(ii) includes ``non-automated markets 
such as open outcry exchanges or voice brokers.'' See Timing of 
Acceptance for Clearing Final Rule at 21288. As the Commission 
affirmatively included voice brokers in connection with paragraph 
(a)(2)(ii), transactions executed through voice brokers do not fall 
under paragraph (a)(2)(iii). Accordingly, Sec.  1.73(a)(2)(iii) only 
applies where two parties transact directly with one another, 
outside of a SEF or DCM.
    \691\ 2013 Staff STP Guidance at 3.
    \692\ Id.
---------------------------------------------------------------------------

    With respect to the requirement that a clearing FCM must be 
identified in advance for trades intended for clearing, the 2013 Staff 
STP Guidance noted that the Commission has already required parties to 
have a clearing arrangement in place with a clearing FCM in advance of 
execution and that in cases where more than one DCO offered clearing 
services, the parties would also need to specify in advance where the 
trade should be sent for clearing.\693\ Accordingly, the 2013 Staff STP 
Guidance expressed the view that no trade intended for clearing may be 
executed on or subject to the rules of a SEF unless a clearing FCM was 
identified in advance for each party on an order-by-order basis.\694\
---------------------------------------------------------------------------

    \693\ See Timing of Acceptance for Clearing Final Rule at 21284.
    \694\ 2013 Staff STP Guidance at 3.
---------------------------------------------------------------------------

    In conjunction with the Commission's proposal to clarify and amend 
straight-through processing requirements, the Commission proposes to 
adopt these two obligations--that each market participant identify a 
clearing member in advance and that a SEF facilitate pre-execution 
credit screening--under Sec. Sec.  37.702(b)(2)-(3), respectively. The 
Commission believes that the proposed requirements are consistent with 
the proposed approach to straight-through processing as described 
above. In

[[Page 62024]]

particular, the use of pre-execution credit screening functionalities 
help SEFs and DCOs to both meet their respective straight-through 
processing requirements by reducing the number of transactions that are 
rejected from clearing by a DCO. The Commission notes that pre-
execution credit screening has become a fundamental component of the 
swaps clearing infrastructure.\695\
---------------------------------------------------------------------------

    \695\ As noted above, the 2013 Staff STP Guidance expressed the 
view that a clearing FCM may not reject a trade that has passed its 
pre-execution credit screening filter because such a rejection would 
violate the AQATP requirement. 2013 Staff STP Guidance at 3. The 
Commission expects that this practice which is beneficial to market 
participants by providing trade certainty in as minimal a time delay 
as possible, will continue. The screening of transactions by a 
clearing FCM does not, however, prevent the DCO from rejecting a 
swap for clearing.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.702 and Sec. Sec.  39.12(b)(7)(i)-(ii). In particular, the 
Commission requests comment on the following questions:
    (71) The proposed ``prompt, efficient, and accurate'' standard, as 
applied to trades submitted to a DCO for clearing via third-party 
affirmation hubs would take into consideration evolving swap market 
practices and technology, as well as current market conditions at the 
time of execution. Is the proposed approach appropriate? Why or why 
not? Does the approach provide sufficient guidance regarding the 
standard?
    (72) Is the distinction sufficiently clear between (i) the 
submission and related processing and routing of a swap by a SEF to a 
DCO under the ``prompt, efficient, and accurate'' standard and (ii) the 
DCO's decision to accept or not accept a swap under the AQATP standard? 
Does the approach provide sufficient clarity regarding the distinct, 
but interrelated, roles of SEFs and DCOs? Why or why not?
    (73) The 2013 Staff STP Guidance and 2015 Supplementary Staff 
Letter apply to ``intended to be cleared swaps,'' including swaps 
subject to the clearing requirement and swaps that are voluntarily 
cleared by the counterparties. Should these requirements apply to 
voluntarily-cleared swaps?
    (74) Proposed Sec. Sec.  39.12(b)(7)(ii) would eliminate the 
distinction when applying the AQATP standard between (i) trades that 
are executed competitively and (ii) trades that are not executed 
competitively or are executed away from a SEF or DCM. Is the proposed 
approach appropriate? Why or why not?
    (75) Proposed Sec.  39.12(b)(7)(ii) would apply the AQATP standard 
after submission to the DCO, rather than after execution. Is the 
proposed approach appropriate? Why or why not?
    (76) Proposed Sec.  39.12(b)(7)(ii) would apply the AQATP standard 
after submission to the DCO, rather than after execution, for all 
swaps, futures, and options on futures submitted for clearing. Proposed 
Sec.  39.12(b)(7)(ii) would apply to all agreements, contracts, and 
transactions submitted to the DCO for clearing. Is the proposed 
approach appropriate? Why or why not?
    (77) Should a DCO have the flexibility to have additional time to 
address instances in which a clearing member has insufficient credit on 
deposit for the DCO to accept an agreement, contract, or transaction 
for clearing? If so, should the Commission require the DCO to have 
rules and procedures for the DCO's process to address those instances?
3. Applicability of Sec.  37.702(b) to SEFs That Do Not Facilitate 
Clearing
    The Commission proposes to amend the introductory language under 
proposed Sec.  37.702(b) to specify that its requirements apply only to 
those transactions routed through a SEF to a registered DCO for 
clearing rather than, as currently required, to any transaction cleared 
by a DCO. While not meant to reflect a substantive change, the 
Commission believes that this amendment would clarify that the 
requirements of Sec.  37.702(b) do not apply to a SEF that does not 
facilitate the clearing of applicable listed swaps that are not subject 
to the clearing requirement. The requirements would apply, however, if 
the SEF offers to facilitate the clearing of such swaps.\696\ 
Therefore, to the extent counterparties choose to voluntary clear such 
transactions through a SEF that offers to facilitate clearing for such 
swaps, Sec.  37.702(b) would then apply to the SEF.
---------------------------------------------------------------------------

    \696\ The Commission notes that certain SEFs, such as those that 
facilitate trading in FX non-deliverable forward products, do not 
hold themselves out as offering services to facilitate clearing with 
a DCO. As a result, the straight-through processing requirements, 
including the ``prompt, efficient, and accurate'' standard and pre-
execution credit screening requirements, would not apply to such 
SEFs, even if the counterparties subsequently voluntarily clear a 
swap away from the SEF. The Commission notes that a SEF could offer 
to facilitate the clearing of certain listed swaps, to which Sec.  
37.702(b)'s requirements would apply, while not offering to 
facilitate the clearing of other of its listed swaps, to which Sec.  
37.702(b)'s requirements would not apply. The Commission notes, 
however, that the requirements of Sec.  39.12(b)(7)(ii) apply to all 
agreements, contracts, and transactions submitted to a DCO for 
clearing, regardless of whether a particular swap is subject to the 
clearing requirement pursuant to section 2(h)(1) of the CEA.
---------------------------------------------------------------------------

C. Sec.  37.703--Monitoring for Financial Soundness

    Section 37.703(a) requires a SEF to monitor its members to ensure 
that they continue to qualify as an ECP pursuant to CEA section 
1a(18).\697\ The Commission proposes a non-substantive amendment to 
proposed Sec.  37.703 to replace the term ``member'' with ``market 
participant.'' The Commission notes that its proposed definition of 
``market participant'' under Sec.  37.2(b) would capture the universe 
of persons and entities that participate on SEFs and would be subject 
to minimum financial requirements, including a SEF's members.\698\
---------------------------------------------------------------------------

    \697\ 17 CFR 37.703.
    \698\ See supra Section IV.B.2.--Sec.  37.2(b)--Definition of 
``Market Participant.'' The Commission notes that CEA section 2(e) 
limits swaps trading to ECPs, as defined by section 1a(18) of the 
Act. 7 U.S.C. 2(e).
---------------------------------------------------------------------------

XIII. Part 37--Subpart I: Core Principle 8 (Emergency Authority)

    Core Principle 8 requires a SEF to adopt rules to provide for the 
exercise of emergency authority, in consultation or cooperation with 
the Commission, as is necessary and appropriate, including the 
authority to liquidate or transfer open positions in any swap or to 
suspend or curtail trading in a swap.\699\
---------------------------------------------------------------------------

    \699\ 7 U.S.C. 7b-3(f)(8). The Commission codified Core 
Principle 8 under Sec.  37.800. 17 CFR 37.800.
---------------------------------------------------------------------------

A. Sec.  37.801--Additional Sources for Compliance

    Section 37.801 further implements Core Principle 8 by referring 
SEFs to associated guidance and/or acceptable practices set forth in 
Appendix B to comply with Sec.  37.800.\700\ The guidance to Core 
Principle 8 specifies, among other things, the types of emergency 
actions that a SEF should take in particular to address perceived 
market threats, and states that the SEF should promptly notify the 
Commission of its exercise of emergency action.
---------------------------------------------------------------------------

    \700\ 17 CFR 37.801.
---------------------------------------------------------------------------

    The Commission proposes to amend the guidance to Core Principle 8 
by eliminating references to certain emergency actions that the 
Commission understands a SEF, as a matter of general market practice, 
would not be able to adopt, including imposing special margin 
requirements and transferring customer contracts and the margin. Since 
SEFs do not own the contracts, they do not have the ability to impose 
margin or transfer contracts. Additionally, the Commission proposes

[[Page 62025]]

several non-substantive amendments to the guidance.\701\
---------------------------------------------------------------------------

    \701\ For example, the Commission proposes to eliminate the 
reference to Sec.  40.9, as this section is currently reserved by 
the Commission.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of the proposed 
associated guidance to Core Principle 8 in Appendix B.

XIV. Part 37--Subpart J: Core Principle 9 (Timely Publication of 
Trading Information)

    The Commission is not proposing any amendments to the regulations 
under Core Principle 9.

XV. Part 37--Subpart K: Core Principle 10 (Recordkeeping and Reporting)

    Core Principle 10 requires a SEF, among other things, to maintain 
records of all activities related to the business of the facility, 
including a complete audit trail, in a form and manner acceptable to 
the Commission for a period of five years.\702\ Section 37.1001 
implements this requirement by requiring a SEF to maintain an audit 
trail for all swaps executed on or subject to the rules of the SEF, 
among other types of records. The Commission proposes a non-substantive 
amendment to Sec.  37.1001 to eliminate ``or subject to the rules of'' 
from the existing requirement. This proposed amendment confirms to 
conforms to the proposed amendment to the ``block trade'' definition 
under Sec.  43.2, discussed further below.\703\
---------------------------------------------------------------------------

    \702\ 7 U.S.C. 7b-3(f)(10). The Commission codified Core 
Principle 10 under Sec.  37.1000. 17 CFR 37.1000.
    \703\ See infra Section XXII.--Part 43--Sec.  43.2--Definition 
of ``Block Trade.''
---------------------------------------------------------------------------

XVI. Part 37--Subpart L: Core Principle 11 (Antitrust Considerations)

    The Commission is not proposing any amendments to the regulations 
under Core Principle 11.

XVII. Part 37--Subpart M: Core Principle 12 (Conflicts of Interest)

    The Commission has not adopted any regulations under Core Principle 
12 and is not proposing any regulations at this time.

XVIII. Part 37--Subpart N: Core Principle 13 (Financial Resources)

    Core Principle 13 requires a SEF to have adequate financial, 
operational, and managerial resources to discharge each of its 
responsibilities.\704\ To achieve financial resource adequacy, a SEF 
must maintain financial resources sufficient to cover its operating 
costs for a period of at least one year, calculated on a rolling 
basis.\705\ The Commission implemented Core Principle 13 by adopting 
Sec. Sec.  37.1301-1307 to specify (i) the eligible types of financial 
resources that may be counted toward compliance (Sec.  37.1302); (ii) 
the computation of projected operating costs (existing Sec.  37.1303); 
(iii) valuation requirements (existing Sec.  37.1304); (iv) a liquidity 
requirement for those financial resources that is equal to six months 
of a SEF's operating costs (existing Sec.  37.1305); and (v) reporting 
obligations to the Commission (Sec.  37.1306).
---------------------------------------------------------------------------

    \704\ 7 U.S.C. 7b-3(f)(13). The Commission codified Core 
Principle 13 under Sec.  37.1300. 17 CFR 37.1300.
    \705\ Id.
---------------------------------------------------------------------------

    The Commission implemented these regulations to ensure a SEF's 
financial strength so that it could discharge its responsibilities, 
ensure market continuity, and withstand unpredictable market 
events.\706\ During the part 37 implementation, the Commission has 
continued to receive feedback from several SEFs that the existing 
requirements impose impractical financial and operating burdens.\707\ 
Among other things, these SEFs have contended that the amount of 
financial resources that a SEF is required to maintain has proven to be 
unnecessary and confines resources that could otherwise be allocated 
toward operational growth and further innovation. To address some of 
these concerns, Commission staff issued two guidance documents 
regarding the calculation of operating costs.\708\
---------------------------------------------------------------------------

    \706\ When the Commission adopted Sec.  37.1301(a), it 
recognized that a ``SEF's financial strength is vital to ensure that 
the SEF can discharge its core principle responsibilities. . . .'' 
SEF Core Principles Final Rule at 33538-39.
    \707\ See WMBAA, Re: Project KISS at 5 (Sept. 29, 2017) (``2017 
WMBAA Letter'').
    \708\ CFTC Letter No. 17-25; CFTC Letter No. 15-26, Division of 
Market Oversight Guidance on Calculating Projected Operating Costs 
by Swap Execution Facilities (Apr. 23, 2015) (``CFTC Letter No. 15-
26'').
---------------------------------------------------------------------------

    Based on its experience with overseeing the financial resources 
requirements, the Commission proposes several amendments to the Core 
Principle 13 regulations that would achieve a better balance between 
ensuring SEF financial stability, promoting SEF growth and innovation, 
and reducing unnecessary costs. The Commission's proposed amendments, 
which include the addition of acceptable practices to Core Principle 13 
in Appendix B, are based in part on existing Commission staff guidance, 
feedback received from SEFs, and Commission experience gained from 
ongoing oversight. As discussed in detail further below, the 
Commission's proposed changes consist of (i) clarification of the scope 
of operating costs that a SEF must cover with adequate financial 
resources; (ii) acceptable practices, based on existing Commission 
staff guidance, that address the discretion that a SEF has when 
calculating projected operating costs pursuant to proposed Sec.  
37.1304; (iii) amendments to the existing six-month liquidity 
requirement for financial resources held by a SEF; and (iv) streamlined 
requirements with respect to financial reports filed with the 
Commission. The proposed changes also would include non-substantive 
amendments to clarify certain existing requirements, including the 
renumbering of several provisions to present the requirements in a more 
cohesive manner.

A. Sec.  37.1301--General Requirements

1. Sec.  37.1301(a)
    Existing Sec.  37.1301(a) requires a SEF to maintain financial 
resources that are sufficient to enable it to perform its functions in 
compliance with the SEF core principles set forth in section 5h of the 
Act (emphasis added).\709\ Existing Sec.  37.1301(c) relates to this 
requirement and specifies that a SEF's financial resources are 
sufficient if their value is ``at least equal to'' the SEF's operating 
costs for a one-year period, on a rolling basis.\710\
---------------------------------------------------------------------------

    \709\ 17 CFR 37.1301(a).
    \710\ 17 CFR 37.1301(c).
---------------------------------------------------------------------------

    Certain SEFs have stated that existing Sec.  37.1301(a), when read 
in conjunction with Sec.  existing 37.1301(c), can be construed to 
state that operational costs incurred for functions that are not 
germane to discharging SEF core principle responsibilities must be 
included in a financial resources calculation. According to those SEFs, 
requiring those costs to be included would require a SEF to allocate 
additional resources to comply with the requirement, which would hinder 
its ability to allocate that capital to operational growth and 
innovation, thereby creating unnecessary burdens.\711\
---------------------------------------------------------------------------

    \711\ See 2017 WMBAA Letter at 6 (stating that the financial 
resource requirements should focus on fixed costs required for 
compliance, rather than variable costs and staff-related costs that 
are not essential).
---------------------------------------------------------------------------

    The Commission proposes to consolidate the requirement under 
existing Sec.  37.1301(c) into a new proposed Sec.  37.1301(a) and 
adopt several amendments. First, the Commission proposes to amend the 
types of operating costs that must be included in a SEF's financial 
resources determination. As proposed, a SEF would be required to 
maintain adequate financial resources to cover the

[[Page 62026]]

operating costs that a SEF needs to ``comply'' with the SEF core 
principles and any applicable Commission regulations, rather than 
``perform its functions in compliance with'' the core principles. For 
example, under the current requirement, a SEF must maintain financial 
resources to continue to afford all of its existing activities (for 
example, activities such as product research or business development), 
even if such activities are not mandated by any core principle or 
regulatory requirement. Under the proposed amendment, a SEF would not 
need to include costs that are not necessary to comply with the SEF 
core principles and any applicable Commission regulations when 
calculating its operating costs.
    The Commission believes that the proposed regulation represents a 
better and more balanced regulatory approach to implementing the Core 
Principle 13 requirements. Some SEF operational costs may not be 
necessary for discharging core principle and regulatory 
responsibilities, and therefore, should not be included when 
calculating a SEF's financial resources. Rather than require a SEF to 
allocate capital to account for such operating costs, the proposed 
amendment permits SEFs to allocate their capital to other areas, 
thereby furthering the goal of promoting SEF growth and 
innovation.\712\ Therefore, proposed Sec.  37.1301(a) would achieve a 
better balance between ensuring that a SEF is financially stable, while 
also providing the SEF with greater discretion to allocate its limited 
resources.\713\ Further, the proposed amendment would remove a 
potential barrier for new SEF entrants who may otherwise have been 
deterred by the relatively higher capital costs posed by a broad 
reading of the existing requirement.
---------------------------------------------------------------------------

    \712\ The Commission understands that businesses, particularly 
nascent SEFs or SEFs developing new product lines, may incur 
relatively greater expenses in growing new business, compared to 
established SEFs or existing product lines. The Commission notes 
that under the proposed acceptable practices to Core Principle 13 in 
Appendix B, costs related to marketing and business development 
could be excluded from a SEF's projected operating cost 
calculations. See infra Section XVIII.D.1.--Acceptable Practices to 
Core Principle 13 in Appendix B.
    \713\ The Commission believes that the proposed financial 
resources obligations in the aggregate would better ensure market 
stability and the financial viability of SEFs. While proposed Sec.  
37.1301(a), along with the associated acceptable practices to Core 
Principle 13, may reduce the total amount of financial resources 
that a SEF must hold under Sec.  37.1301(a), the Commission believes 
that such a change should not affect market integrity or the 
financial viability of SEFs. SEFs may include illiquid financial 
assets, as opposed to cash or cash equivalents, towards satisfying 
this requirement. The Commission, however, has also recognized that 
based on its experience, illiquid resources are less effective for 
ensuring an entity's viability, especially in times of market 
volatility where it may be difficult to timely sell illiquid assets 
or avoid a significant haircut on such assets. Consequently, the 
Commission believes that the amount of liquid assets that a SEF must 
hold, which the Commission addresses under proposed Sec.  37.1303, 
more effectively protects market integrity and the financial 
viability of SEFs. As discussed below, proposed Sec.  37.1303 would 
explicitly require SEFs to maintain sufficient liquidity to cover 
their projected wind-down costs, with a minimum liquidity level in 
an amount no less than three months of projected operating costs 
where wind-down costs would be less than three months of projected 
operating costs. See infra Section XVIII.C.--Sec.  37.1303--
Liquidity of Financial Resources.
---------------------------------------------------------------------------

    The Commission also proposes several non-substantive changes to 
align proposed Sec.  37.1301(a) more closely to Core Principle 13 
requirements. To reflect the ongoing nature of the Core Principle 13 
requirements, the Commission proposes to specify that a SEF must 
maintain adequate financial resources on an ``ongoing basis.'' For 
consistency purposes with Core Principle 13, the Commission also 
proposes to replace the word ``sufficient'' with ``adequate'' and adopt 
additional language to specify that a SEF's financial resources will be 
considered ``adequate'' if their value ``exceeds,'' rather than is ``at 
least equal to,'' one year's worth of operating costs,\714\ calculated 
on a rolling basis pursuant to the requirements for calculating such 
costs under proposed Sec.  37.1304.\715\
---------------------------------------------------------------------------

    \714\ The Commission notes that it is also proposing a non-
substantive amendment to refer to ``projected operating costs'' 
instead of ``operating costs'' to conform to existing Sec.  37.1304 
and Sec.  37.1307, both of which refer to ``projected operating 
costs.'' The Commission notes that during informal discussions with 
SEFs, Commission staff and SEFs have generally referred to SEFs' 
``projected'' operating costs.
    \715\ As discussed below, proposed Sec.  37.1304 (which the 
Commission proposes to renumber from existing Sec.  37.1303) would 
continue to provide SEFs with reasonable discretion to calculate 
their projected operating costs to determine their financial 
resources requirement under Sec.  37.1301(a) and their liquidity 
requirement under proposed Sec.  37.1303.
---------------------------------------------------------------------------

    Further, as noted above, the Commission proposes to adopt 
additional language to clarify that a SEF's financial resources must be 
adequate to comply with the SEF core principles and any ``applicable 
Commission regulations.'' This amendment is intended to clarify that a 
SEF's resource adequacy obligation under proposed Sec.  37.1301(a) also 
applies to any resources needed for complying with any additional 
regulatory requirements that the Commission has promulgated.\716\ The 
Commission notes that SEFs are already complying with this 
clarification in practice.
---------------------------------------------------------------------------

    \716\ The Commission notes that under Core Principle 1, a SEF 
must comply with any rule or regulation promulgated by the 
Commission pursuant to section 8a(5) of the Act. 17 CFR 37.100. For 
a SEF to discharge its responsibilities pursuant to Core Principle 
13, which include complying with the SEF core principles, it is 
required to ensure that its financial resources are adequate to 
comply with those rules or regulations.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.1301(a). In particular, the Commission requests comment on the 
following question:
    (78) To what extent does a requirement for SEFs to maintain 
financial resources to cover operational costs needed only for core 
principle and regulatory compliance reduce the financial resources that 
a SEF needs to maintain, as opposed to the current requirement? Would 
such a reduction, if any, impair the stability of either the SEF or the 
marketplace or the marketplace's confidence in the SEF market 
structure? Would this proposed change encourage innovation or new 
entrants into the marketplace?
2. Sec.  37.1301(b)
    Section 37.1301(b) requires a SEF that also operates as a DCO to 
also comply with the financial resource requirements for DCOs under 
Sec.  39.11.\717\ The Commission proposes to amend Sec.  37.1301(b) to 
permit SEFs that also operate as DCOs to file a single financial report 
under Sec.  39.11 that covers both the SEF and DCO.\718\ This proposed 
approach would streamline and simplify the SEF financial report filing 
process set forth under Sec.  37.1306 and would also be consistent with 
the requirement for DCMs under Sec.  38.1101(a)(3), which permits DCMs 
that operate as a DCO to file a single financial report.\719\
---------------------------------------------------------------------------

    \717\ 17 CFR 37.1301(b).
    \718\ See Derivatives Clearing Organization General Provisions 
and Core Principles, 76 FR 69334 (Nov. 8, 2011). Section 39.11 
establishes requirements that a DCO will have to meet in order to 
comply with Core Principle B (Financial Resources) for DCOs. Core 
Principle B requires a DCO to possess financial resources that, at a 
minimum, exceed the total amount that would enable the DCO to meet 
its financial obligations to its clearing members, notwithstanding a 
default by a clearing member creating the largest financial exposure 
for the DCO in extreme but plausible conditions; and enable the DCO 
to cover its operating costs for a period of one year, as calculated 
on a rolling basis. 7 U.S.C. 7a-1(c)(2)(B)(ii).
    \719\ 17 CFR 38.1101(a)(3).
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.1301(b).

[[Page 62027]]

3. Sec.  37.1301(c)
    Given the proposed consolidation with Sec.  37.1301(a), as 
described above, the Commission proposes to eliminate Sec.  37.1301(c).

B. Sec.  37.1302--Types of Financial Resources

    Section 37.1302 sets forth the types of financial resources 
available to SEFs to satisfy the general financial resources 
requirement.\720\ These resources include the SEF's own capital, 
meaning its assets minus liabilities calculated in accordance with U.S. 
generally accepted accounting principles; and any other financial 
resource deemed acceptable by the Commission.\721\ The Commission 
proposes a non-substantive amendment to the current language by 
referring to generally accepted accounting principles ``in the United 
States'' to conform to the proposed amendments to Sec.  37.1306 
described further below.\722\
---------------------------------------------------------------------------

    \720\ 17 CFR 37.1302.
    \721\ Id.
    \722\ See infra Section XVIII.F.1.--Sec.  37.1306(a).
---------------------------------------------------------------------------

C. Sec.  37.1303--Liquidity of Financial Resources \723\
---------------------------------------------------------------------------

    \723\ The Commission proposes to renumber existing Sec.  37.1305 
to Sec.  37.1303 and amend the requirement as described.
---------------------------------------------------------------------------

    Existing Sec.  37.1305--``Liquidity of financial resources''--
currently requires a SEF to maintain unencumbered, liquid financial 
assets, i.e., cash and/or highly liquid securities, that are equal to 
at least six months of a SEF's operating costs.\724\ If any portion of 
a SEF's financial resources is not sufficiently liquid, then a SEF is 
permitted to take into account a committed line of credit or similar 
facility to meet this requirement.\725\ In adopting this rule, the 
Commission explained that the liquidity requirement is intended to 
ensure that a SEF could continue to operate and wind down its 
operations in an orderly fashion, if necessary.\726\ The Commission 
also determined that a six-month period would be an accurate assessment 
of how long it would take for a SEF to wind down in an orderly manner, 
absent support for alternative time frames.\727\
---------------------------------------------------------------------------

    \724\ 17 CFR 37.1305.
    \725\ Id.
    \726\ The Commission stated that ``the purpose of the liquidity 
requirement is so that all SEFs have liquid financial assets to 
allow them to continue to operate and to wind down in an orderly 
fashion'' and that the Commission ``view[ed] a six month period as 
appropriate for a wind-down period . . . .'' SEF Core Principles 
Final Rule at 33540.
    \727\ Id.
---------------------------------------------------------------------------

    The Commission proposes to amend the minimum amount of liquid 
financial resources that a SEF must include from six months of 
operating costs to the greater of (i) three months of a SEF's projected 
operating costs or (ii) the projected costs for a SEF to wind down its 
business, as determined by the SEF.\728\ The Commission acknowledges 
that in the SEF Core Principles Final Rule, it rejected a three-month 
requirement based on a lack of cited support for a shorter time 
frame.\729\ Based on its own past oversight of SEFs and DCMs and 
feedback from registered SEFs since the adoption of part 37, however, 
the Commission recognizes that the existing six-month requirement is 
not necessary. Rather, the Commission believes that the proposed 
requirement, which sets the minimum amount of unencumbered, liquid 
financial assets that a SEF must maintain at three months of projected 
operating costs, would be sufficient to fulfill the goal of ensuring 
that a SEF can continue to operate and, if necessary, wind down its SEF 
operations in an orderly fashion.
---------------------------------------------------------------------------

    \728\ The Commission notes that it is proposing to specify 
``projected'' operating costs for consistency with the cost 
calculation requirement under Sec.  37.1304, discussed below. See 
infra Section XVIII.D.--Sec.  37.1304--Computation of Costs to Meet 
Financial Resources Requirement.
    \729\ SEF Core Principles Final Rule at 33540.
---------------------------------------------------------------------------

    Since the adoption of part 37, many SEFs have continued to maintain 
that a six-month minimum requirement is not necessary and that some of 
their liquid assets would be better applied toward growth 
initiatives.\730\ Consistent with that feedback, the Commission has 
observed over time that the wind downs or ownership changes of several 
registered trading platforms, including SEFs and DCMs, have occurred 
within a much shorter time frame.\731\ Based on this experience, the 
Commission acknowledges that a SEF may be better positioned to 
determine the amount of liquid financial resources needed to continue 
its operations and to conduct an orderly wind down. Under the proposed 
change, SEFs would be able to use the additional resources to invest in 
other areas of their operations. Accordingly, compared to the existing 
static six-month requirement, the Commission believes that a liquid 
resources requirement of the ``greater of'' either (i) three months of 
projected operating costs or (ii) projected wind-down costs would 
better ensure an orderly wind down for SEFs and ensure a more efficient 
allocation of resources for SEFs that require a wind-down period of 
less than six months. Further, by explicitly requiring a SEF to 
maintain sufficient liquidity to conduct an orderly wind down of its 
business, this approach would also better protect against the risk of 
failure in the unlikely event that a SEF would require a wind-down 
period of longer than six months.
---------------------------------------------------------------------------

    \730\ See 2017 WMBAA Letter at 5 (citing argument that a shorter 
liquidity requirement would allow for a SEF to allocate capital for 
innovation).
    \731\ For example, the Commission notes that the DCM Green 
Exchange LLC had its designation vacated and ceased operations. 
Similarly, the DCM Kansas City Board of Trade was acquired by CME 
Group and had its designation vacated; it ultimately ceased 
operations. Likewise, Javelin SEF, LLC was acquired by Bats Global 
Markets, Inc., which in turn was subsequently acquired by CBOE SEF, 
LLC. In each case, the Commission observed a relatively efficient 
process.
---------------------------------------------------------------------------

    The Commission also proposes a non-substantive amendment to clarify 
that if a SEF has a deficiency in satisfying this requirement, then it 
may overcome that deficiency by obtaining a committed line of credit or 
similar facility in an amount at least equal to that deficiency.
Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.1303. In particular, the Commission requests responses to the 
questions below.
    (79) Is the Commission's proposed requirement for a SEF to have 
liquid assets equal to the greater of either three months of projected 
operating costs or projected wind-down costs an appropriate approach? 
If not, then what should the Commission adopt as a more appropriate 
liquidity requirement and why? Would a SEF's wind-down period generally 
be longer or shorter than three months?
    (80) Would the change to the liquidity requirement under proposed 
Sec.  37.1303 impair the stability of either the SEF or the 
marketplace? Would proposed Sec.  37.1303 encourage innovation or new 
entrants into the marketplace?

D. Sec.  37.1304--Computation of Costs To Meet Financial Resources 
Requirement 732
---------------------------------------------------------------------------

    \732\ The Commission also proposes to renumber existing Sec.  
37.1303 to Sec.  37.1304 and amend the requirement as described.
---------------------------------------------------------------------------

    Existing Sec.  37.1303--``Computation of projected operating costs 
to meet financial resource requirement''--currently requires a SEF to 
make a reasonable calculation of its projected operating costs for each 
fiscal quarter over a twelve-month period to determine the amount of 
financial resources needed to comply with the financial resource 
requirement.\733\ Existing Sec.  37.1303 further provides that a SEF 
has reasonable discretion to determine the methodology that it uses to 
compute its projected operating costs, although the Commission may 
review

[[Page 62028]]

the SEF's methodology and require the SEF to make changes as 
appropriate.\734\
---------------------------------------------------------------------------

    \733\ 17 CFR 37.1303.
    \734\ Id.
---------------------------------------------------------------------------

    The Commission proposes to amend the existing requirement to 
specify that a SEF must also make a reasonable calculation of projected 
wind-down costs, but would have reasonable discretion in adopting the 
methodology for calculating such costs. This proposed addition is 
consistent with the reasonable discretion already provided for 
calculating projected operating costs and corresponds to Sec.  37.1303, 
which incorporates the calculation of a SEF's wind-down costs into the 
liquidity determination. The Commission also proposes two non-
substantive amendments that would add a reference to Sec.  37.1303, 
given that a SEF must calculate projected operating costs to determine 
how to comply with the liquidity requirement; and eliminate the twelve-
month requirement, given that proposed Sec.  37.1301(a) already 
establishes that the financial resource requirement applies on a one-
year, rolling basis.
1. Acceptable Practices to Core Principle 13 in Appendix B
    To help SEFs comply with Core Principle 13, which requires a SEF to 
calculate its operating costs as part of a financial resources 
determination, the Commission is proposing acceptable practices to Core 
Principle 13 in Appendix B associated with Sec.  37.1304. The proposed 
acceptable practices expound upon the reasonable discretion that SEFs 
have for computing projected operating costs in determining their 
financial resource requirements. Among other things, these acceptable 
practices would further explain which operating costs are not necessary 
to comply with the SEF core principles and the Commission's 
regulations. The Commission notes that these acceptable practices 
generally incorporate existing guidance provided by Commission 
staff.\735\
---------------------------------------------------------------------------

    \735\ The proposed acceptable practices to Core Principle 13 in 
Appendix B are based in part upon existing DMO staff guidance. See 
CFTC Letter No. 17-25 and CFTC Letter No. 15-26.
---------------------------------------------------------------------------

    The proposed acceptable practices state that calculations of 
projected operating costs, i.e., those that are necessary for the SEF 
to comply with the SEF core principles and any applicable Commission 
regulations, should be based on a SEF's current business model and 
anticipated business volume.\736\ In particular, if the SEF offers more 
than one bona fide execution method, then a SEF would be allowed to 
include the costs of only one of those methods in calculating projected 
operating costs.\737\ A bona fide method refers to a method actually 
used by SEF participants and not established by a SEF on a pro forma 
basis merely for the purpose of complying with--or evading--the 
financial resources requirement.
---------------------------------------------------------------------------

    \736\ In determining a SEF's projected operating costs under 
Sec.  37.1301(a) or Sec.  37.1303, a calculation based upon a 
hypothetical business model that has lower associated costs or lower 
business volume, and is intended to underestimate or minimize the 
level of required financial resources, would not be appropriate. As 
stated in the proposed acceptable practices, however, a SEF may 
account for any projected modification to its business model, e.g., 
the addition or subtraction of business lines or operations or other 
changes, in its calculations and therefore any projected increase or 
decrease in revenue or operating costs from those changes over the 
next 12 months.
    \737\ For example, if a SEF offers both an order book and RFQ 
system, then the SEF may include the costs associated with one of 
those methods and exclude the costs associated with the other 
method.
---------------------------------------------------------------------------

    This approach would still require SEFs to maintain sufficient 
financial resources to ensure their financial viability, but also 
provide greater flexibility to SEFs to compute operating costs, 
consistent with the reasonable discretion provided under proposed Sec.  
37.1304. Although neither the CEA nor the Commission's regulations 
require a SEF to have more than one execution method, this flexibility 
could encourage SEFs to innovate and experiment in offering a variety 
of trading systems or platforms compared to the current requirements. 
Accordingly, this flexibility would mitigate possible disincentives for 
a SEF to limit the number and types of execution methods that it might 
otherwise develop and offer, were it required to account for the 
associated operating costs for all offered execution methods in a 
calculation. In excluding any of these expenses, however, a SEF would 
need to document and justify those exclusions pursuant to proposed 
requirements under Sec.  37.1306, discussed further below.\738\
---------------------------------------------------------------------------

    \738\ See infra Section XVIII.F.3.--Sec.  37.1306(c).
---------------------------------------------------------------------------

    The proposed acceptable practices would also specify that a SEF may 
exclude certain expenses in making a ``reasonable'' calculation of 
projected operating costs. These expenses include, in part, marketing 
and development costs; variable commissions paid to SEF trading 
specialists, the payment of which is contingent on whether the SEF 
collects associated revenue from transactions on its systems or 
platforms; \739\ and costs for other SEF personnel who are not 
necessary to enable a SEF to comply with the core principles, based on 
its current business model and business volume.\740\ Further, a SEF may 
exclude any non-cash costs, including depreciation and amortization. 
The Commission notes that excluding these expenses would be consistent 
with the proposed financial resource requirement and proposed liquidity 
requirement because they do not reflect costs necessary for a SEF to 
comply with the SEF core principles or Commission regulations.
---------------------------------------------------------------------------

    \739\ See CFTC Letter No. 17-25.
    \740\ For example, if a SEF requires a certain amount of SEF 
trading specialists to operate a voice-based or voice-assisted 
trading system or platform, but hires additional personnel to 
enhance its operations to benefit market participants, then the SEF 
would only need to include the minimum number of trading specialists 
needed to operate the trading system or platform based on its 
current business volume and take into account any projected increase 
or decrease in business volume in its projected operating cost 
calculations.
---------------------------------------------------------------------------

    In addition to allowing a SEF to exclude certain projected 
operating costs, the proposed acceptable practices further specify that 
a SEF may pro-rate, but not exclude, certain expenses in calculating 
projected operating costs. The Commission recognizes that some costs 
may be only partly attributable to a SEF's ability to comply with the 
SEF core principles and the Commission's regulations; therefore, only 
those attributed costs would need to be included in a SEF's projected 
operating costs. Accordingly, a SEF may pro-rate expenses that are 
shared with affiliates, e.g., the costs of administrative staff or 
seconded employees that a SEF shares with affiliates. Further, a SEF 
may also pro-rate expenses that are attributable in part to operational 
aspects that are not required to comply with the SEF core principles, 
e.g., costs of a SEF's office rental space, to the extent that it is 
also used to house marketing personnel. In pro-rating any such 
expenses, however, a SEF would need to document and justify those pro-
rated expenses pursuant to proposed requirements under Sec.  37.1306, 
discussed further below.\741\
---------------------------------------------------------------------------

    \741\ See infra Section XVIII.F.3.--Sec.  37.1306(c).
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.1304 and the associated acceptable practices to Core Principle 13 in 
Appendix B. In particular, the Commission requests comment on the 
following question:
    (81) The proposed acceptable practices would permit a SEF to 
include only the costs related to one of the bona fide execution 
methods that it offers. Should a SEF instead be required to include in 
its projected operating costs the expenses related to all of its 
execution methods? Why or why not?

[[Page 62029]]

E. Sec.  37.1305--Valuation of Financial Resources 742
---------------------------------------------------------------------------

    \742\ The Commission proposes to renumber Sec.  37.1304 to Sec.  
37.1305 and amend the requirement as described.
---------------------------------------------------------------------------

    Section 37.1304--``Valuation of financial resources''--currently 
requires a SEF, at least once each fiscal quarter, to compute the 
current market value of each financial resource used to meet its 
financial resources requirement under Sec.  37.1301.\743\ The 
requirement is designed to address the need to update valuations when 
there may have been material fluctuations in market value that could 
impact a SEF's ability to satisfy its financial resource 
requirement.\744\ When valuing a financial resource, the SEF must 
reduce the value, as appropriate, to reflect any market or credit risk 
specific to that particular resource, i.e., apply a haircut.\745\
---------------------------------------------------------------------------

    \743\ 17 CFR 37.1304.
    \744\ SEF Core Principles Final Rule at 33539.
    \745\ A ``haircut'' is a deduction taken from the value of an 
asset to reserve for potential future adverse price movement in such 
asset. Id. at 33539 n.772.
---------------------------------------------------------------------------

    The Commission proposes a non-substantive amendment to add an 
applicable reference to Sec.  37.1303. The Commission notes that in 
addition to calculating the current market value of each financial 
resource used to satisfy its financial resource requirement, compliance 
with the liquidity requirement would require a SEF to utilize the 
current market value of the applicable financial resources.

F. Sec.  37.1306--Reporting to the Commission

1. Sec.  37.1306(a)
    Section 37.1306 establishes a SEF's financial reporting 
requirements to the Commission. Section 37.1306(a)(1) currently 
requires that at the end of each fiscal quarter or upon Commission 
request, a SEF must report to the Commission (i) the amount of 
financial resources necessary to meet the financial resources 
requirement of Sec.  37.1301; and (ii) the value of each financial 
resource available to meet those requirements as calculated under Sec.  
37.1304.\746\ Section 37.1306(a)(2) additionally requires a SEF to 
provide the Commission with a financial statement, including a balance 
sheet, income statement, and statement of cash flows of the SEF or its 
parent company.\747\ In lieu of submitting its own financial 
statements, a SEF may submit the financial statements of its parent 
company.\748\
---------------------------------------------------------------------------

    \746\ 17 CFR 37.1306(a)(1).
    \747\ 17 CFR 37.1306(a)(2).
    \748\ Id.
---------------------------------------------------------------------------

    The Commission proposes several amendments to Sec.  37.1306(a)(2). 
First, the Commission proposes to require a SEF to prepare its 
financial statements in accordance with generally accepted accounting 
principles in the United States (``GAAP''). For a SEF that is not 
domiciled in the U.S. and is not otherwise required to prepare its 
financial statements in accordance with GAAP, the Commission would 
allow that SEF to prepare its statements in accordance with either the 
International Financial Reporting Standards issued by the International 
Accounting Standards Board, or a comparable international standard as 
the Commission may accept in its discretion. The Commission notes that 
the quality and transparency of SEF financial reports submitted under 
the existing requirement have varied and believes that the GAAP-based 
requirement would promote consistency and better ensure a minimum 
reporting standard across financial submissions.
    The Commission also proposes to require a SEF to provide its own 
financial statements, rather than allow a SEF the option of submitting 
the statements of its parent company. The Commission notes that it may 
lack jurisdiction over a SEF's parent company or its affiliates; in 
such instances, the Commission could not consider the parent company's 
financial resources in determining whether the SEF itself possesses 
adequate financial resources. Therefore, the Commission believes that a 
separate SEF financial statement would more clearly demonstrate 
evidence of the SEF's compliance with Core Principle 13.
    In addition to the proposed amendments to Sec.  37.1306(a)(2), the 
Commission proposes non-substantive revisions to Sec.  37.1306(a)(1) to 
add appropriate references to Sec.  37.1303 to Sec.  37.1305, as 
discussed above. In addition to specifying the amount of financial 
resources necessary to comply with Sec.  37.1301, a SEF's quarterly 
report must include the amount of financial resources necessary to 
comply with the liquidity requirement. Further, the amounts specified 
in the report must be based on the current market value of each 
financial resource and computed as reasonable calculations of the SEF's 
projected operating costs and wind-down costs.
Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.1306(a). In particular, the Commission requests comment on the 
questions below:
    (82) Should the Commission require a SEF's financial reports to be 
audited? Would requiring an audited annual financial report improve 
Commission oversight? What costs would be associated with an audit 
requirement?
    (83) Instead of submitting four financial reports as currently 
required, should the Commission require a semi-annual report and an 
audited annual report?
    (84) Would providing the Commission with the discretionary 
authority to request that SEFs provide audited financial statements, as 
necessary or appropriate, help the Commission meet its oversight 
responsibilities?
    (85) Financial statements currently submitted by SEFs do not need 
to comply with GAAP. What are the costs and benefits of requiring GAAP-
compliant financial submissions?
2. Sec.  37.1306(b)
    Section 37.1306(b) currently requires a SEF to make its financial 
resource calculations on the last business day of its fiscal 
quarter.\749\ The Commission proposes a non-substantive amendment to 
Sec.  37.1306(b) that would add the word ``applicable'' before ``fiscal 
quarter'' in the existing rule text.
---------------------------------------------------------------------------

    \749\ 17 CFR 37.1306(b).
---------------------------------------------------------------------------

3. Sec.  37.1306(c)
    Section 37.1306(c) sets forth documentation requirements for a 
SEF's financial reporting obligations. Section 37.1306(c)(1) requires a 
SEF to provide the Commission with sufficient documentation explaining 
the methodology used to calculate its financial resource requirements 
under Sec.  37.1301.\750\ Section 37.1306(c)(2) requires a SEF to 
provide sufficient documentation explaining the basis for its valuation 
and liquidity determinations.\751\ To provide such documentation, Sec.  
37.1306(c)(3) requires SEFs to provide copies of certain agreements 
that evidence or otherwise support its conclusions.\752\
---------------------------------------------------------------------------

    \750\ 17 CFR 37.1306(c)(1)
    \751\ 17 CFR 37.1306(c)(2).
    \752\ 17 CFR 37.1306(c)(3).
---------------------------------------------------------------------------

    Based on the proposed amendments to the Core Principle 13 
regulations described above, the Commission proposes conforming 
amendments to Sec.  37.1306(c) to require a SEF to specify the 
methodology used to compute its financial resource and liquidity 
requirements. The documentation to be provided must be sufficient for 
the Commission to determine that the SEF has made reasonable 
calculations of projected operating costs and wind-down costs under 
Sec.  37.1304. As

[[Page 62030]]

proposed, Sec. Sec.  37.1306(c)(2)(i)-(iv) \753\ would require that the 
SEF, at a minimum (i) list all of its expenses, without exclusion; (ii) 
identify all of those expenses that the SEF excluded or pro-rated in 
its projected operating cost calculations and explain the basis for 
excluding or pro-rating any expenses; (iii) include documentation 
related to any committed line of credit or similar facility used to 
meet the liquidity requirement; \754\ and (v) identify estimates of all 
of the costs and the projected amount of time required for any wind 
down of operations, including the basis for those estimates.
---------------------------------------------------------------------------

    \753\ The Commission proposes to consolidate paragraphs (c)(1)-
(3) into paragraphs (c)(1)-(2) and adopt the proposed requirements 
as described.
    \754\ The Commission notes that it is also proposing a non-
substantive change to eliminate the current language in paragraph 
(c)(3) regarding copies of insurance coverage or other arrangement 
evidencing or otherwise supporting the SEF's conclusions. The 
Commission notes that subsection (c) still requires a SEF to provide 
sufficient documentation explaining the methodology used to compute 
its financial resource requirements; therefore, if insurance 
coverage or other arrangements are necessary to explain a SEF's 
methodology, then the SEF must submit such documentation. The 
Commission also notes, however, that such documentation may not be 
required in all cases; proposed paragraph (c)(2) provides minimum 
requirements.
---------------------------------------------------------------------------

    The proposed requirement does not necessarily create new 
obligations, but rather clarifies a SEF's existing obligations based 
upon existing guidance provided by Commission staff.\755\ Further, the 
proposed requirement is specifically intended to ensure that a SEF has 
sufficient financial resources, particularly in light of the discretion 
provided to SEFs to compute their projected operating costs and wind-
down costs. Therefore, the Commission believes that maintaining the 
general obligation for each SEF to identify all of its expenses in its 
financial report, including those that correspond to activities that 
are not needed for compliance or otherwise are excluded or pro-rated 
from projected operating costs, is appropriate on an ongoing basis.
---------------------------------------------------------------------------

    \755\ See CFTC Letter No. 17-25 at 4.
---------------------------------------------------------------------------

    The Commission further believes that proposed Sec. Sec.  
37.1306(c)(2)(i)-(iv) would address the current lack of adequate 
documentation or insufficient identification of excluded or pro-rated 
expenses by some SEFs in submitting their projected operating costs 
based on Commission staff guidance. Absent the guidance, the Commission 
notes that the existing rule has created burdens for Commission staff 
when determining whether a SEF complies with Core Principle 13. In its 
experience thus far, the Commission recognizes that Commission staff 
has devoted additional effort to obtain the appropriate documentation 
from SEFs. Therefore, the Commission believes that adding greater 
specificity to the existing requirement would mitigate the time and 
resources required to determine a SEF's compliance with the financial 
resource requirements.
Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.1306(c).
4. Sec.  37.1306(d)
    Section 37.1306(d) requires a SEF to file its financial report no 
later than forty calendar days after the end of each of the SEF's first 
three fiscal quarters and no later than sixty calendar days after the 
end of the SEF's fourth fiscal quarter, or at such later time as the 
Commission may permit.\756\
---------------------------------------------------------------------------

    \756\ 17 CFR 37.1306(d).
---------------------------------------------------------------------------

    The Commission proposes to extend the due date for each SEF's 
fourth fiscal quarter report from sixty to ninety days following the 
end of the quarter. This new proposed due date conforms with the due 
date for the SEF annual compliance report under proposed Sec.  
37.1501(e)(2).\757\ The Commission recognizes that preparing multiple 
year-end reports, which includes a fourth-quarter financial report and 
an annual compliance report, for concurrent submission imposes resource 
constraints on a SEF.\758\ Therefore, the Commission believes that such 
potential constraints justify an additional thirty days to prepare and 
concurrently file the SEF's fourth quarter financial report along with 
its annual compliance report.
---------------------------------------------------------------------------

    \757\ See infra Section XX.A.5.--Sec.  37.1501(e)--Submission of 
Annual Compliance Report and Related Matters.
    \758\ The Commission also notes that it is proposing to require 
a SEF to submit an updated Technology Questionnaire under Sec.  
37.1401(g) at the same time on an annual basis. See infra Section 
XIX.B.--Sec.  37.1401(g)--Program of Risk Analysis and Oversight 
Technology Questionnaire.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.1306(d).
5. Sec.  37.1306(e)
    The Commission proposes to add a new requirement under Sec.  
37.1306(e) for each SEF to provide notice to the Commission of its non-
compliance with the financial resource requirements no later than 
forty-eight hours after the SEF knows or reasonably should have known 
of its non-compliance.\759\ Each SEF has an ongoing obligation to 
comply with the requirements under Core Principle 13. The proposed 
requirement would clarify that the SEF cannot wait until filing its 
quarterly financial reports to notify the Commission that it no longer 
satisfies the Core Principle 13 financial resources requirements. In 
some instances, the Commission has not been informed of a SEF's non-
compliance with the financial resource requirements until the filing of 
a quarterly financial report. The Commission believes, however, that 
prompt notification of non-compliance is necessary for the Commission 
to conduct proper market oversight and ensure market stability on an 
ongoing basis.
---------------------------------------------------------------------------

    \759\ For example, if a SEF knows or reasonably should know that 
its assets will no longer cover its projected operating costs for 
the next twelve months, as calculated on a rolling basis, then the 
SEF should notify the Commission within forty-eight hours.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.1306(e).

G. Sec.  37.1307--Delegation of Authority

    Section 37.1307(a) currently delegates authority to the Director of 
DMO, or other staff as the Director may designate, to perform certain 
functions that are reserved to the Commission under the Core Principle 
13 regulations, including reviewing the methodology used to compute 
projected operating costs.\760\
---------------------------------------------------------------------------

    \760\ 17 CFR 37.1307(a).
---------------------------------------------------------------------------

    The Commission proposes to amend Sec.  37.1307(a)(2) to clarify 
that the Commission may additionally delegate the authority to review 
and make changes to the methodology used by a SEF to determine the 
market value of its financial resources under Sec.  37.1305 and the 
methodology that SEFs use to determine their wind-down costs under 
Sec.  37.1304. Further, the Commission would delegate the ability to 
request the additional documentation related to the calculation 
methodologies used under Sec.  37.1306(c) and the notification of non-
compliance under Sec.  37.1306(e). The proposed amendments also include 
several additional non-substantive amendments based on the proposed 
amendments to Core Principle 13 regulations, as described above.
Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.1307.

XIX. Part 37--Subpart O: Core Principle 14 (System Safeguards)

    Core Principle 14 requires that SEFs (i) establish and maintain a 
program of risk analysis and oversight to identify and minimize sources 
of operational risk, through the development of

[[Page 62031]]

appropriate controls and procedures, and automated systems that are 
reliable, secure, and have adequate scalable capacity; (ii) establish 
and maintain emergency procedures, backup facilities, and a plan for 
disaster recovery that allow for the timely recovery and resumption of 
operations and the fulfillment of the SEFs' responsibilities and 
obligations; and (iii) periodically conduct tests to verify that backup 
resources are sufficient to ensure continued order processing and trade 
matching, price reporting, market surveillance, and maintenance of a 
comprehensive and accurate audit trail.\761\ The Commission promulgated 
rules under Sec.  37.1401 to further implement those requirements.\762\
---------------------------------------------------------------------------

    \761\ 7 U.S.C. 7b-3(f)(14). The Commission codified Core 
Principle 14 under Sec.  37.1400. 17 CFR 37.1400.
    \762\ 17 CFR 37.1401.
---------------------------------------------------------------------------

    The Commission is not proposing any amendments to existing 
Sec. Sec.  37.1401(a)-(b), (e)-(f), (g)-(i), or (k)-(m), other than 
non-substantive changes to paragraph references that are based on the 
changes described below.

A. Sec.  37.1401(c)

    Section 37.1401(c) requires each SEF to maintain a business 
continuity-disaster recovery plan and resources, emergency procedures, 
and backup facilities sufficient to enable timely recovery, resumption 
of its operations, and resumption of its ongoing fulfillment of its 
responsibilities and obligations as a SEF following any disruption of 
its operations.\763\ A SEF's business continuity-disaster recovery plan 
and resources generally should enable resumption of trading and 
clearing of swaps executed on or pursuant to the rules of the SEF 
during the next business day following the disruption.
---------------------------------------------------------------------------

    \763\ 17 CFR 37.1401(c).
---------------------------------------------------------------------------

    As noted above, the Commission proposes to move the existing 
requirement under Sec.  37.205(b)(4)--``Safe storage capability''--that 
a SEF must protect audit trail data from unauthorized alteration, 
accidental erasure, or other loss to a more appropriate provision under 
proposed Sec.  37.1401(c).\764\ The Commission also proposes additional 
non-substantive amendments to Sec.  37.1401(c). First, the Commission 
proposes to eliminate the sentence that references ``critical financial 
markets'' and Sec.  40.9, which do not exist.\765\ Second, the 
Commission proposes to replace the reference to ``designated clearing 
organization'' with ``derivatives clearing organization,'' which is the 
appropriate term under the Commission's regulations. Finally, the 
Commission proposes to eliminate the reference to swaps executed 
``pursuant to the rules of'' a SEF, which conforms to the proposed 
amendment to the ``block trade'' definition under Sec.  43.2, discussed 
further below.\766\
---------------------------------------------------------------------------

    \764\ See supra Section VII.D.2.a.--Sec.  37.205(b)(1)--Original 
Source Documents; Sec.  37.205(b)(2)--Transaction History Database; 
Sec.  37.205(b)(3)--Electronic Analysis Capability.
    \765\ The Commission further proposes to eliminate the reference 
to ``critical financial market'' under Sec.  37.1401(d).
    \766\ See infra Section XXII.--Part 43--Sec.  43.2--Definition 
of ``Block Trade.''
---------------------------------------------------------------------------

B. Sec.  37.1401(g)--Program of Risk Analysis and Oversight Technology 
Questionnaire

    Existing Exhibit V to Form SEF in Appendix A requires an applicant 
for SEF registration to file an Operational Capability Technology 
Questionnaire (``Questionnaire'') in order to demonstrate compliance 
with Core Principle 14 and Sec.  37.1401.\767\ The current version of 
the Questionnaire requests documents and information pertaining to the 
following eight areas of an applicant's program of risk analysis and 
oversight: (i) Organizational structure, system descriptions, facility 
locations, and geographic distribution of staff and equipment; (ii) 
risk analysis and oversight; (iii) system operations; (iv) systems 
development methodology; (v) information security; (vi) physical 
security and environmental controls; (vii) capacity planning and 
testing; and (viii) business continuity and disaster recovery. The 
current version of the Questionnaire is located on the Commission's 
website.\768\
---------------------------------------------------------------------------

    \767\ 17 CFR part 37 app. A.
    \768\ SEF Operational Capability Technology Questionnaire, 
available at https://www.cftc.gov/sites/default/files/idc/groups/public/@industryoversight/documents/file/seftechnologyquestionnaire.pdf.
---------------------------------------------------------------------------

    The Commission proposes a new provision under Sec.  37.1401(g) to 
require each SEF to annually prepare and submit an up-to-date 
Questionnaire to Commission staff not later than 90 calendar days after 
the SEF's fiscal year-end.\769\ The Commission notes that where 
information previously submitted on the Questionnaire remains current, 
the annual update may note that fact, rather than fully describe the 
same information again.
---------------------------------------------------------------------------

    \769\ The Commission notes that based on the proposed amendments 
to Form SEF in Appendix A discussed above, Exhibit V would be re-
designated as Exhibit Q of Form SEF. The up-to-date questionnaire 
would be called the ``Program of Risk Analysis and Oversight 
Technology Questionnaire'' and would be located in Appendix A to 
part 37. See supra note 169 and accompanying discussion. Based on 
the proposed addition of subsection (g), the Commission proposes to 
renumber the existing provisions under subsections (g)-(i) to 
subsections (h)-(j), respectively. Based on the renumbering of these 
provisions, the Commission also proposes conforming non-substantive 
amendments to update applicable cross-references to these provisions 
in proposed paragraphs (a)(3), (h)(5), (i)(1)-(i)(7), and subsection 
(m).
---------------------------------------------------------------------------

    The updated version of the Questionnaire requests documents and 
information in the following nine areas to assist the Commission in 
assessing a SEF's compliance with the Act and Commission regulations: 
(i) Organizational structure, system descriptions, facility locations, 
and geographic distribution of staff and equipment, including 
organizational charts and diagrams; (ii) enterprise risk management 
program and governance, including information regarding the Board of 
Directors, audits, and third-party providers; (iii) information 
security, including storage of records, access controls, and 
cybersecurity threat intelligence capabilities; (iv) business 
continuity and disaster recovery plan and resources, including testing 
and recovery time objectives; (v) capacity planning and testing; (vi) 
system operations, including configuration management and event 
management; (vii) systems development methodology, including quality 
assurance; (viii) physical security and environmental controls; and 
(ix) testing, including vulnerability, penetration, and controls 
testing. While the majority of the updated Questionnaire is unchanged 
from the current version, the Commission is making certain amendments, 
including the addition of enterprise technology risk assessments, board 
of director and committee information, third-party service provider 
information, and cybersecurity threat intelligence capabilities to keep 
up-to-date with the rapidly changing field of system safeguards and 
cybersecurity.
    The proposed annual update is designed to reduce overall 
compliance-related burdens and enhance internal operational efficiency 
for SEFs. First, the Commission would use the Questionnaire as the 
basis for Systems Safeguards Examination (``SSE'') document requests. 
The Commission believes that maintaining an updated Questionnaire would 
limit SSE document requests and the effort required to respond to these 
requests--a SEF would be able to provide updated information and 
documents for sections of the Questionnaire that have changed since the 
last annual filing.\770\ Second,

[[Page 62032]]

the Commission would use the Questionnaire to conduct required system 
safeguards oversight and maintain a current profile of the SEF's 
automated systems.\771\ Annual updates would reduce the need for 
separate requests and the burden of responding to these requests. 
Third, annual updates would assist a SEF's obligation to provide timely 
advance notice of all material (i) planned changes to automated systems 
that may impact the reliability, security, or adequate scalable 
capacity of such systems; and (ii) planned changes to the SEF's program 
of risk analysis and oversight.\772\ Fourth, annual updates, which a 
SEF would submit concurrently with its annual compliance report, could 
provide information and documents that are potentially useful in 
preparing that report.\773\
---------------------------------------------------------------------------

    \770\ To the extent that still-current information and documents 
were provided in the most recent update to the Questionnaire, a SEF 
responding to an SSE document request would be able to reference 
that fact, rather than resubmit such information and documents.
    \771\ The Commission notes that proposed subsection (h) 
(renumbered from existing subsection (g)) requires a SEF to provide 
to the Commission system safeguards-related books and records, 
including (i) current copies of its business continuity-disaster 
recovery plans and other emergency procedures; (ii) all assessments 
of its operational risks or system safeguards-related controls; 
(iii) all reports concerning system safeguards testing and 
assessment required by this chapter; and (iv) all other books and 
records requested by Commission staff in connection with Commission 
oversight of system safeguards or maintenance of a current profile 
of the SEF's automated systems. Id.
    \772\ 17 CFR 37.1401(f)(1)-(2).
    \773\ The Commission is proposing under Sec.  37.1306(d) and 
Sec.  37.1501(e)(2), respectively, to require a SEF to submit its 
fourth quarter financial report and annual compliance report no 
later than ninety days after the SEF's fiscal year end.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.1401(g).

C. Sec.  37.1401(j)

    Section 37.1401(j) specifies that for registered entities deemed by 
the Commission to be ``critical financial markets,'' Sec.  40.9 sets 
forth requirements for maintaining and dispersing disaster recovery 
resources in a manner sufficient to meet a same-day recovery time 
objective in the event of a wide-scale disruption. The Commission 
proposes to eliminate this provision, given that the Commission has not 
defined ``critical financial markets'' and such requirements do not 
exist under Sec.  40.9.

XX. Part 37--Subpart P: Core Principle 15 (Designation of Chief 
Compliance Officer)

    Core Principle 15 requires each SEF to designate a CCO and sets 
forth its corresponding duties.\774\ Among other responsibilities, a 
CCO is required to ensure that the SEF complies with the CEA and 
applicable rules and regulations, as well as establish and administer 
required policies and procedures.\775\ Core Principle 15 also requires 
the CCO to prepare and file an annual compliance report (``ACR'') to 
the Commission.\776\ The Commission further promulgated requirements 
under Sec.  37.1501 to implement these requirements.\777\ Based on its 
experience during part 37 implementation, the Commission proposes 
several amendments to Sec.  37.1501, in particular to streamline 
requirements related to the composition of the ACR and provide more 
useful information to the Commission.
---------------------------------------------------------------------------

    \774\ 7 U.S.C. 7b-3(f)(15). The Commission codified Core 
Principle 15 under Sec.  37.1500. 17 CFR 37.1500.
    \775\ 7 U.S.C. 7b-3(f)(15)(B)(iv)-(v).
    \776\ 7 U.S.C. 7b-3(f)(15)(D).
    \777\ 17 CFR 37.1501.
---------------------------------------------------------------------------

A. Sec.  37.1501--Chief Compliance Officer

1. Sec.  37.1501(a)--Definitions
    Core Principle 15 requires a CCO to report directly to the SEF's 
``board [of directors]'' or the SEF's ``senior officer'' \778\ and 
consult either the board or the senior officer to resolve conflicts of 
interest.\779\ Section 37.1501(a) defines ``board of directors,'' \780\ 
but does not define ``senior officer.'' \781\ In the SEF Core 
Principles Final Rule, the Commission noted that it would not adopt a 
definition of ``senior officer,'' but noted that the statutory term 
would only include the most senior executive officer of the legal 
entity registered as a SEF.\782\
---------------------------------------------------------------------------

    \778\ 7 U.S.C. 7b-3(f)(15)(B)(i). The Commission also notes that 
the CEA does not define ``senior officer.''
    \779\ 7 U.S.C. 7b-3(f)(15)(B)(iii).
    \780\ Section 37.1501(a) defines ``board of directors'' as the 
board of directors of a SEF, or for those SEFs whose organizational 
structure does not include a board of directors, a body performing a 
function similar to a board of directors. 17 CFR 37.1501(a).
    \781\ 17 CFR 37.1501(a).
    \782\ SEF Core Principles Final Rule at 33544.
---------------------------------------------------------------------------

    The Commission proposes to define a ``senior officer'' under Sec.  
37.1501(a) as the chief executive officer or other equivalent officer 
of the SEF. Across the various organizational structures that SEFs have 
established, the Commission has observed that a senior officer often 
may be the appropriate individual to whom a CCO would report regarding 
SEF activities. Therefore, this proposed definition would clarify the 
permissible reporting lines for the CCO and would provide specificity 
to the Commission's proposed amendments to the Core Principle 15 
regulations, as described below. Among other things, the proposed 
requirements would enable the senior officer to have greater oversight 
responsibilities over the CCO consistent with Core Principle 15.
Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.1501(a). In particular, the Commission requests comment on the 
questions below.
    (86) Is the Commission's proposed definition of ``senior officer'' 
sufficiently clear and complete? If not, then please provide an 
explanation of those aspects of the definition that you believe are 
insufficiently clear or inadequately addressed.
    (87) Are there any officers that may meet the definition of 
``senior officer,'' but pose a potential conflict of interest? If so, 
identify such officers and the types of conflicts that may arise.
    (88) Should the Commission add any other definitions to proposed 
Sec.  37.1501(a)?
2. Sec.  37.1501(b)--Chief Compliance Officer \783\
---------------------------------------------------------------------------

    \783\ The Commission proposes to retitle Sec.  37.1501(b) to 
``Chief compliance officer'' from ``Designation and qualifications 
of chief compliance officer'' based on the proposed changes 
described below.
---------------------------------------------------------------------------

    Sections 37.1501(b)-(c) set forth certain baseline requirements for 
the SEF CCO position. Section 37.1501(b)--``Designation and 
qualifications of chief compliance officer''-- requires a SEF to 
designate an individual to serve as the CCO; requires the CCO to have 
the authority and resources to help fulfill the SEF's statutory and 
regulatory duties, including supervisory authority over compliance 
staff; and establishes minimum qualifications for the designated 
CCO.\784\ Section 37.1501(c)--``Appointment, supervision, and removal 
of chief compliance officer''--establishes the respective authorities 
of the SEF board of directors and senior officer to designate, 
supervise, and remove the CCO; and requires the CCO to meet with the 
SEF's board and regulatory oversight committee (``ROC'') on an annual 
and quarterly basis, respectively, and provide them with information as 
requested.\785\
---------------------------------------------------------------------------

    \784\ 17 CFR 37.1501(b).
    \785\ 17 CFR 37.1501(c).
---------------------------------------------------------------------------

    The Commission proposes to amend, clarify, and eliminate various 
existing requirements under Sec. Sec.  37.1501(b)-(c) and consolidate 
the remaining provisions into Sec.  37.1501(b), as described below. The 
Commission proposes to eliminate duplicative rules to Core Principle 
15, including requirements that a SEF designate a

[[Page 62033]]

CCO \786\ and the CCO report directly to the board or the senior 
officer.\787\ With respect to the CCO's obligations to a ROC, Core 
Principle 15 does not require a SEF to establish a ROC and the 
Commission has not finalized a rule that establishes requirements for a 
ROC; therefore, the Commission proposes to eliminate the existing ROC-
related requirements from part 37.\788\
---------------------------------------------------------------------------

    \786\ The Commission proposes to eliminate this requirement 
under existing paragraph (b)(1), which the Commission proposes to 
retitle to ``Authority of chief compliance officer'' from ``Chief 
compliance officer required.''
    \787\ The Commission proposes to eliminate this requirement 
under existing paragraph (c)(2).
    \788\ These requirements include a mandatory quarterly meeting 
with the ROC under existing subparagraph (c)(1)(iii); and the 
requirement that the CCO provide self-regulatory program information 
to the ROC under existing subparagraph (c)(1)(iv). Conflicts of 
Interest Proposed Rule at 36741-42.
---------------------------------------------------------------------------

    Consistent with Core Principle 15, which requires the CCO to report 
to the SEF's board or senior officer, the Commission also proposes 
amendments to the consolidated requirement under Sec.  37.1501(b) to 
allow the SEF's senior officer to have the same oversight 
responsibilities over the CCO as the board. First, the Commission 
proposes to allow a CCO to consult with the board of directors or 
senior officer of the SEF as the CCO develops the SEF's policies and 
procedures.\789\ Second, the Commission also proposes to allow a CCO to 
meet with the senior officer of the SEF, in addition to the board of 
directors, on an annual basis.\790\ Third, the Commission further 
proposes to allow the CCO to provide self-regulatory program 
information to the SEF's senior officer, in addition to the board of 
directors.\791\
---------------------------------------------------------------------------

    \789\ The Commission proposes the amendment under proposed 
subparagraph (b)(1)(i).
    \790\ The Commission proposes to renumber existing subparagraph 
(c)(1)(iii) to paragraph (b)(5), based on the proposed consolidation 
of existing subsections (b)-(c), and amend the requirement as 
described.
    \791\ The Commission proposes to renumber existing subparagraph 
(c)(1)(iv) to paragraph (b)(6), based on the proposed consolidation 
of existing subsections (b)-(c), and amend the requirement as 
described.
---------------------------------------------------------------------------

    The Commission further proposes to eliminate the limitations on 
authority to remove a CCO, which currently restricts that removal 
authority to a majority of the board, or in the absence of a board, a 
senior officer.\792\ Instead, the Commission proposes a more simplified 
requirement under proposed Sec.  37.1501(b) to establish that (i) the 
board or the senior officer may appoint or remove the CCO; \793\ and 
(ii) the SEF must notify the Commission within two business days of the 
appointment or removal (on an interim or permanent basis) of the 
CCO.\794\ Based on its experience, the Commission recognizes that in 
many instances, the senior officer may be better positioned than the 
board to provide day-to-day oversight of the SEF and the CCO, as well 
as to determine whether to remove a CCO. Therefore, consistent with 
Core Principle 15, the Commission believes that a SEF's senior officer 
should have the same CCO oversight authority as the SEF's board of 
directors. This proposed amendment is consistent with Core Principle 
15, which does not mandate a voting percentage to approve or remove the 
CCO. The Commission also believes that these proposed amendments would 
not only allow a SEF to more appropriately designate, appoint, 
supervise, and remove a CCO based on the SEF's particular corporate 
structure, size, and complexity, but also continue to ensure a level of 
independence for its CCO that is appropriate to comply with Core 
Principle 15.
---------------------------------------------------------------------------

    \792\ The Commission proposes to eliminate this requirement 
under existing paragraph (c)(3).
    \793\ The Commission proposes to consolidate and amend the 
requirements under existing subparagraph (c)(1)(i) in part, which 
addresses the appointment of a CCO by the board or senior officer, 
with existing subparagraph (c)(3)(i), which currently addresses the 
removal of a CCO. Based on the proposed consolidation of existing 
subsections (b)-(c), the Commission proposes to renumber this 
consolidated provision to paragraph (b)(3) and retitle the 
consolidated provision to ``Appointment and removal of chief 
compliance officer.''
    \794\ The Commission notes that notification to the Commission 
of the appointment and removal of a CCO is currently required under 
existing subparagraph (c)(1)(i) and existing subparagraph 
(c)(3)(ii), respectively. Based on the proposed consolidation of 
existing subsections (b)-(c), the Commission proposes to consolidate 
and amend these notification requirements, and renumber the 
consolidated requirement to subparagraph (b)(3)(i).
---------------------------------------------------------------------------

    Based on the proposed consolidation of existing Sec. Sec.  
37.1501(b)-(c), the Commission also proposes several non-substantive 
amendments to the remaining provisions under proposed Sec.  37.1501(b), 
including the renumbering of certain existing provisions.\795\
---------------------------------------------------------------------------

    \795\ The Commission proposes to renumber the requirements under 
existing paragraph (b)(2)--``Qualifications of chief compliance 
officer''--to proposed subparagraphs (b)(2)(i)-(ii). The Commission 
also proposes to retitle existing subparagraph (c)(1)(ii), which 
specifies that the board or the senior officer must approve the 
CCO's compensation, to ``Compensation of the chief compliance 
officer.'' Based on the proposed consolidation of existing 
subsections (b)-(c), the Commission is proposing to renumber this 
requirement to paragraph (b)(4).
---------------------------------------------------------------------------

a. Acceptable Practices to Core Principle 15 in Appendix B
    The Commission proposes a new acceptable practice to Core Principle 
15 in Appendix B associated with Sec.  37.1501(b)(2)(i), which requires 
a CCO to have the background and skills appropriate to the 
position.\796\ The proposed acceptable practice would provide a non-
exclusive list of factors that a SEF may consider when evaluating an 
individual's qualifications to be a CCO and state that a SEF may make a 
determination based on the totality of a person's qualifications. The 
Commission believes that a non-exclusive list provides the clarity that 
SEFs have sought as to a CCO's requisite qualifications, but still 
allows a board and senior officer reasonable flexibility in appointing 
a CCO.
---------------------------------------------------------------------------

    \796\ The Commission proposes to add this provision in paragraph 
(b)(1) of the acceptable practices to Core Principle 15 in Appendix 
B. 17 CFR part 37 app. B.
---------------------------------------------------------------------------

    The proposed acceptable practice also states that a SEF should be 
especially vigilant regarding potential conflicts of interest when 
appointing a CCO. The Commission notes that the preamble to the SEF 
Core Principles Final Rule stated ``a conflict of interest may 
compromise a CCO's ability to effectively fulfill his or her 
responsibilities as a CCO . . . .'' \797\ The Commission continues to 
believe that conflicts of interest could affect a CCO's ability to 
effectively fulfill his or her responsibilities. Accordingly, a SEF 
should be especially vigilant in this regard when appointing a CCO. The 
Commission also continues to believe that a SEF should have policies 
and procedures in place to handle instances where its CCO has conflicts 
of interest.
---------------------------------------------------------------------------

    \797\ SEF Core Principles Final Rule at 33543-44.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.1501(b) and the associated acceptable practices to Core Principle 15 
in Appendix B.
3. Sec.  37.1501(c)--Duties of Chief Compliance Officer \798\
---------------------------------------------------------------------------

    \798\ The Commission proposes to renumber existing subsection 
(d) to subsection (c).
---------------------------------------------------------------------------

    Section 37.1501(d)--``Duties of chief compliance officer''--
currently requires a CCO, at a minimum, to (i) oversee and review the 
SEF's compliance with the Act and Commission regulations; \799\ (ii) 
resolve any conflicts of interest that may arise, including in certain 
enumerated circumstances; \800\ (iii) establish and administer written 
policies and procedures reasonably designed to prevent violations of 
the Act and

[[Page 62034]]

Commission regulations; \801\ (iv) take reasonable steps to ensure 
compliance with the Act and Commission regulations; \802\ (v) establish 
procedures for the remediation of noncompliance issues identified by 
the CCO through certain specified protocols; \803\ (vi) establish and 
follow appropriate procedures for the handling, management response, 
remediation, retesting, and closing of noncompliance issues; \804\ 
(vii) establish and administer a compliance manual and a written code 
of ethics; \805\ (viii) supervise a SEF's self-regulatory program; 
\806\ and (ix) supervise the effectiveness and sufficiency of any 
regulatory services provided to the SEF in accordance with Sec.  
37.204.\807\
---------------------------------------------------------------------------

    \799\ 17 CFR 37.1501(d)(1).
    \800\ 17 CFR 37.1501(d)(2). A CCO is specifically required to 
address conflicts between (i) business considerations and compliance 
requirements; (ii) business considerations and the requirement that 
the SEF provide fair, open, and impartial access under Sec.  37.202; 
and (iii) a SEF's management and board members. 17 CFR 
37.1501(d)(2)(i)-(iii).
    \801\ 17 CFR 37.1501(d)(3).
    \802\ 17 CFR 37.1501(d)(4).
    \803\ 17 CFR 37.1501(d)(5).
    \804\ 17 CFR 37.1501(d)(6).
    \805\ 17 CFR 37.1501(d)(7).
    \806\ 17 CFR 37.1501(d)(8).
    \807\ 17 CFR 37.1501(d)(9).
---------------------------------------------------------------------------

    The Commission proposes to adopt several substantive and non-
substantive amendments to clarify and streamline these duties. The 
Commission proposes to consolidate certain existing provisions and 
specify that the CCO may identify noncompliance matters through ``any 
means,'' in addition to the currently prescribed means; and clarify 
that the procedures followed to address noncompliance issues must be 
``reasonably designed'' by the CCO to handle, respond, remediate, 
retest, and resolve noncompliance issues identified by the CCO.\808\ 
These proposed amendments acknowledge that a CCO may not be able to 
design procedures that detect all possible noncompliance issues and 
reflect that a CCO may utilize a variety of resources to identify 
noncompliance issues beyond a limited set of means.
---------------------------------------------------------------------------

    \808\ Existing paragraph (d)(5) requires a CCO to establish 
procedures for remediation of noncompliance issues identified 
through a compliance office review, look-back, internal or external 
audit finding, self-reported error, or validated complaint. Existing 
paragraph (d)(6) requires a CCO to establish and follow appropriate 
procedures for the handling, management response, remediation, 
retesting, and closing of non-compliance issues. The Commission 
proposes to consolidate and amend these requirements and renumber 
the consolidated requirement to paragraph (c)(5).
---------------------------------------------------------------------------

    The Commission also proposes to amend a CCO's duty to resolve 
conflicts of interest.\809\ First, the Commission proposes to limit a 
CCO's duty to address only ``material'' conflicts of interest. This 
proposed amendment reflects the Commission's view that the current 
requirement is overly broad and impractical because a CCO cannot 
reasonably be expected to resolve every potential conflict of interest 
that may arise. Consistent with this view, the Commission also proposes 
to refine the scope of the CCO's duty to taking only ``reasonable 
steps'' to resolve ``material'' conflicts of interest that may 
arise.\810\ The Commission further proposes to eliminate the existing 
enumerated conflicts of interest to avoid any inference that they are 
an exhaustive list of conflicts that a CCO must address.\811\
---------------------------------------------------------------------------

    \809\ The Commission proposes to renumber existing paragraph 
(d)(2), which addresses the CCO's duty to resolve conflicts of 
interest, to paragraph (c)(2) and amend the requirement as 
described.
    \810\ The Commission also proposes to eliminate ``a body 
performing a function similar to the board of directors'' under 
proposed paragraph (c)(2) (existing paragraph (d)(2)), as this 
phrase is already included in the definition of ``board of 
directors'' under Sec.  37.1501(a).
    \811\ These provisions are currently set forth under existing 
subparagraphs (d)(2)(i)-(iii). See supra note 800.
---------------------------------------------------------------------------

    The Commission believes that these proposed amendments do not 
weaken a CCO's statutory duty to address conflicts of interest, but 
rather reflect the CCO's practical ability to detect and resolve 
conflicts. Moreover, the proposed amendments reflect the Commission's 
belief that a CCO should have discretion to determine the conflicts 
that are material to his or her SEF's ability to comply with the Act 
and the Commission's regulations. The Commission believes that these 
proposed changes are consistent with Core Principle 15.
Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.1501(c).
4. Sec.  37.1501(d)--Preparation of Annual Compliance Report \812\
---------------------------------------------------------------------------

    \812\ The Commission proposes to renumber existing subsection 
(e) to subsection (d).
---------------------------------------------------------------------------

    Existing Sec.  37.1501(e)--``Preparation of annual compliance 
report''--currently requires the CCO to annually prepare and sign an 
ACR that, at a minimum (i) describes the SEF's written policies and 
procedures, including the code of ethics and conflicts of interest 
policies; \813\ (ii) reviews the SEF's compliance with the Act and 
Commission regulations in conjunction with the SEF's policies and 
procedures; \814\ (iii) provides a self-assessment of the effectiveness 
of the SEF's policies and procedures, including areas of improvement 
and related recommendations for the SEF's compliance program or 
resources; \815\ (iv) lists material changes to the policies and 
procedures; \816\ (v) describes the SEF's financial, managerial, and 
operational resources, including compliance program staffing and 
resources, a catalogue of investigations and disciplinary actions, and 
a review of the disciplinary committee's performance; \817\ (vi) 
describes any material compliance matters identified through certain 
enumerated mechanisms, e.g., compliance office review or lookback, and 
explains how they were resolved; \818\ and (vii) certifies that, to the 
best of the CCO's knowledge and reasonable belief and under penalty of 
law, the ACR report is accurate and complete.\819\
---------------------------------------------------------------------------

    \813\ 17 CFR 37.1501(e)(1).
    \814\ 17 CFR 37.1501(e)(2)(i).
    \815\ 17 CFR 37.1501(e)(2)(ii)-(iii).
    \816\ 17 CFR 37.1501(e)(3).
    \817\ 17 CFR 37.1501(e)(4).
    \818\ 17 CFR 37.1501(e)(5).
    \819\ 17 CFR 37.1501(e)(6).
---------------------------------------------------------------------------

    During part 37 implementation, the Commission has gained experience 
and received feedback with respect to the ACR requirements. The 
Commission notes that some of the required ACR content has provided the 
Commission with minimal meaningful insight into a SEF's compliance 
program. For example, some of the content is duplicative of information 
obtained by the Commission from other reporting channels, such as the 
system-related information that a SEF must file pursuant to Core 
Principle 14 \820\ and rule certifications filed pursuant to part 40 of 
the Commission's regulations.\821\ Various SEF CCOs have also provided 
feedback that certain ACR content requires substantial time to prepare 
and includes some information that does not change frequently.\822\ 
They have requested that the Commission simplify these requirements and 
provide additional time to file the reports. The Commission also notes, 
however, that many SEFs have not provided sufficient details that 
describe and assess whether their respective policies and procedures

[[Page 62035]]

(e.g., rulebooks, compliance manuals, conflict of interest policies, 
code of ethics, governance documentation, and third-party service 
agreements) comply with the Act and Commission regulations.
---------------------------------------------------------------------------

    \820\ The Commission notes that proposed subsection (h) 
(existing subsection (g)) requires a SEF to produce system 
safeguards-related books and records that include current copies of 
its business continuity-disaster recovery plans and emergency 
procedures, assessments of its operational risks and controls, and 
reports concerning system safeguards testing and assessments.
    \821\ Among other information required to be submitted to the 
Commission pursuant to part 40, a SEF is required to provide the 
Commission with amendments to its rulebook and compliance manual.
    \822\ See CFTC Letter No. 17-61, No-Action Relief for Swap 
Execution Facilities from Compliance with the Timing Requirements of 
Commission Regulation 37.1501(f)(2) Relating to Chief Compliance 
Officer Annual Compliance Reports and Commission Regulation 
37.1306(d) Relating to Fourth Quarter Financial Reports at 2-3 (Nov. 
20, 2017) (``NAL No. 17-61'') (citing testimonials from SEFs that 
the preparation of an ACR requires an extensive information 
gathering process, including a review and documentation of 
information gathered on an entity-wide basis).
---------------------------------------------------------------------------

    Based upon its experience in reviewing ACRs, the Commission is 
proposing certain amendments that would eliminate duplicative or 
unnecessary information requirements and streamline existing 
requirements. These amendments would reduce unnecessary regulatory 
burdens and compliance costs associated with certain aspects of ACRs. 
The Commission is also proposing certain amendments to enhance the 
usefulness of ACRs by enabling the Commission to assess the 
effectiveness of a SEF's compliance and self-regulatory programs. The 
proposed revisions represent a simplified approach that continues to 
effectuate Core Principle 15.
    The Commission proposes to refine the scope of some of the required 
ACR content that it believes is otherwise duplicative, unnecessary, or 
burdensome. Under the proposed approach, a SEF would no longer need to 
include in its ACR either a review of all the Commission regulations 
applicable to a SEF or an identification of the written policies and 
procedures designed to ensure compliance with the Act and Commission 
regulations.\823\ The Commission believes that instead requiring an ACR 
to include a description and self-assessment of the effectiveness of 
the SEF's written policies and procedures to ``reasonably ensure'' 
compliance with the Act and applicable Commission regulations is more 
closely aligned with the corresponding provisions of Core Principle 15 
and would still allow the Commission to properly assess the SEF's 
compliance and self-regulatory programs.\824\ Similarly, the Commission 
also proposes to eliminate a required discussion of the SEF's 
compliance staffing and structure; a catalogue of investigations and 
disciplinary actions taken over the last year; and a review of 
disciplinary committee and panel performance.\825\ An ACR would 
continue to be required to describe a SEF's financial, managerial, and 
operational resources set aside for compliance, which the Commission 
believes is sufficient information to assess a SEF's self-regulatory 
program.\826\ By refining the scope of information required to be 
included in the ACR, the Commission anticipates that a SEF will be to 
devote its resources in providing more detailed, and ultimately better 
quality, information that will better help assess its compliance.
---------------------------------------------------------------------------

    \823\ The Commission proposes to eliminate these requirements in 
existing subparagraph (e)(2)(i) and the introductory language of 
existing paragraph (e)(2).
    \824\ As proposed, a SEF would continue to be required to 
describe the SEF's written policies and procedures, consistent with 
Core Principle 15. In addition to the required description, the 
Commission proposes to consolidate and amend existing subparagraph 
(e)(2)(ii), which requires a SEF to provide a self-assessment as to 
the effectiveness of its policies and procedures in the ACR, with 
existing paragraph (e)(1), and renumber the consolidated requirement 
to paragraph (d)(1). Further, the Commission proposes to consolidate 
and amend existing subparagraph (e)(2)(iii), which requires an ACR 
to discuss areas for improvement and recommend potential or 
prospective changes or improvements to a SEF's compliance program 
and resources, with existing paragraph (e)(3) and renumber the 
consolidated requirement to paragraph (d)(2). The Commission expects 
that the CCO will provide more nuanced and in-depth discussions 
through these consolidated provisions, rather than merely providing 
generalized responses.
    \825\ The Commission proposes to eliminate these requirements 
under existing paragraph (e)(4).
    \826\ The Commission proposes to renumber the remaining 
requirements under existing paragraph (e)(4) to paragraph (d)(3) and 
adopt minor non-substantive amendments.
---------------------------------------------------------------------------

    To facilitate the Commission's ability to assess a SEF's written 
policies and procedures regarding compliance matters, the Commission 
also proposes to require a SEF to discuss only material noncompliance 
matters and explain the corresponding actions taken to resolve such 
matters.\827\ The Commission believes that requiring SEFs to focus on 
describing material non-compliance matters, rather than describing all 
compliance matters in similar depth, will streamline this requirement 
and provide more useful information to the Commission. Further, the 
Commission proposes to eliminate the enumerated mechanisms for 
identifying non-compliance issues, which conforms to the ability of a 
CCO to establish procedures to address non-compliance issues through 
``any means,'' as described above.\828\
---------------------------------------------------------------------------

    \827\ The Commission proposes to renumber this requirement under 
existing paragraph (e)(5) to paragraph (d)(4) and adopt the 
amendments as described above and other non-substantive amendments.
    \828\ The Commission proposes to eliminate these enumerated 
mechanisms under existing paragraph (e)(5).
---------------------------------------------------------------------------

    Consistent with these proposed amendments, the Commission also 
proposes to limit a SEF CCO's certification of an ACR's accuracy and 
completeness to ``all material respects'' of the report.\829\ The 
Commission recognizes that CCOs have been hesitant to certify that an 
entire ACR is accurate and complete under the penalty of the law, 
without regard to whether a potential inaccuracy or omission would be a 
material error or not. Therefore, the Commission believes this proposed 
change will provide an appropriate balance between the SEF CCOs' 
concerns of potential liability with the material accuracy of an ACR 
submitted to the Commission.
---------------------------------------------------------------------------

    \829\ The Commission proposes to renumber existing paragraph 
(e)(6) to paragraph (d)(5) and amend the requirement as described.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.1501(d). In particular, the Commission requests comment to the 
questions below.
    (89) Are the proposed revisions to the required content for ACRs 
appropriate? If not, then how should the Commission modify the required 
content?
    (90) Are there any unintended consequences to removing the specific 
requirements regarding a description of a SEF's self-regulatory 
program's staffing and structure, a catalogue of investigations and 
disciplinary actions taken since the last ACR, and a review of the 
performance of the disciplinary committees and panels?
    (91) Is it appropriate to limit the discussion of non-compliance 
matters to only those that are material in nature? If not, then why?
5. Sec.  37.1501(e)--Submission of Annual Compliance Report and Related 
Matters \830\
---------------------------------------------------------------------------

    \830\ The Commission proposes to renumber existing subsection 
(f) to subsection (e). The Commission also proposes to retitle 
subsection (e) to ``Submission of annual compliance report and 
related matters'' from ``Submission of annual compliance report'' 
based on the proposed changes described below.
---------------------------------------------------------------------------

    Existing Sec.  37.1501(f)(1) currently requires a CCO to provide an 
ACR to the board or, in the absence of a board, the senior officer for 
review.\831\ The board of directors and senior officer may not require 
the CCO to change the ACR.\832\ The SEF's board minutes or a similar 
written record must reflect the submission of the ACR to the board of 
directors or senior officer and any subsequent discussion of the 
report.\833\ Additionally, the SEF must concurrently file the ACR and 
the fourth quarter financial statements with the Commission within 60 
calendar days of the end of the SEF's fiscal year end.\834\ The CCO 
must certify and promptly file an amended ACR with the Commission upon 
the discovery of any material error or omission in the report.\835\ A 
SEF may

[[Page 62036]]

request an extension to file the ACR with the Commission based on 
substantial, undue hardship in filing the ACR on time.\836\
---------------------------------------------------------------------------

    \831\ 17 CFR 37.1501(f)(1).
    \832\ Id.
    \833\ Id.
    \834\ 17 CFR 37.1501(f)(2).
    \835\ 17 CFR 37.1501(f)(3).
    \836\ 17 CFR 37.1501(f)(4).
---------------------------------------------------------------------------

    The Commission proposes several amendments to simplify the ACR 
submission procedures. First, the Commission proposes to provide SEFs 
with an additional thirty days to file the ACR with the Commission, but 
no later than ninety calendar days after a SEF's fiscal year end.\837\ 
This proposed extension is consistent with the basis provided by 
Commission staff in granting current no-action relief to SEFs that 
provides an additional thirty days to prepare and file an ACR.\838\ In 
particular, the Commission recognizes that in addition to the ACR, a 
CCO has other reporting obligations, such as the fourth quarter 
financial report required to be submitted under Core Principle 13 and 
other year-end reports; SEFs have indicated that these multiple 
reporting obligations present resource constraints on SEFs and their 
CCOs.\839\ In addition to an extended deadline, the Commission proposes 
to replace the ``substantial and undue hardship'' standard required for 
filing ACR extensions with a ``reasonable and valid'' standard.\840\ 
Further, the Commission proposes to eliminate the requirement that each 
SEF must document the submission of the ACR to the SEF's board of 
directors or senior officer in board minutes or some other similar 
written record; \841\ the Commission notes that the Core Principle 15 
recordkeeping requirement under proposed Sec.  37.1501(f), as discussed 
further below, would incorporate this requirement.\842\ The Commission 
also proposes to require a CCO to submit an amended ACR to the SEF's 
board of directors or, in the absence of a board of directors, the 
senior officer of the SEF, for review prior to submitting the amended 
ACR to the Commission; this approach is the same as the requirements 
that exist for submitting an initial ACR.\843\
---------------------------------------------------------------------------

    \837\ The Commission proposes to renumber existing paragraph 
(f)(2) to paragraph (e)(2) and amend the requirement as described. 
The Commission also proposes to add a title to this paragraph--
``Submission of annual compliance report to the Commission.''
    \838\ NAL No. 17-61 at 4.
    \839\ Id. at 2-3.
    \840\ The Commission proposes to renumber existing paragraph 
(f)(4) to paragraph (e)(4) and amend the provision as described. The 
Commission also proposes to add a title--``Request for extension.''
    \841\ The Commission proposes to eliminate this requirement 
under existing paragraph (f)(1).
    \842\ The Commission notes that existing Sec.  37.1501(g) sets 
forth recordkeeping requirements for SEFs related to the CCO's 
duties. As discussed below, the Commission is proposing to amend 
those requirements. See infra Section XX.A.6.--Sec.  37.1501(f)--
Recordkeeping.
    \843\ The Commission proposes to renumber existing paragraph 
(f)(3) to paragraph (e)(3) and add a title--``Amendments to annual 
compliance report.'' The Commission proposes to adopt this 
requirement under subparagraph (e)(3)(i). The Commission notes that 
under proposed subparagraph (e)(3)(ii), an amended ACR would be 
subject to the amended certification requirement, i.e., a CCO must 
certify that the ACR is accurate and complete in all material 
respects.
---------------------------------------------------------------------------

    In addition to the proposed amendments described above related to 
submitting the ACR, the Commission proposes certain non-substantive 
amendments to the remaining provisions under proposed Sec.  
37.1501(e).\844\
---------------------------------------------------------------------------

    \844\ The Commission proposes to renumber existing paragraph 
(f)(1) to paragraph (e)(1), adopt non-substantive amendments to the 
existing language, and add a title--``Furnishing the annual 
compliance report prior to submission to the Commission.''
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.1501(e).
6. Sec.  37.1501(f)--Recordkeeping \845\
---------------------------------------------------------------------------

    \845\ The Commission proposes to renumber existing subsection 
(g) to subsection (f).
---------------------------------------------------------------------------

    Existing Section 37.1501(g)(1) currently requires a SEF to maintain 
a copy of written policies and procedures adopted in furtherance of 
compliance with the Act and the Commissions regulations; \846\ copies 
of all materials created in furtherance of the CCO's duties under 
existing Sec. Sec.  37.1501(d)(8)-(9); \847\ copies of all materials in 
connection with the review and submission of the ACR; \848\ and any 
records relevant to the ACR.\849\ Existing Sec.  37.1501(g)(2) requires 
the SEF to maintain these records in accordance with Sec.  1.31 and 
part 45 of the Commission's regulations.\850\
---------------------------------------------------------------------------

    \846\ 17 CFR 37.1501(g)(1)(i).
    \847\ 17 CFR 37.1501(g)(1)(ii).
    \848\ 17 CFR 37.1501(g)(1)(iii).
    \849\ 17 CFR 37.1501(g)(1)(iv).
    \850\ 17 CFR 37.1501(g)(2).
---------------------------------------------------------------------------

    The Commission proposes streamline the recordkeeping requirements 
that pertain to the CCO's duties and the preparation and submission of 
the ACR. Accordingly, the Commission proposes a revised general 
requirement under proposed Sec.  37.1501(f) that would require the SEF 
to keep all records demonstrating compliance with the duties of the CCO 
and the preparation and submission of the ACR consistent with the 
recordkeeping requirements under Sec. Sec.  37.1000-1001.
7. Sec.  37.1501(g)--Delegation of Authority \851\
---------------------------------------------------------------------------

    \851\ The Commission proposes to renumber existing subsection 
(h) to subsection (g) based on the changes described above.
---------------------------------------------------------------------------

    Section 37.1501(h)--``Delegation of authority''--currently 
delegates the authority to grant or deny a SEF's request for an 
extension of time to file its ACR to the Director of DMO.\852\ In 
addition to renumbering the provision based on the amendments described 
above, the Commission proposes to adopt non-substantive amendments that 
conform to the proposed amendments to the Core Principle 15 regulations 
discussed above.
---------------------------------------------------------------------------

    \852\ 17 CFR 37.1501(h).
---------------------------------------------------------------------------

XXI. Part 36--Trade Execution Requirement

    The Commission is proposing regulations under part 36 to address 
the broadened scope of swaps that will become subject to the trade 
execution requirement based on the proposed interpretation of ``makes 
the swap available to trade'' in CEA section 2(h)(8). In addition to an 
implementing regulation, the Commission proposes several exemptions 
from the requirement for certain types of swap transactions, as 
discussed below. Further, the Commission proposes to require that SEFs 
and DCMs file a standardized form with the Commission that details the 
swaps that they respectively list for trading that are subject to the 
requirement. The Commission also proposes a new provision to compel the 
Commission to establish a centralized registry on its website that 
reflects (i) the SEFs and DCMs that list swaps subject to the 
requirement; and (ii) the particular swaps listed on each of those 
entities. To transition trading of additional swaps onto SEFs or DCMs 
pursuant to the requirement, the Commission additionally proposes a 
revised compliance schedule.

A. Sec.  36.1--Trade Execution Requirement

1. Sec.  36.1(a)--Trade Execution Requirement
    The Commission proposes Sec.  36.1(a) to codify the statutory 
language of the trade execution requirement, which requires 
counterparties to execute a swap that is subject to the clearing 
requirement on a DCM, a SEF or an exempt SEF unless no such entity 
``makes the swap available to trade'' or the swap is subject to a 
clearing exception in CEA section 2(h)(7).\853\ The

[[Page 62037]]

Commission believes that the statutory phrase ``makes the swap 
available to trade'' specifies the listing of a swap by a DCM, a SEF, 
or an exempt SEF on its facility for trading.\854\ Accordingly, Sec.  
36.1(a) would specify that counterparties must execute a transaction 
subject to the clearing requirement on a DCM, a SEF, or an Exempt SEF 
that lists the swap for trading.\855\
---------------------------------------------------------------------------

    \853\ 7 U.S.C. 2(h)(8)(B). The Commission interprets ``swap 
execution facility'' in CEA section 2(h)(8)(B) to include a swap 
execution facility that is exempt from registration pursuant to CEA 
section 5h(g). See supra note 10. See also supra Section IV.I.4.a.--
Sec.  36.1(a)--Trade Execution Requirement.
    \854\ See supra Section IV.I.4.a.--Sec.  36.1(a)--Trade 
Execution Requirement. As discussed below, the Commission is 
proposing an exemption from the requirement for swap transactions 
involving swaps that are listed for trading only by an Exempt SEF. 
See infra Section XXI.A.2.--Sec.  36.1(b)--Exemption For Certain 
Swaps Listed Only By Exempt SEFs.
    \855\ See supra Section IV.I.4.a.--Sec.  36.1(a)--Trade 
Execution Requirement.
---------------------------------------------------------------------------

    The Commission also proposes to exempt certain types of swap 
transactions from the trade execution requirement pursuant to its 
exemptive authority in CEA section 4(c). For the purposes of promoting 
responsible economic or financial innovation and fair competition, CEA 
section 4(c)(1) provides the Commission with the authority to exempt 
any agreement, contract, or transaction from any CEA provision, subject 
to specified factors.\856\ CEA section 4(c)(2) prohibits the Commission 
from providing an exemption from any requirements in CEA section 
4(c)(1), unless the Commission determines that (i) the requirement 
should not be applied to the agreement, contract, or transaction for 
which the exemption is sought; (ii) the exemption would be consistent 
with the public interest and the purposes of the Act; (iii) the 
agreement, contract, or transaction at issue will be entered into 
solely between appropriate persons; \857\ and (iv) the agreement, 
contract, or transaction at issue will not have a material adverse 
effect on the ability of the Commission or exchange to discharge its 
regulatory or self-regulatory duties under the Act.\858\
---------------------------------------------------------------------------

    \856\ 7 U.S.C. 6(c)(1). CEA section 4(c)(1) is intended to allow 
the Commission to ``provid[e] certainty and stability to existing 
and emerging markets so that financial innovation and market 
development can proceed in an effective and competitive manner.'' 
House Conf. Report No. 102-978, 102d Cong. 2d Sess. at 81 (Oct. 2, 
1992), reprinted in 1992 U.S.C.C.A.N. 3179, 3213.
    \857\ 7 U.S.C. 6(c)(3). CEA section 4(c)(3) includes a number of 
specified categories of persons within ``appropriate persons'' that 
are deemed as appropriate to enter into swaps exempted pursuant to 
CEA section 4(c). This includes persons the Commission determines to 
be appropriate in light of their financial profile or other 
qualifications, or the applicability of appropriate regulatory 
protections. For purposes of considering the CEA section 4(c) 
exemptions within this proposal, the Commission believes that ECPs 
would qualify as ``appropriate persons.''
    \858\ 7 U.S.C. 6(c)(2). Notwithstanding the adoption of 
exemptions from the Act, the Commission emphasizes that their use is 
subject to the Commission's antifraud and anti-manipulation 
enforcement authority. In this connection, Sec.  50.10(a) prohibits 
any person from knowingly or recklessly evading or participating in, 
or facilitating, an evasion of CEA section 2(h) or any Commission 
rule or regulation adopted thereunder. 17 CFR 50.10(a). Further, 
Sec.  50.10(c) prohibits any person from abusing any exemption or 
exception to CEA section 2(h), including any associated exemption or 
exception provided by rule, regulation, or order. 17 CFR 50.10(c).
---------------------------------------------------------------------------

    As discussed below, the Commission specifically proposes exemptions 
from the trade execution requirement for the following transactions 
that would otherwise be subject to that requirement: (i) Swap 
transactions involving swaps that are listed for trading only by an 
Exempt SEF; (ii) swap transactions for which the clearing exceptions in 
CEA section 2(h)(7) or the clearing exceptions or exemptions under part 
50 apply; (iii) swap transactions that are executed as a component of a 
package transaction that includes a component that is a new issuance 
bond; and (iv) swap transactions between ``eligible affiliate 
counterparties'' (``inter-affiliate counterparties'') that elect to 
clear such transactions, notwithstanding their ability to elect the 
relevant clearing exemption under Sec.  50.52.
2. Sec.  36.1(b)--Exemption For Certain Swaps Listed Only By Exempt 
SEFs
    The Commission proposes Sec.  36.1(b) to establish an exemption 
from the trade execution requirement that may be elected by 
counterparties to a swap that is subject to the trade execution 
requirement, but is listed for trading only by Exempt SEFs.\859\ The 
Commission believes that exempting these types of transactions from the 
trade execution requirement would be consistent with the objectives of 
CEA section 4(c).
---------------------------------------------------------------------------

    \859\ The Commission notes, however, that once a swap subject to 
the clearing requirement is listed by a SEF or a DCM, then 
counterparties may not use this exemption and would be required to 
comply with the trade execution requirement.
---------------------------------------------------------------------------

    As noted above, CEA section 2(h)(8)(A) provides that counterparties 
to transactions involving a swap subject to the clearing requirement 
must execute the transaction on a DCM designated under CEA section 5, a 
SEF registered under CEA section 5h or a SEF that is exempt from 
registration under CEA 5h(g).\860\ CEA section 2(h)(8)(B), however, 
specifies that this requirement does not apply if no DCM or swap 
execution facility makes the swap available to trade (emphasis 
added).\861\ The Commission interprets the phrase ``swap execution 
facility'' in CEA section 2(h)(8)(B) to include both registered SEFs 
and SEFs that are exempt from registration pursuant to section 5h(g), 
given the references in section 2(h)(8)(A) and the applicability of 
section 5h to both types of entities.\862\ Therefore, under the 
Commission's proposed interpretation of ``makes the swap available to 
trade,'' either a registered SEF or an Exempt SEF that lists a swap 
subject to the clearing requirement for trading can make the swap 
``available to trade,'' thereby triggering the trade execution 
requirement for that swap.
---------------------------------------------------------------------------

    \860\ 7 U.S.C. 2(h)(8)(A).
    \861\ 7 U.S.C. 2(h)(8)(B).
    \862\ See supra note 10.
---------------------------------------------------------------------------

    While the Commission interprets CEA section 2(h)(8) to mean that 
the listing of a swap by an Exempt SEF would trigger the trade 
execution requirement, the Commission believes that it would be 
appropriate to exempt such listings from the requirement, given that 
the Commission does not oversee the listing of swaps by Exempt SEFs. To 
list new contracts SEFs submit their products for Commission review 
pursuant to the part 40 filing requirements.\863\ The Commission 
reviews a new swap contract to ensure that it is consistent with the 
CEA and applicable Commission regulations, including the requirement 
that the contract not be susceptible to manipulation. Upon listing, a 
SEF, under Commission oversight, remains responsible for ensuring that 
the contract continues to comport with the CEA and applicable 
Commission regulations. In contrast, the Commission does not have 
oversight authority with respect to the listing of new contracts by 
Exempt SEFs.
---------------------------------------------------------------------------

    \863\ 17 CFR 40.2-3.
---------------------------------------------------------------------------

    The Commission believes that exempting swaps subject to the 
clearing requirement that are listed exclusively by Exempt SEFs should 
have little practical impact on the number of products that become 
subject to the trade execution requirement. Given the internationally 
competitive nature of the swaps industry, the Commission believes that 
SEFs and DCMs will likely list many of the same swaps listed by Exempt 
SEFs. The Commission also emphasizes that once the trade execution 
requirement is triggered for a particular swap by a SEF or DCM that 
lists the swap, the requirement may be satisfied by executing the swap 
on not only a SEF or DCM, but also on an Exempt SEF as well.

[[Page 62038]]

a. Discussion of CEA Section 4(c) Enumerated Factors
    For the reasons stated above, the Commission believes that 
exempting a swap subject to the clearing requirement that is listed for 
trading only on an Exempt SEF from triggering the trade execution 
requirement would be consistent with the objectives of CEA section 
4(c).
    Given that the number of swaps that are subject to the clearing 
requirement and only listed by Exempt SEFs is likely small, the 
Commission believes that the proposed exemption is appropriate and 
would be consistent with the public interest and purposes of the CEA. 
The Commission believes that the proposed regulation would not have a 
material adverse effect on the ability of the Commission or any SEF or 
DCM to discharge its regulatory or self-regulatory duties under the 
Act. The Commission notes that under the proposed exemption, swap 
agreements, contracts, and transactions would still be entered into 
solely between ECPs,\864\ who the Commission believes, for purposes of 
this proposal, to be appropriate persons.
---------------------------------------------------------------------------

    \864\ As noted above, pursuant to CEA section 2(e), it is 
unlawful for any U.S. person other than an ECP, as defined in CEA 
section 1a(18), to enter into a swap unless the swap is entered into 
on, or subject to the rules of, a DCM. 7 U.S.C. 2(e).
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
36.1(b), including whether the proposed exemptive relief is consistent 
with the public interest and the other requirements of CEA section 
4(c). In particular, the Commission requests comment on the following 
question:
    (92) Pursuant to its authority in CEA section 4(c), should the 
Commission exempt swaps that are subject to the clearing requirement 
and listed for trading only by an Exempt SEF from the trade execution 
requirement, until such swaps are listed by a SEF or DCM?
3. Sec.  36.1(c)--Exemption for Swap Transactions Excepted or Exempted 
From the Clearing Requirement Under Part 50
    The Commission proposes Sec.  36.1(c) to establish an exemption to 
the trade execution requirement for swap transactions for which an 
exception or exemption has been elected pursuant to part 50. The 
proposed exemption would apply to any transaction for which (i) a 
clearing exception under Sec.  50.50 or a clearing exemption under 
Sec.  50.51 or Sec.  50.52 has been elected; or (ii) a future exemption 
that has been adopted by the Commission under part 50 would apply. The 
Commission has determined that exempting these types of transactions 
from the trade execution requirement would be consistent with the 
objectives of CEA section 4(c).
    The Act and the Commission's regulations specify that certain 
transactions that are not subject to the clearing requirement are not 
subject to the trade execution requirement. CEA section 2(h)(8) clearly 
establishes that transactions that are not subject to the clearing 
requirement pursuant to a clearing exception in CEA section 2(h)(7) are 
not subject to the trade execution requirement.\865\ CEA section 
2(h)(7), i.e., the end-user exception, provides a clearing exception to 
a swap transaction if one of the counterparties (i) is not a financial 
entity; (ii) is using the swap to hedge or mitigate commercial risk; 
and (iii) notifies the Commission about how it generally meets its 
financial obligations associated with entering into uncleared 
swaps.\866\ The Commission adopted requirements under Sec.  50.50 to 
implement this exception.\867\
---------------------------------------------------------------------------

    \865\ 7 U.S.C. 2(h)(8)(B).
    \866\ 7 U.S.C. 2(h)(7).
    \867\ 7 U.S.C. 2(h)(7). Among other things, Sec.  50.50 
establishes when a swap transaction is considered to hedge or 
mitigate commercial risk; specifies how to satisfy the reporting 
requirement; and exempts small financial institutions from the 
definition of ``financial entity.'' 17 CFR 50.50.
---------------------------------------------------------------------------

    In contrast to swaps that are eligible for the end-user exception, 
however, swaps that are not subject to the clearing requirement based 
on other statutory authority are currently not expressly exempted from 
the trade execution requirement. Pursuant to its exemptive authority in 
CEA section 4(c), the Commission has provided additional exemptions 
from the clearing requirement for swaps between certain types of 
entities, as well as for certain types of swap transactions. Section 
50.51 allows certain cooperatives--those that otherwise consist 
entirely of entities that would qualify for the end-user exception--to 
elect a clearing exemption for swaps executed with a member of an 
exempt cooperative.\868\ Section 50.52 allows inter-affiliate 
counterparties who have ``eligible affiliate counterparty status'' to 
elect a clearing exemption for swaps that are entered into between the 
affiliated parties.\869\ The Commission notes that it has also 
proposed, pursuant to CEA section 4(c), to exempt transactions by 
eligible bank holding companies, savings and loan holding companies, 
and community development financial institutions from the clearing 
requirement.\870\
---------------------------------------------------------------------------

    \868\ 17 CFR 50.51. The exemption applies to swaps that are 
executed in connection with originating a loan or loans for the 
member of the cooperative, or hedging or mitigating commercial risk 
related to member loans or arising from swaps related to originating 
loans for members. 17 CFR 50.51(b)(1)-(2).
    \869\ 17 CFR 50.52. Counterparties have ``eligible affiliate 
counterparty status'' if one counterparty, directly or indirectly, 
holds a majority ownership interest in the other counterparty; or a 
third party, directly or indirectly, holds a majority ownership 
interest in both counterparties. 17 CFR 50.52(a)(1)(i)-(ii). To 
elect the exemption, such counterparties must also meet additional 
conditions, including reporting requirements. 17 CFR 50.52(b)-(c).
    \870\ Amendments to Clearing Exemption for Swaps Entered Into by 
Certain Bank Holding Companies, Savings and Loan Holding Companies, 
and Community Development Financial Institutions, 83 FR 44001 
(proposed Aug. 29, 2018).
---------------------------------------------------------------------------

    The Commission believes that applying the trade execution 
requirement to swaps that are eligible for a clearing exception or 
clearing exemption potentially mitigates the benefits that are 
associated with that exception or exemption. For example, a 
counterparty that determines not to clear a swap pursuant to a clearing 
exemption, but otherwise remains subject to the trade execution 
requirement, would be limited in where it may trade or execute that 
swap and may incur additional costs related to SEF onboarding. 
Therefore, in order to fully preserve the benefits of a clearing 
exception or clearing exemption, the Commission believes swaps that are 
excepted or exempted from the clearing requirement should not be 
subject to the trade execution requirement.
a. Discussion of CEA Section 4(c) Enumerated Factors
    For the reasons stated above, the Commission believes that 
exempting a swap transaction, for which a clearing exception or 
clearing exemption have been elected pursuant to part 50, from the 
trade execution requirement would be consistent with the objectives of 
CEA section 4(c).
    Given that the scope of this proposed exemption is limited and 
applies to transactions that are already excepted or exempted from the 
clearing requirement, the Commission believes that the proposed 
regulation would not have a material adverse effect on the ability of 
the Commission or any SEF or DCM to discharge its regulatory or self-
regulatory responsibilities under the CEA and the Commission's 
regulations. The Commission believes that under the proposed exemption, 
swap transactions would still be entered into solely between ECPs, who 
the Commission believes, for purposes of this proposal, to be 
appropriate persons.\871\
---------------------------------------------------------------------------

    \871\ See supra note 857 (discussing the scope of ``appropriate 
persons'').

---------------------------------------------------------------------------

[[Page 62039]]

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
36.1(c), including whether the proposed exemptive relief is consistent 
with the public interest and the other requirements of CEA section 
4(c). In particular, the Commission requests comment on the following 
question:
    (93) Pursuant to its authority in CEA section 4(c), should the 
Commission exempt swap transactions that are subject to a clearing 
exception or clearing exemption under part 50 from the trade execution 
requirement?
4. Sec.  36.1(d)--Exemption for Swaps Executed With Bond Issuance
    The Commission proposes Sec.  36.1(d) to establish an exemption to 
the trade execution requirement for swap transactions that are 
components of a ``New Issuance Bond'' package transaction. The 
Commission believes that exempting these types of transactions from the 
trade execution requirement would be consistent with the objectives of 
CEA section 4(c). This proposed approach is consistent with the time-
limited no-action relief provided by Commission staff for this category 
of package transactions.\872\
---------------------------------------------------------------------------

    \872\ See supra note 334 (describing the no-action relief from 
the trade execution requirement provided by Commission staff for 
categories of package transactions).
---------------------------------------------------------------------------

    New Issuance Bond package transactions include at least one 
individual swap component that is subject to the trade execution 
requirement and at least one individual component that is a bond \873\ 
issued and sold in the primary market.\874\ An underwriter (on behalf 
of an issuer) arranges the issuance of a bond packaged with a fixed-to-
floating IRS that features the issuer as a counterparty. The terms of 
the IRS, which include tenor and payment terms, typically match the 
terms of the bond issuance. By issuing a bond with a fixed-to-floating 
IRS, issuers are able to effectively turn fixed-rate liabilities into 
variable rate liabilities, or vice versa.\875\ To correspond the terms 
between these two components and facilitate the bond issuance in an 
efficient and cost-effective manner, the IRS component is customized 
and negotiated in a manner that closely corresponds to the bond 
issuance process.
---------------------------------------------------------------------------

    \873\ The Commission notes that this proposed exemption would 
not apply to swap components of package transactions that include 
sovereign debt, such as U.S. Treasury bonds, notes, and bills.
    \874\ The Commission understands that a bond issued and sold in 
the primary market that may constitute part of a package transaction 
is a ``security,'' as defined in section 2(a)(1) of the Securities 
Act of 1933 or section 3(a)(10) of the Securities Exchange Act of 
1934. To the extent that counterparties may be facilitating package 
transactions that involve a security, or any component agreement, 
contract, or transaction over which the Commission does not have 
exclusive jurisdiction, the Commission does not opine on whether 
such activity complies with other applicable law and regulations.
    \875\ For example, a bond issuer seeks to pay variable rates on 
its bonds, but prospective investors may seek a fixed rate of 
return. By arranging a New Issuance Bond package transaction, the 
bond issuer can issue a fixed-rate bond and simultaneously enter 
into an offsetting IRS. The IRS enables the issuer to receive a 
fixed rate that matches the fixed rate on its bond to be issued, 
while paying the variable rate that it originally sought. 
Ultimately, this arrangement may allow the bond issuer to issue the 
fixed-rate bond at a lower cost.
---------------------------------------------------------------------------

    Given the role of the issuer in the package transaction--both as 
issuer of the bond and a counterparty to the swap--and the process 
under which the swap is negotiated,\876\ this type of package 
transaction has not been conducive to execution on a SEF trading system 
or platform. The Commission notes that the no-action relief that has 
been provided by Commission staff for these swaps components reflects 
the ongoing lack of an available execution method on an appropriate 
venue.\877\ Based on the integral role of the bond issuance in 
facilitating the component swap execution, the Commission believes that 
the IRS component is not suitable for execution on a SEF, even where a 
SEF may offer flexible means of execution.
---------------------------------------------------------------------------

    \876\ The Commission notes that these types of package 
transactions differ from other package transactions that involve the 
purchase or sale of a security in the secondary market, given that 
they involve the issuance of a new security.
    \877\ NAL No. 17-55 at 2-3.
---------------------------------------------------------------------------

    Therefore, consistent with current no-action relief provided by 
Commission staff, the Commission proposes to exempt swap components of 
a New Bond Issuance package transaction from the trade execution 
requirement. The proposed exemption would establish that a ``package 
transaction'' consists of two or more component transactions executed 
between two or more counterparties, where (i) execution of each 
component transaction is contingent upon the execution of all other 
components transactions; and (ii) the component transactions are priced 
or quoted together as one economic transaction with simultaneous or 
near simultaneous execution of all components. The Commission 
recognizes the inherent challenges in trading or executing these swap 
components on a SEF or DCM and, therefore, recognizes the benefits of 
continuing to allow market participants to maintain established market 
practices with respect to this type of package transaction.
a. Discussion of CEA Section 4(c) Enumerated Factors
    The Commission believes that exempting swap components of New 
Issuance Bond package transactions from the trade execution requirement 
would be consistent with the objectives of CEA section 4(c).
    The Commission recognizes the importance of new bond issuances in 
helping market participants to raise capital and fund origination loans 
for businesses and homeowners. Accordingly, the Commission recognizes 
that allowing the swap components of New Bond Issuance package 
transaction to be executed away from a SEF or DCM--consistent with 
current market practice--is integral to facilitating the bond issuance. 
Further, the Commission recognizes that the proposed exemption is 
limited in nature, i.e., the swap transaction remains subject to all 
other applicable Commission rules and regulations.
    The Commission believes, therefore, that the proposed exemption 
from the trade execution requirement for swap components of New 
Issuance Bond package transactions is appropriate and would be 
consistent with the public interest and purposes of the CEA. The 
Commission further believes that the proposed regulation would not have 
a material adverse effect on the ability of the Commission or any SEF 
or DCM to discharge its regulatory or self-regulatory duties under the 
CEA. The Commission notes that under the proposed exemption, swap 
transactions would still be entered into solely between ECPs, who the 
Commission believes, for purposes of this proposal, to be appropriate 
persons.
Request for Comment
    The Commission requests comment on all aspects of the proposed 
exemption of swap components of New Issuance Bond package transactions 
from the trade execution requirement under proposed Sec.  36.1(d), 
including whether the proposed exemptive relief is consistent with the 
public interest and the other requirements of CEA section 4(c). The 
Commission specifically requests comment on the following questions:
    (94) Pursuant to its authority in CEA section 4(c), should the 
Commission exempt the swap components of a New Issuance Bond package 
transaction from the trade execution requirement?
    (95) Is the proposed definition of ``package transaction'' in 
proposed Sec.  36.1(d)(1) appropriate?

[[Page 62040]]

    (96) Are there additional package transactions that should be 
exempt from the trade execution requirement? If so, then please 
describe in detail why such package transactions should be exempt from 
the trade execution requirement, especially in light of the flexible 
means of execution the Commission is proposing to allow for all swaps 
listed by a SEF.
5. Sec.  36.1(e)--Exemption for Swaps Executed Between Affiliates That 
Elect To Clear
    The Commission proposes Sec.  36.1(e) to establish an exemption 
from the trade execution requirement that may be elected by inter-
affiliate counterparties to a swap that is submitted for clearing. 
Counterparties would be eligible to elect the exemption by meeting the 
conditions set forth under Sec.  50.52(a) for ``eligible affiliate 
counterparty'' status.\878\ The Commission notes that this proposed 
exemption would apply to transactions that inter-affiliate 
counterparties elect to clear, notwithstanding their ability to elect 
the clearing exemption.
---------------------------------------------------------------------------

    \878\ See supra note 869 (describing requirements for meeting 
``eligible affiliate counterparty'' status).
---------------------------------------------------------------------------

    Based on time-limited no-action relief granted by Commission staff, 
inter-affiliate counterparties that do not elect the Sec.  50.52 
clearing exemption are executing swaps away from a SEF or DCM that are 
otherwise subject to the trade execution requirement.\879\ The relief 
has been granted to address the difficulty cited by market participants 
in executing inter-affiliate swap transactions through the required 
methods of execution prescribed for swaps subject to the trade 
execution requirement under Sec.  37.9, i.e., Order Book and RFQ 
System. In particular, executing these transactions via competitive 
means of execution would be difficult because inter-affiliate swaps are 
generally not intended to be executed on an arm's-length basis or based 
on fully competitive pricing.\880\ Rather, such swaps are used as tools 
to manage risk between affiliates and are carried out through internal 
accounting processes.\881\ Market participants have asserted that 
forcing these transactions to be executed through a SEF would impose 
unnecessary costs and inefficiencies without any related benefits.\882\ 
The Commission believes that requiring these types of transactions to 
be executed on a SEF would likely confer less benefit to the overall 
swaps markets and inhibit inter-affiliate counterparties from 
efficiently executing these types of transactions for operational 
purposes.
---------------------------------------------------------------------------

    \879\ CFTC Letter No. 17-67, Re: Extension of No-Action Relief 
from Commodity Exchange Act Section 2(h)(8) for Swaps Executed 
Between Certain Affiliated Entities that Are Not Exempt from 
Clearing Under Commission Regulation 50.52 (Dec. 14, 2017) (``NAL 
No. 17-67''); CFTC Letter No. 16-80, Re: Extension of No-Action 
Relief from Commodity Exchange Act Section 2(h)(8) for Swaps 
Executed Between Certain Affiliated Entities that Are Not Exempt 
from Clearing Under Commission Regulation 50.52 (Nov. 28, 2016); 
CFTC Letter No. 15-62, Re: Extension of No-Action Relief from 
Commodity Exchange Act Section 2(h)(8) for Swaps Executed Between 
Certain Affiliated Entities that Are Not Exempt from Clearing Under 
Commission Regulation 50.52 (Nov. 17, 2015); CFTC Letter No. 14-136, 
Re: Extension of No-Action Relief from Commodity Exchange Act 
Section 2(h)(8) for Swaps Executed Between Certain Affiliated 
Entities that Are Not Exempt from Clearing Under Commission 
Regulation 50.52 (Nov. 7, 2014); CFTC Letter No. 14-26, Time-Limited 
No-Action Relief from the Commodity Exchange Act Section 2(h)(8) for 
Swaps Executed Between Certain Affiliated Entities Not Electing 
Commission Regulation Sec.  50.52 (Mar. 6, 2014). As discussed 
above, the Commission previously stated that transactions subject to 
the inter-affiliate exemption from clearing would also be exempt 
from the trade execution requirement. See supra Section XXI.A.3.--
Sec.  36.1(c)--Exemption for Swap Transactions Excepted or Exempted 
from the Clearing Requirement under Part 50.
    \880\ See NAL No. 17-67 at 2.
    \881\ In the 2013 Inter-Affiliate Final Rule, commenters 
explained that corporate groups can use a single conduit in the 
market on behalf of multiple affiliates within the group, which 
permits the corporate group to net affiliates' trades. This netting 
effectively reduces the overall risk of the corporate group and the 
number of open positions with external market participants, which in 
turn reduces operational, market, counterparty credit, and 
settlement risk. Clearing Exemption for Swaps Between Certain 
Affiliated Entities, 78 FR 21750, 21753-54 (Apr. 11, 2013).
    \882\ NAL No. 17-67 at 2.
---------------------------------------------------------------------------

a. Discussion of CEA Section 4(c) Enumerated Factors
    The Commission believes that exempting a swap executed between 
inter-affiliate counterparties that is submitted for clearing from the 
trade execution requirement would be consistent with the objectives of 
CEA section 4(c).
    As noted above, these transactions are not intended to be arm's-
length, market-facing, or competitively executed under any 
circumstance, irrespective of the type of swap involved. Therefore, the 
nature of these transactions mitigates the potential benefits of their 
execution on a SEF or a DCM. The Commission believes this proposed 
exemption would ensure that inter-affiliate counterparties would be 
able to efficiently utilize the risk management approach that best 
suits their individual needs, such as clearing inter-affiliate swaps, 
without being unduly influenced by whether that choice would require 
them to execute swaps on a SEF. Notably, the Commission's proposed 
rules would allow SEFs to provide more flexible means of execution and, 
thus, could address some of the issues currently cited with respect to 
executing inter-affiliate transactions on a SEF. Nevertheless, the 
Commission believes that the policy justifications described above 
support an exemption for such inter-affiliate swap transactions from 
the trade execution requirement.
    The Commission believes, therefore, that the proposed exemption 
from the trade execution requirement for inter-affiliate counterparties 
is appropriate, and it would be consistent with the public interest and 
purposes of the CEA. Given the limited applicability of this proposed 
exemption to transactions only executed between inter-affiliates, the 
Commission believes that the proposed regulation would not have a 
material adverse effect on the ability of the Commission or any SEF or 
DCM to discharge its regulatory or self-regulatory duties under the 
CEA. Finally, the Commission notes that under the proposed exemption, 
swap transactions would still be entered into solely between ECPs, who 
the Commission believes, for purposes of this proposal, to be 
appropriate persons.\883\
---------------------------------------------------------------------------

    \883\ See supra note 857 (discussing the scope of ``appropriate 
persons'').
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
36.1(e), including whether the proposed exemptive relief is consistent 
with the public interest and the other requirements of CEA section 
4(c). In particular, the Commission requests comment on the following 
questions:
    (97) Pursuant to its authority in CEA section 4(c), should the 
Commission exempt transactions between inter-affiliate counterparties 
who do not elect the inter-affiliate clearing exemption from the trade 
execution requirement?
    (98) Should the Commission also consider exempting end-users that 
meet the criteria for a clearing exception in CEA section 2(h)(7) from 
the trade execution requirement regardless of whether they elect to use 
the end-user clearing exception?

B. Sec.  36.2--Registry of Registered Entities Listing Swaps Subject to 
the Trade Execution Requirement; Appendix A to Part 36--Form TER

    The Commission currently provides information on its website 
regarding the swaps that are subject to the trade execution 
requirement. In addition to providing a chart that identifies those 
swaps,\884\ the Commission also posts the

[[Page 62041]]

corresponding MAT determinations submitted pursuant to part 40's rule 
filing procedures.\885\ While this approach has been effective in 
informing market participants about the limited number of swaps 
currently subject to the trade execution requirement, the Commission 
expects that the number of swaps that would be subject to the 
requirement will increase. To ensure that market participants have 
notice of the swaps that are subject to the trade execution requirement 
and the venues listing those swaps, the Commission proposes to create a 
registry under Sec.  36.2(a) that will set forth the swaps that are 
subject to the trade execution requirement, and the SEFs and DCMs that 
list such swaps.\886\
---------------------------------------------------------------------------

    \884\ CFTC, Industry Filings--Swaps Made Available to Trade, 
available at https://www.cftc.gov/idc/groups/public/@otherif/documents/file/swapsmadeavailablechart.pdf.
    \885\ CFTC, Industry Filings--Swaps Made Available to Trade 
Determination, available at https://sirt.cftc.gov/sirt/sirt.aspx?Topic=%20SwapsMadeAvailableToTradeDetermination.
    \886\ The Commission notes that the proposed registry would not 
include information regarding the swaps subject to the trade 
execution requirement that are listed by Exempt SEFs. The 
Commission, however, anticipates that it will provide a list of the 
Exempt SEFs on which market participants may execute those swaps, 
subject to their availability on those facilities.
---------------------------------------------------------------------------

    To help the Commission publish and maintain such a registry, the 
Commission also proposes a requirement under Sec.  36.2(b) and Appendix 
A to part 36 that SEFs and DCMs submit a standardized Form TER. Form 
TER would detail the swaps that they list that are subject to or 
subsequently become subject to the clearing requirement. The Commission 
further proposes to require that a SEF or DCM submit a Form TER 
concurrently with any Sec.  40.2 or Sec.  40.3 product filing that 
consists of a swap that is subject to the clearing requirement. In 
addition, the Commission proposes that SEFs and DCMs file a Form TER, 
for any swaps they currently list that are subject to the clearing 
requirement, ten business days prior to the effective date of any final 
rule adopted from this notice. To effectuate this proposed change 
initially, the Commission is proposing that the effective date for 
proposed Sec.  36.2 occur twenty days prior to effective date for the 
rest of this proposed rule. The Commission believes that this earlier 
effective period would provide SEFs and DCMs sufficient time to file 
their initial Form TERs and give Commission staff sufficient time to 
review and process these initial Form TERs. Finally, for swaps that are 
listed by a SEF or DCM that subsequently become subject to the clearing 
requirement, the Commission proposes to require that SEFs and DCMs file 
Form TER ten business days prior to the effective date of that 
requirement for such swaps. By requiring SEFs and DCMs to file Form TER 
prior to the effective date of such requirements, Commission staff 
would have sufficient time to review, compile Form TERs, and publish 
its trade execution requirement registry on its website.
    Form TER in Appendix A to part 36 would require a SEFs or DCM to 
provide the specific relevant economic terms of the swaps that it lists 
for trading. Each SEF or DCM that lists a swap that is subject to or 
becomes subject to the clearing requirement would be required to file 
an initial Form TER that details all such listed swaps. Any subsequent 
changes to a SEF's or DCM's listing of such swaps, such as additional 
listed swaps that later become subject to the clearing requirement, 
would require the SEF or DCM to amend its Form TER to reflect that 
scope. For IRS listed for trading, Form TER would require a SEF or DCM 
to specify (i) product class/specification; (ii) currency; (iii) 
floating rate index; (iv) stated termination date; (v) optionality; 
(vi) dual currencies; and (vii) conditional notional amounts. For CDS 
listed for trading, Form TER would require a SEF or DCM to specify (i) 
product class/specification; (ii) reference entities; (iii) region; 
(iv) indices; (v) tenor; (vi) applicable series; and (vii) tranche. The 
Commission notes that the scope of required information corresponds to 
the scope of information provided under Sec.  50.4 for IRS and CDS that 
are subject to the clearing requirement.
    The Commission believes that Form TER would provide the information 
needed to efficiently produce a trade execution requirement registry 
under Sec.  36.2. Given the potentially large number of filings and 
swaps that would comprise the trade execution requirement registry, the 
Commission believes that uniform submissions through a standardized 
Form TER will foster efficient processing of the submissions and 
uniform presentation of relevant information in the registry.
    The Commission also proposes to require under Sec.  36.2(c) that 
DCMs and SEFs publicly post their respective Form TER filings on their 
respective websites, and promptly amend any inaccurate Form TERs.
Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
36.2 and proposed Form TER in Appendix A to part 36. In particular, the 
Commission requests comment on the following questions:
    (99) Does the proposed Form TER request appropriate and sufficient 
information? If not, then what information should the Commission 
request, and why?
    (100) What information should the Commission include in the trade 
execution requirement registry, and why?

C. Sec.  36.3--Trade Execution Requirement Compliance Schedule

    The Commission observes that with the proposed elimination of the 
existing MAT determination process and the expanded scope of swaps that 
would be subject to the trade execution requirement under proposed 
Sec.  36.1, counterparties may require additional time to prepare and 
update their business practices and technological and operational 
capabilities to trade and execute these swaps on a SEF or DCM. For 
example, market participants would have to directly on-board to a SEF 
or DCM, or otherwise avail themselves of other means of access, to 
continue trading those swaps that become newly subject to the trade 
execution requirement. Therefore, the Commission proposes to eliminate 
the existing trade execution requirement compliance schedule \887\ and 
to replace it with a new compliance schedule, based on participant 
type, for the additional swaps that become subject to the expanded 
trade execution requirement. The proposed compliance schedule would be 
triggered on the effective date of any final rule adopted from this 
notice. The Commission has designed this proposed compliance schedule 
to ensure a smooth and timely implementation of the expanded 
requirement.
---------------------------------------------------------------------------

    \887\ 17 CFR 37.12, 38.11.
---------------------------------------------------------------------------

    In formulating the proposed compliance schedule, the Commission 
considered the expanded scope of swaps that would become subject to the 
trade execution requirement. The Commission also referred to the 
compliance schedule previously established for the initial 
implementation of the clearing requirement, with a focus on the defined 
categories of market participants and respective levels of swap trading 
activity.\888\ Accordingly, the proposed approach recognizes that 
different categories of counterparties have different abilities and 
resources for achieving compliance and is designed to provide 
counterparties with sufficient time to adapt to the expanded trade 
execution requirement.
---------------------------------------------------------------------------

    \888\ 17 CFR 50.25.

---------------------------------------------------------------------------

[[Page 62042]]

    The proposed schedule would establish different compliance dates 
for different categories of counterparties, as described below. As 
specified under proposed Sec.  36.3(d), however, nothing in this 
proposed compliance schedule should be construed to prohibit 
counterparties from voluntarily complying with the trade execution 
requirement sooner than prescribed in the proposed compliance schedule. 
Finally, the Commission notes that pursuant to proposed Sec.  36.3(b), 
the compliance schedule would not apply to swaps that are already 
subject to the trade execution requirement before the effective date of 
any final rule. Accordingly, market participants must continue to 
comply with the existing trade execution requirement for those swaps.
1. Sec.  36.3(c)(1)--Category 1 Entities
    Under Sec.  36.3(c)(1), a Category 1 entity, which would include 
swap dealers, major swap participants, security-based swap dealers, or 
major security-based swap participants, would have ninety days to 
comply with the expanded trade execution requirement when it executes a 
swap transaction with another Category 1 entity or a non-Category 1 
entity that voluntarily seeks to execute the swap on a SEF, a DCM, or 
an Exempt SEF. The Commission believes that a ninety-day time frame 
would be a reasonable period for these entities because they possess 
experience in the swaps market and resources to comply with the 
requirement sooner than other counterparties. Further, the Commission 
believes that Category 1 entities are generally the most active 
participants in the swaps market, often serving as market makers and 
liquidity providers to other participants. As the initial category of 
participants that are required to comply with the expanded trade 
execution requirement, the Commission believes that Category 1 entities 
are best equipped to work internally and with the trading venues, i.e., 
SEFs and DCMs, to operate under the expanded trade execution 
requirement.
    The Commission also believes that ninety days is a reasonable 
period of time for SEFs and DCMs to prepare to facilitate trading in 
additional swaps that would become subject to the expanded trade 
execution requirement. In particular, the Commission notes that some 
SEFs already list many of the types of swaps that would become subject 
to the expanded requirement.\889\ Therefore, the Commission expects 
that the SEFs and DCMs that list these types of swaps would be both 
technologically and operationally ready to offer the expanded number of 
swaps within ninety days.
---------------------------------------------------------------------------

    \889\ See supra note 280.
---------------------------------------------------------------------------

2. Sec.  36.3(c)(2)--Category 2 Entities
    The Commission proposes Sec.  36.3(c)(2) to provide Category 2 
entities with 180 days to comply with the expanded trade execution 
requirement when they execute swap transactions with a Category 1 
entity, another Category 2 entity, or other counterparties that 
voluntarily seek to execute the swap on a SEF, a DCM, or an Exempt SEF. 
Category 2 entities would include commodity pools; private funds as 
defined in section 202(a) of the Investment Advisers Act of 1940; or 
persons predominantly engaged in activities related to the business of 
banking, or in activities that are financial in nature as defined in 
section 4(k) of the Bank Holding Company Act of 1956.
    The Commission believes that a significant amount of swaps trading 
would migrate to SEFs or DCMs upon the compliance date for Category 2 
entities because they consist of many active liquidity takers. 
Nevertheless, the Commission believes that an additional ninety days to 
comply with the expanded trade execution requirement would be 
reasonable for Category 2 entities, given that they may not have the 
same level of swaps trading expertise or resources as Category 1 
entities. The Commission believes that it is essential for these 
entities to have sufficient time to transition their trading to venue-
based environments.
3. Sec.  36.3(c)(3)--Other Counterparties
    The Commission proposes Sec.  36.3(c)(3) to provide all entities 
that are not either Category 1 entities or Category 2 entities with 270 
days to comply with the expanded trade execution requirement. The 
Commission believes that entities that do not qualify as either a 
Category 1 entity or Category 2 entity should be provided the greatest 
amount of time to comply with the expanded trade execution requirement 
because they likely have less sophistication in swaps trading. Of all 
of the participants in the swaps market, the Commission believes that 
the participants in this category are least likely to have on-boarded 
to or have experience trading swaps through SEFs or DCMs. Further, the 
Commission understands that onboarding onto such venues can be an 
intensive and time-consuming process. Therefore, the Commission 
believes that this additional time will help ensure that these 
participants have sufficient time to onboard or establish means of 
access and are prepared to trade on a SEF or DCM.
4. Sec.  36.3(e)--Future Compliance Schedules
    Under proposed Sec.  36.3(e), the Commission would devise an 
appropriate compliance schedule when additional swaps listed by a SEF 
or DCM are subject to the trade execution requirement in the future 
i.e., after the effective date of any final rules that are associated 
with this part and upon the issuance of additional clearing requirement 
determinations. The Commission believes that this approach will provide 
it with sufficient flexibility to promote compliance in a manner that 
balances the Commission's policy goal of promoting trading on SEFs and 
DCMs while also accounting for different considerations, such as the 
nature of the swap products, their availability on multiple trading 
venues, and the readiness of relevant market participants to trade 
those products through a SEF or DCM.
Request for Comment
    The Commission requests comment on all aspects of the proposed 
compliance schedule in proposed Sec.  36.3. The Commission specifically 
requests comment on the following questions:
    (101) Are the proposed compliance schedules for Category 1 
Entities, Category 2 Entities, and all other entities appropriate? If 
not, then should the Commission consider longer or shorter compliance 
time frames and why?
    (102) Are the entities included in Category 1 and Category 2 
appropriate? If not, then please explain why. Should additional 
entities be included within either Category 1 or Category 2 and why?
    (103) Are the compliance schedule time frames adequate for SEFs and 
DCMs to be technologically and operationally ready for the expanded 
trade execution requirement? If not, then what alternative compliance 
schedule time frame should the Commission consider and why?
    (104) How should the Commission handle the compliance schedules for 
any future expansions of the trade execution requirement?

XXII. Part 43--Sec.  43.2--Definition of ``Block Trade''

    Section 43.2 defines a swap ``block trade'' as a publicly 
reportable swap transaction that (i) involves a swap that is listed on 
a SEF or DCM; (ii) occurs away from the SEF's or DCM's trading system 
or platform and is executed pursuant to the SEF's or DCM's rules

[[Page 62043]]

and procedures; (iii) has a notional or principal amount at or above 
the appropriate minimum block trade size applicable to such swap; and 
(iv) is reported subject to the rules or procedures of the SEF or DCM 
and the rules set forth under part 43, including the appropriate time 
delay requirements set forth under Sec.  43.5.\890\ In specifying these 
elements, the Commission considered the treatment of block trades in 
various swap and non-swap markets.\891\ In particular, the Commission 
looked to the futures markets, where futures block trades are 
``permissible, privately-negotiated transaction[s] that equal[ ] or 
exceed[ ] a DCM's specified minimum quantity of futures or options 
contracts and is executed away from the DCM's centralized market but 
pursuant to its rules.'' \892\ Accordingly, the Commission's regulatory 
definition of a ``block trade'' for swaps closely tracks this futures 
market concept of a block trade.
---------------------------------------------------------------------------

    \890\ 17 CFR 43.2.
    \891\ Real-Time Public Reporting of Swap Transaction Data, 75 FR 
76140, 76159 (proposed Dec. 7, 2010) (discussion of block trades 
with respect to futures).
    \892\ Id.
---------------------------------------------------------------------------

    Similar to futures block trades, the Commission requires that swap 
block trades ``occur away'' from a SEF's or a DCM's trading system or 
platform, but pursuant to the SEF's or a DCM's rules and 
procedures.\893\ The Commission clarified the ``block trade'' 
definition by stating that ``[a]ny swap that is executed on a SEF or a 
DCM's trading system or platform, regardless of whether it is for a 
size at or above the appropriate minimum block size for such swap, is 
not a block trade under this definition. . . .'' \894\ Accordingly, to 
receive the fifteen-minute public reporting delay that block trades are 
entitled to under Sec.  43.5(d), the swap transaction not only must 
have a notional amount at or above the appropriate minimum block size, 
but must also ``occur away'' from the SEF's or the DCM's trading system 
or platform.\895\
---------------------------------------------------------------------------

    \893\ 17 CFR 43.2.
    \894\ Procedures To Establish Appropriate Minimum Block Sizes 
for Large Notional Off-Facility Swaps and Block Trades, 78 FR 32866, 
32904 n.425 (May 31, 2013).
    \895\ CEA section 2(a)(13) requires the Commission to establish 
rules that govern the real-time reporting of swap transaction and 
pricing data to the public, but also directs the Commission, among 
other things, to prescribe rules that specify the appropriate 
reporting time delay for block trades, including the criteria for 
determining what constitutes a block trade. 7 U.S.C. 2(a)(13).
---------------------------------------------------------------------------

    Given that block trades must occur away from a SEF's or a DCM's 
trading system or platform, the enumerated prohibition on pre-arranged 
trading as an abusive trading practice under Sec.  37.203(a) allows 
block trades as an exception.\896\ This exception allows transactions 
that meet or exceed the requisite block size to be privately negotiated 
to avoid potentially significant, adverse price impacts that would 
occur if traded on trading systems or platforms that offer pre-trade 
price transparency.
---------------------------------------------------------------------------

    \896\ ``Pre-arranged trading'' is prohibited as an abusive 
trading practice under Sec.  37.203(a). This prohibition generally 
applies to market participants who communicate with one another to 
pre-negotiate the terms of a trade away from a trading system or 
platform, but then execute the trade on the trading system or 
platform in a manner that appears competitive and subject to market 
risk. Accordingly, the Commission intended the prohibition to 
maintain the integrity of price competition and market risk that is 
incident to trading in the market. See supra Section VI.A.2.--Sec.  
37.203(a)--Pre-Arranged Trading Prohibition; Sec.  37.9--Time Delay 
Requirement.
---------------------------------------------------------------------------

A. Sec.  43.2--Definition--Block Trade; Sec.  37.203(a)--Elimination of 
Block Trade Exception to Pre-Arranged Trading

    During the part 37 implementation process, SEFs and market 
participants informed the Commission that for swap transactions that 
are intended to be cleared, requiring that such swaps to ``occur away'' 
from a SEF's trading system or platform creates an issue with carrying 
out pre-execution credit screening.\897\ These market participants note 
that, in many cases, clearing FCMs are unable to conduct pre-execution 
credit screening for such block trades because they are unaware that a 
block trade has occurred away from a SEF until after it has been 
executed and reported to the SEF.\898\ Accordingly, SEFs were unable to 
facilitate pre-execution credit checks for block trades.
---------------------------------------------------------------------------

    \897\ For the Commission's discussion of pre-execution credit 
screening requirements, see supra Section XII.B.2.b.(3)--Sec. Sec.  
37.702(b)(2)-(3)--Pre-Execution Credit Screening.
    \898\ CFTC Letter No. 17-60, Re: Extension of No-Action Relief 
for Swap Execution Facilities from Certain ``Block Trade'' 
Requirements in Commission Regulation 43.2 at 2 (Nov. 14, 2017) 
(``NAL No. 17-60'').
---------------------------------------------------------------------------

    DMO acknowledged this operational challenge and accordingly has 
granted ongoing no-action relief from the requirement that swap block 
trades ``occur away'' from a SEF.\899\ Based on Commission staff no-
action relief, a SEF may allow market participants to execute swap 
block trades that are intended to be cleared on a SEF's non-Order Book 
trading system or platform.\900\ As a result, FCMs and SEFs have been 
able to comply with their respective pre-execution credit screening 
obligations.
---------------------------------------------------------------------------

    \899\ NAL No. 17-60; CFTC Letter No. 16-74, Re: Extension of No-
Action Relief for Swap Execution Facilities from Certain ``Block 
Trade'' Requirements in Commission Regulation 43.2 (Oct. 7, 2016); 
CFTC Letter No. 15-60, Re: Extension of No-Action Relief for Swap 
Execution Facilities from Certain ``Block Trade'' Requirements in 
Commission Regulation 43.2 (Nov. 2, 2015); CFTC Letter No. 14-118, 
No-Action Relief for Swap Execution Facilities from Certain ``Block 
Trade'' Requirements in Commission Regulation 43.2 (Sept. 19, 2014).
    \900\ NAL No. 17-60 at 2-3.
---------------------------------------------------------------------------

    The Commission proposes to revise certain elements of the ``block 
trade'' definition under Sec.  43.2. First, the Commission proposes to 
eliminate the ``occurs away'' requirement for swap block trades. 
Second, the Commission proposes to require that to the extent 
counterparties seek to execute any swap that has a notional or 
principal amount at or above the appropriate minimum block trade size 
applicable to such swap on a SEF, they must do so on a SEF's trading 
system or platform. For swaps listed by a SEF for trading that 
participants intend to execute on the SEF and submit for clearing, the 
Commission believes that the proposed revised definition would (i) 
allow FCMs to conduct pre-execution credit screenings in accordance 
with Sec.  1.73; and (ii) allow SEFs to facilitate those screenings in 
accordance with the Commission's proposed requirement under Sec.  
37.702(b).\901\ In addition, for swaps listed by a SEF that 
participants intend to execute on the SEF, but do not intend to submit 
for clearing, participants would no longer be permitted to submit an 
already-executed block trade to the SEF pursuant to its rules; such 
transactions would be required to be executed on the SEF.
---------------------------------------------------------------------------

    \901\ The Commission notes that proposed Sec.  37.702(b) applies 
to SEFs that list (i) swaps that are subject to the clearing 
requirement; and/or (ii) swaps that are not subject to the clearing 
requirement, but for which the SEF facilitates processing and 
routing to a DCO for clearing. See supra Section XII.B.3.--
Applicability of Sec.  37.702(b) to SEFs that Do Not Facilitate 
Clearing.
---------------------------------------------------------------------------

    The Commission notes that this revised block trade definition is 
consistent with the provisions of the Dodd-Frank Act. CEA section 
2(a)(13), as amended by the Dodd-Frank Act, directs the Commission to 
prescribe criteria for determining what constitutes a block trade for 
the purpose of establishing appropriate post-trade reporting time 
delays. The provision, however, does not set forth any pre-trade 
requirements, such as a requirement that the transaction be executed 
away from a SEF. Second, requiring block trades to be executed on a SEF 
for those swaps listed by the SEF, rather than allowing them to be 
executed away from the SEF, would also facilitate the statutory SEF 
goal of promoting swaps trading on SEFs.\902\
---------------------------------------------------------------------------

    \902\ See 7 U.S.C. 7b-3(e).

---------------------------------------------------------------------------

[[Page 62044]]

    The revised definition also corresponds with other proposed changes 
to the SEF regulatory framework. For example, the Commission believes 
that allowing SEFs to use flexible means of execution for swap 
transactions negates the need to allow swap block trade execution to 
occur away from SEFs. Similarly, the Commission's proposed approach to 
pre-execution communications should facilitate swap block trade 
execution on SEFs; proposed Sec.  37.201(b) would generally prohibit 
participants from conducting such communications away from the SEF, 
except for communications regarding a listed swap that is not subject 
to the trade execution requirement, among other exceptions.\903\ 
Accordingly, participants may pre-negotiate block trades with one 
another for those swaps away from a SEF and submit them to the SEF for 
execution. This approach would allow participants to comply with the 
proposed definition, i.e., the swap must be executed on a SEF, but also 
facilitate compliance with pre-execution credit screening requirements 
if the swap is intended to be cleared.
---------------------------------------------------------------------------

    \903\ See supra Section VI.A.2.a.--Sec.  37.201(b)--Pre-
Execution Communications.
---------------------------------------------------------------------------

    To conform to the amended block trade definition, the Commission 
also proposes to eliminate the block trade exception to the pre-
arranged trading prohibition under Sec.  37.203(a). Given that block 
trades would no longer occur away from a SEF, but would be executed on 
a SEF via flexible means of execution, the Commission expects that 
market participants will have sufficient ability to continue to execute 
such transactions through a SEF's trading system or platform.
Request for Comment
    The Commission requests comments on all aspects of proposed Sec.  
43.2. The Commission specifically requests comment on the following 
questions:
    (105) Should the Commission limit the type of execution methods 
that may be utilized to permit block trades to receive a public 
reporting delay as set forth in Commission regulation Sec.  43.5(d)? If 
so, then which methods of execution for block trades should be 
precluded from receiving a public reporting delay, and why? Would views 
on this question change if the public dissemination delay for a block 
trade was extended beyond fifteen minutes? If so, then please explain 
why.
    (106) Should the Commission allow all swap block trades on SEFs to 
be negotiated through pre-execution communications and then submitted 
to SEFs for execution? Please explain why or why not.

XXIII. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act \904\ requires Federal agencies, in 
promulgating regulations, to consider the impact of those regulations 
on small businesses. The regulations adopted herein will directly 
affect SEFs, DCMs, DCOs, SDs, MSPs and certain ECPs. The Commission has 
previously established certain definitions of ``small entities'' to be 
used by the Commission in evaluating the impact of its regulations on 
small entities in accordance with the Regulatory Flexibility Act.\905\ 
The Commission has also previously determined that SEFs,\906\ 
DCMs,\907\ DCOs,\908\ SDs,\909\ MSPs \910\ and ECPs \911\ are not small 
entities for the purpose of the Regulatory Flexibility Act.
---------------------------------------------------------------------------

    \904\ 5 U.S.C. 601 et seq.
    \905\ Policy Statement and Establishment of Definitions of 
``Small Entities'' for Purposes of the Regulatory Flexibility Act, 
47 FR 18618 (Apr. 30, 1982)(``1982 Policy Statement'').
    \906\ Core Principles and Other Requirements for Swap Execution 
Facilities, 78 FR 33476, 33548 (Jun. 4, 2013).
    \907\ 1982 Policy Statement.
    \908\ A New Regulatory Framework for Clearing Organizations, 66 
FR 45604, 45609 (Aug. 29, 2001).
    \909\ Further Definition of ``Swap Dealer,'' ``Security-Based 
Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based 
Swap Participant'' and ``Eligible Contract Participant,'' 77 FR 
30596, 30701 (May 23, 2012).
    \910\ Id.
    \911\ See 66 FR 20740, 20743 (Apr. 25, 2001).
---------------------------------------------------------------------------

    Therefore, the Chairman, on behalf of the Commission, pursuant to 5 
U.S.C. 605(b), hereby certifies that the proposed rules will not have a 
significant economic impact on a substantial number of small entities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995, 44 U.S.C. 3501 et seq. 
(``PRA'') imposes certain requirements on Federal agencies (including 
the Commission) in connection with conducting or sponsoring any 
``collection of information,'' \912\ as defined by the PRA. Among its 
purposes, the PRA is intended to minimize the paperwork burden to the 
private sector, to ensure that any collection of information by a 
government agency is put to the greatest possible uses, and to minimize 
duplicative information collections across the government.\913\
---------------------------------------------------------------------------

    \912\ For purposes of this PRA discussion, the terms 
``information collection'' and ``collection of information'' have 
the same meaning, and this section will use the terms 
interchangeably.
    \913\ 44 U.S.C. 3501.
---------------------------------------------------------------------------

    The PRA applies to all information, regardless of form or format, 
whenever the government is obtaining, causing to be obtained, or 
soliciting information, and includes required disclosure to third 
parties or the public, of facts or opinions, when the information 
collection calls for answers to identical questions posed to, or 
identical reporting or recordkeeping requirements imposed on, ten or 
more persons.\914\ The PRA requirements have been determined to include 
not only mandatory, but also voluntary information collections, and 
include both written and oral communications.\915\
---------------------------------------------------------------------------

    \914\ 44 U.S.C. 3502.
    \915\ 5 CFR 1320.3(c)(1).
---------------------------------------------------------------------------

    The Commission's proposed amendments would result in a collection 
of information within the meaning of the PRA, as discussed below. Under 
the PRA, an agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid control number from the Office of Management and 
Budget (``OMB''). The proposed rulemaking would amend parts 9, 36, 37, 
38, 39, and 43 of the Commission's regulations to include new 
information collections, eliminate certain existing information 
collections, and modify existing information collections.\916\
---------------------------------------------------------------------------

    \916\ The proposed amendments would not substantially or 
materially modify existing information collection burdens, or create 
new information collection burdens, under parts 9, 39, and 43.
---------------------------------------------------------------------------

    OMB control number 3038-0074 currently covers, among other things, 
all information collections arising in part 37 (other than the 
information collections related to existing Sec.  37.10) and part 
9.\917\ OMB control number

[[Page 62045]]

3038-0052 covers, among other things, information collections arising 
in part 38 (other than the information collections related to Sec.  
38.12).\918\ OMB control number 3038-0099 covers the information 
collections related to the ``available to trade'' determination (``MAT 
determination'') process under Sec.  37.10 and Sec.  38.12. 
Accordingly, the proposed rulemaking would amend OMB control numbers 
3038-0074 and 3038-0052; however, the Commission proposes to eliminate 
OMB control number 3038-0099 along with the corresponding MAT 
determination information collections under Sec.  37.10 and Sec.  
38.12. Instead, the Commission proposes to transfer the corresponding 
MAT determination information collections under Sec.  37.10 and Sec.  
38.12 to part 36, and the related information collections related to 
the MAT determination process for SEFs and DCMs will be incorporated 
under OMB control numbers 3038-0074 and 3038-0052, respectively. The 
Commission, therefore, is submitting this proposal to OMB for review in 
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    \917\ The Commission notes that this OMB control number covers 
all information collections in part 37, including Subpart A and the 
SEF core principles, i.e., Subparts B through P, and the appendices 
thereto, i.e., Appendix A (Form SEF), Appendix B (guidance and 
acceptable practices), and proposed Appendix C (guidance to Core 
Principle 3). This OMB control number also includes all information 
collections related to part 9 to the extent applicable to SEFs. For 
clarity, existing Sec.  37.10(a) is not covered under this OMB 
control number, but rather is subject to a separate information 
collection under OMB control number 3038-0099. The Commission 
further notes that in the most recent request for an extension of 
OMB control number 3038-0074, the Commission stated in the renewal 
notice that OMB control number 3038-0074 ``covers all information 
collections in part 37 of the Commission's regulations, including 
Subpart A and the SEF core principles (i.e., Subparts B and C) . . . 
. [other than] any information collections related to Sec.  37.10 . 
. . .'' The Commission notes that the reference to ``Subparts B and 
C'' should specify ``Subparts B through P'' instead. Agency 
Information Collection Activities Under OMB Review, 81 FR 65630, n.1 
(Sep. 23, 2016) (``2016 Part 37 PRA Renewal'').
    \918\ The Commission notes that this OMB control number covers 
all information collections in part 38 of the Commission's 
regulations, including Subpart A and the DCM core principles, i.e., 
Subparts B through X. This OMB control number also includes all 
information collections related to part 9 to the extent applicable 
to DCMs. The Commission also notes for clarity that existing Sec.  
38.12 is not covered under this OMB control number, but rather is 
subject to a separate information collection with OMB control number 
3038-0099.
---------------------------------------------------------------------------

    The collections of information under these proposed amendments are 
necessary to implement certain provisions of the CEA, as amended by the 
Dodd-Frank Act. Among other provisions in the CEA, CEA section 8a(5) 
provides the Commission with authority to promulgate rules as 
reasonably necessary to effectuate any of the provisions or to 
accomplish any of the purposes of the CEA.\919\
---------------------------------------------------------------------------

    \919\ The full authority provided under part 37 of the 
Commission's regulations includes: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a-
2, 7b-3, and 12a, as amended by Titles VII and VIII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act, Public Law 
111-203, tit. VII-VIII, 124 Stat. 1376 (2010).
---------------------------------------------------------------------------

    If the proposed amendments are adopted, responses to the proposed 
collections of information generally would be mandatory, although 
certain collections of information could vary based upon a SEF's 
discretion or level of business. For example, a SEF has the discretion 
to establish the scope of its trading operations, e.g., determining 
which swaps to list for trading, which may affect the various burden 
hours discussed herein.
    The Commission will protect proprietary information according to 
the Freedom of Information Act and 17 CFR part 145, ``Commission 
Records and Information.'' In addition, section 8(a)(1) of the CEA 
strictly prohibits the Commission, unless specifically authorized by 
the CEA, from making public ``data and information that would 
separately disclose the business transactions or market positions of 
any person and trade secrets or names of customers.'' The Commission is 
also required to protect certain information contained in a government 
system of records according to the Privacy Act of 1974, 5 U.S.C. 552a.
    As discussed in the preamble to the final rules for part 37 (``SEF 
Core Principles Final Rule''), the methodology the Commission used to 
formulate the proposed estimates reflect an average across all SEFs 
(and in respect to proposed part 36, all SEFs and DCMs).\920\ By 
definition, averages are meant to serve as only a reference point; the 
Commission understands that due to both discretionary and mandatory 
requirements, some SEFs may go above the estimated burden hours to 
complete information collection requirements, while others may stay 
below those estimates.\921\
---------------------------------------------------------------------------

    \920\ Core Principles and Other Requirements for Swap Execution 
Facilities, 78 FR 33476, 33551 (Jun. 4, 2013).
    \921\ Id.
---------------------------------------------------------------------------

1. Information Provided by Reporting Entities/Persons
    The following is a brief description of the information collections 
for SEFs, and as applicable DCMs and other market participants, under 
the proposed amendments to parts 36, 37 and 38.\922\ To the extent that 
the Commission does not identify a specific provision, the Commission 
does not believe that any associated change substantively or materially 
modifies an existing information collection burden or creates a new 
one.\923\
---------------------------------------------------------------------------

    \922\ As noted above, the Commission proposes to eliminate the 
MAT determination process for DCMs under Sec.  38.12.
    \923\ For the purposes of the PRA discussion herein, the 
Commission will not discuss the proposed amendments to parts 9, 39, 
and 43 because it has determined that they would not impose new 
information collection burdens or substantively or materially modify 
existing burdens therein. Further, the Commission will not discuss 
any proposed amendments to parts 36, 37, and 38 unless the 
Commission has determined that such changes would create, eliminate, 
or substantively or materially modify existing information 
collections or related burden hours.
---------------------------------------------------------------------------

    The Commission notes that some of the proposed amendments are 
covered by other OMB control numbers. For example, some amendments 
would require SEFs to promulgate new rules that are required to be 
submitted to the Commission pursuant to part 40 of the Commission's 
regulations.\924\ PRA burdens, if any, related to the submission by a 
SEF to the Commission of new rules, policies and procedures, and 
amendments have been accounted for in the previous information 
collection burden estimate associated with part 40, which governs the 
process by which SEFs must submit rules and amendments to the 
Commission.\925\ Additionally, some of the hours associated with those 
information collections would not be deemed to be ``burden hours'' if 
they result from ``usual and customary'' business practices.\926\
---------------------------------------------------------------------------

    \924\ For example, proposed Sec. Sec.  37.201(a)(1)-(3) would 
require a SEF to establish rules governing its operation that 
specify (i) the protocols and procedures for trading and execution, 
including entering, amending, cancelling, or executing orders for 
each execution method; (ii) the manner or circumstances in which the 
swap execution facility may exercise discretion in facilitating 
trading and execution for each execution method; and (iii) the 
sources and methodology for generating any market pricing 
information provided to facilitate trading and execution for each 
execution method.
    \925\ Provisions Common to Registered Entities, 76 FR 44776, 
44789 (July 27, 2011).
    \926\ 5 CFR 1320.3(b)(2). For example, proposed Sec.  
37.6(b)(2)(iii) would require a SEF to establish and enforce rules 
to require the intermediary to transmit the confirmation or trade 
evidence record to the respective counterparty ``as soon as 
technologically practicable'' upon receipt of the confirmation or 
trade evidence record from the SEF. The Commission notes that SEF 
members and market participants acting in an intermediary capacity 
and executing swaps on behalf of customers, as a matter of industry 
practice, generally make such confirmations available to their 
customers, i.e., the swap counterparties. Accordingly, this proposed 
amendment reflects an existing ``usual and customary practice'' that 
would create a new information collection but would not impose any 
associated burden hours.
---------------------------------------------------------------------------

a. Sec.  37.3(a)--Requirements for Registration
    The Commission expects that as a result of the proposed application 
of the SEF registration requirement under Sec.  37.3(a), additional 
swaps broking entities will register as SEFs. For PRA purposes, the 
Commission previously had revised the current number of registered SEFs 
from 23 \927\ to the current 25 \928\ and had estimated approximately 4 
new SEF applicants per year.\929\
---------------------------------------------------------------------------

    \927\ 2016 Part 37 PRA Renewal at 65631.
    \928\ Agency Information Collection Activities: Notice of Intent 
To Revise Collection Numbers 3038-0052 and 3038-0074, Core 
Principles and Other Requirements for Designated Contract Markets, 
and Core Principles and Other Requirements for Swap Execution 
Facilities, 83 FR 1609, 1611 (Jan. 12, 2018).
    \929\ 2016 Part 37 PRA Renewal at 65631.
---------------------------------------------------------------------------

    The Commission notes that based on data from the National Futures 
Association (``NFA''), more than 300 interdealer brokers that are 
registered

[[Page 62046]]

with the NFA as ``introducing brokers'' are also ``swap firms,'' i.e., 
interdealer brokers that are registered as introducing brokers and also 
designated to deal with swap products. The Commission, however, does 
not expect that proposed Sec.  37.3(a) will result in all swap 
interdealer brokers registering as SEFs. The Commission understands 
that some of these entities may (i) already be affiliated with current 
SEFs and could operate as part of their respective affiliated SEFs 
rather than registering as new, separate SEFs; (ii) merge, become 
affiliated with, or otherwise be acquired by registered SEFs; or (iii) 
adjust their business practices such that they would not be required to 
register as a SEF. Additionally, some of these entities may be 
currently registered as introducing broker swap firms, but are not 
currently in the business of swaps trading and therefore do not trigger 
the SEF registration requirement. Additionally, the Commission notes 
that certain non-U.S. interdealer brokers may also be affiliated with 
platforms that are currently exempt or may become exempt in the future 
from Commission registration, and therefore, would not need to 
separately register as SEFs.
    The Commission initially estimates that up to 60 swaps broking 
entities, including interdealer brokers, and one Single-Dealer 
Aggregator Platform would register as SEFs as a result of the proposed 
application of the SEF registration requirement under Sec.  
37.3(a).\930\ Consequently, for the purposes of this PRA analysis, the 
Commission estimates that the proposed application of Sec.  37.3(a) 
will impose an initial, non-recurring information collection burden of 
295 burden hours associated with the SEF registration process for these 
60 entities.\931\ The Commission does not believe that the proposed 
application of the SEF registration requirement in Sec.  37.3(a) would 
impose new information collection burdens or substantively or 
materially modify existing burdens for registered SEFs.
---------------------------------------------------------------------------

    \930\ The Commission estimates that approximately 40-60 swaps 
broking entities, including interdealer brokers would be required to 
register as SEFs as a result of the proposed application of the SEF 
registration requirement in Sec.  37.3(a). Similarly, the Commission 
is aware of one Single-Dealer Aggregator Platform, which is 
affiliated with a SEF. For the purposes of this PRA, the Commission 
estimates and assumes that 60 such swaps broker entities and the one 
Single-Dealer Aggregator Platform of which it is aware would 
register as SEFs. For further discussion, see infra Section 
XXIII.C.3.c.--Costs (cost discussion related to the SEF registration 
requirement).
    \931\ As noted below, based on the proposed changes to the SEF 
registration requirements described herein, the Commission is 
reducing the estimated burden hours associated with the registration 
process by 5 hours from 300 hours to 295 hours.
---------------------------------------------------------------------------

    In connection with the Commission's proposed clarification of the 
registration requirement, the Commission would propose to delay the 
application of the registration requirement with respect to (i) swaps 
broking entities, including interdealer brokers for a six-month period; 
and (ii) foreign swaps broking entities, including foreign interdealer 
brokers that facilitate swaps trading for U.S. persons for two-year 
period, provided that in each case the subject entity submits a request 
to the Commission with certain information.\932\ As noted above, the 
Commission expects in the aggregate that approximately 60 such 
entities, including swaps broking entities and foreign swaps broking 
entities, would be required to register as SEFs, and the Commission 
estimates that all such relevant entities would request a delay. 
Accordingly, the Commission estimates that the voluntary request to 
delay the registration requirement will impose an initial, non-
recurring information collection burden of 1 burden hour associated 
with the SEF registration process for each of these 60 entities. The 
Commission does not believe that the clarification in proposed Sec.  
37.3(a) would impose new information collection burdens or 
substantively or materially modify existing burdens for registered 
SEFs.
---------------------------------------------------------------------------

    \932\ The request would include the (i) entity's name as it 
appears in the entity's charter; (ii) name and address of the 
entity's ultimate parent company; (iii) any names under which the 
entity does business; (iv) address of principal executive office; 
(v) a contact person's name, address, phone number, and email 
address; (vi) asset classes and swap products for which the entity 
facilitates trading; and (vii) any registrations, authorizations, or 
licenses held. Foreign broking entities additionally would need to 
provide (viii) certification that it currently arranges or 
negotiates swap transactions for U.S. persons; (ix) home country 
regulator or regulators; and (x) any registrations, authorizations, 
or licenses held in the entity's home country.
---------------------------------------------------------------------------

b. Sec.  37.3(b)--Procedures for Registration
    Proposed Sec.  37.3(b) would streamline Form SEF by consolidating, 
amending, and eliminating several of the existing exhibits.\933\ The 
Commission believes that these changes would establish a clearer and 
more simplified application for SEF applicants that would still provide 
the Commission with sufficient information needed to determine 
compliance. The Commission believes that the proposed streamlined Form 
SEF will reduce the initial, non-recurring burden hours associated with 
the application process for SEF registration by approximately 5 burden 
hours.
---------------------------------------------------------------------------

    \933\ For further discussion on the specific changes, see supra 
Section IV.C.3.b.--Sec.  37.3(b)(1)--Application for Registration.
---------------------------------------------------------------------------

c. Sec.  37.3(c)--Amendment to an Order of Registration
    Proposed Sec.  37.3(c) would eliminate the requirement that a SEF 
amend Form SEF when requesting an amended order of registration from 
the Commission. Instead, a registered SEF would file a request with the 
Commission for an amended order pursuant to proposed Sec.  37.3(c), but 
would no longer be required to file updated exhibits to Form SEF, 
although a SEF would be required to provide the Commission with any 
additional information and documentation as the Commission deems 
necessary.\934\ The Commission estimates that approximately 1 SEF per 
year seeks to amend its registration order and that the proposed change 
would save that SEF approximately 2 burden hours.
---------------------------------------------------------------------------

    \934\ The Commission notes that it proposes to eliminate the 
existing language under Sec.  37.3(b) that specifies the use of part 
40 to file application amendments subsequent to registration. The 
Commission emphasizes that not all of the information from the Form 
SEF exhibits need to be updated pursuant to part 40 subsequent to 
registration--for example, certain part 37 provisions already 
require SEFs to update their information on an ongoing basis. Under 
Sec.  37.1306, a SEF is required to file financial reports, 
including fiscal year end reports, which precludes the need to amend 
new Exhibit G (existing Exhibit I) and file it through part 40. As 
discussed above, the Commission clarifies that part 40 only applies 
to information from application exhibits that constitute a ``rule,'' 
as defined under Sec.  40.1(i). The Commission generally interprets 
the Sec.  40.1(i) rule definition broadly to encompass governance 
documentation (proposed Exhibit C); fees (proposed Exhibit H); 
rulebooks (proposed Exhibit J); compliance manuals (proposed Exhibit 
K); participant agreements (proposed Exhibit L); SDR-related 
agreements (proposed Exhibit M); clearing-related agreements 
(proposed Exhibit N); other third-party agreements (proposed Exhibit 
O); and information related to execution methods (proposed Exhibit 
P). Therefore, registered SEFs have already been submitting changes 
to these types of documentation pursuant to the part 40 rule filing 
procedures.
---------------------------------------------------------------------------

d. Sec.  37.5(c)--Provision of Information Relating to a Swap Execution 
Facility
    Proposed Sec.  37.5(c) would amend the existing notification 
requirements related to transfers of equity interest in a SEF. Proposed 
Sec.  37.5(c)(1) would require a SEF to file a notice with the 
Commission regarding any transaction that results in the transfer of 
direct or indirect ownership of fifty percent or more of the equity 
interest of a SEF as opposed to only direct ownership transfers as 
currently required.\935\ As part of that notification, a SEF may

[[Page 62047]]

incur burdens that are similar to those incurred when providing a 
notice of a direct change, including providing details of the proposed 
transaction and how the transaction would not adversely impact the 
SEF's ability to comply with the SEF core principles and the 
Commission's regulations, responding to any requests for supporting 
documentation from the Commission, and updating any ongoing changes to 
the transaction. Accordingly, the Commission estimates that 
approximately 1 additional SEF per year would need to notify the 
Commission as a result of an indirect equity transfer and that the 
proposed amendment would impose a one-time, non-recurring information 
collection of approximately 10 burden hours on such SEF.
---------------------------------------------------------------------------

    \935\ Transfer of ownership in an ``indirect'' manner may occur 
through a transaction that involves the transfer of ownership of a 
SEF's direct parent or an indirect parent, and therefore, implicates 
effective change in ownership of the SEF's equity interest.
---------------------------------------------------------------------------

e. Sec.  37.6(b)(1)--Legally Binding Documentation
    Proposed Sec. Sec.  37.6(b)(1)(i)-(ii) would amend the existing 
swap documentation requirements by establishing separate transaction 
documentation requirements for cleared and uncleared swaps, 
respectively. Under existing Sec.  37.6(b), a SEF is required to 
provide each counterparty to a transaction with a written 
``confirmation'' that contains all of the terms of a swap transaction 
at the time of the swap's execution for both cleared and uncleared swap 
transactions, including (i) ``economic terms'' specific to the 
transaction and (ii) non-transaction specific ``relationship terms'' 
governing the relationship between the two counterparties.\936\ To 
include all of the terms of a uncleared swap into a confirmation, a SEF 
would comply with Sec.  37.6(b) by incorporating by reference the 
relevant terms set forth in the previously-negotiated agreements and 
documents, as long as the SEF had obtained these agreements prior to 
execution.\937\
---------------------------------------------------------------------------

    \936\ As noted above, economic terms include, for example, swap 
product, price, trade date, settlement date, and notional amount. 
``Relationship terms'' generally govern all transactions between two 
counterparties, e.g., default provisions, margin requirements, and 
governing law. See supra Section IV.F.--Sec.  37.6--Enforceability.
    \937\ SEF Core Principles Final Rule at 33491 n.195.
---------------------------------------------------------------------------

    Proposed Sec.  37.6(b)(1)(i), which would continue to apply the 
existing confirmation requirement to cleared swap transactions, would 
not alter the information collection burdens with respect to cleared 
swaps. For uncleared swaps, however, proposed Sec.  37.6(b)(1)(ii) 
would require a SEF to provide a ``trade evidence record'' that 
memorializes the terms that are agreed upon by the counterparties on 
the SEF. In contrast to the requirement for cleared swaps, proposed 
Sec.  37.6(b)(1)(ii) would not require the trade evidence record to 
include all the terms of the swap transaction, including relationship 
terms contained in underlying documentation between the counterparties, 
nor would the SEF need to obtain or maintain the underlying agreements 
prior to the execution of the swap transaction.\938\ To the extent that 
such terms either (i) are agreed upon between the counterparties in 
underlying documentation established away from the SEF and continue to 
govern the transaction post-execution or (ii) are not required to 
establish legal certainty for a specific transaction, a SEF would not 
be required to incorporate those terms into a trade evidence record. 
The proposed approach would address the challenges that have prevented 
SEFs from fully complying with Sec.  37.6(b) by reducing the 
administrative burdens for SEFs, who under the proposal would not be 
required to obtain, incorporate, or reference those previous 
agreements; and for counterparties, who would not be required to submit 
all of their relevant documentation with other potential counterparties 
to the SEF.
---------------------------------------------------------------------------

    \938\ The Commission anticipates that the terms listed in a 
trade evidence record would include, at a minimum, the transaction's 
``economic terms,'' e.g., trade date, notional amount, settlement 
date, and price.
---------------------------------------------------------------------------

    As a result, the Commission believes that the proposed amendments 
would reduce a SEF's annual recurring information collection burden for 
uncleared swap transactions. Accordingly, the Commission estimates that 
proposed Sec.  37.6(b)(1)(ii) would reduce annual recurring information 
collection burdens by about 375 hours per SEF.\939\
---------------------------------------------------------------------------

    \939\ The Commission previously estimated that the process to 
obtain, review, incorporate, and maintain the previously-negotiated 
agreements takes approximately 1.5 hour per SEF participant and that 
on average, a SEF has about 375 participants. For purposes of this 
PRA discussion herein, however, the Commission is revising its 
estimate of the number of burden hours that the proposal would 
eliminate and will assume that each such agreement takes 
approximately 1.0 hours per SEF participant. Accordingly, 375 
participants x 1.0 hour per participant = 375 estimated burden 
hours. The Commission also notes that this estimate of 375 burden 
hours includes the burden estimates in connection with Sec.  
37.1001, which establishes a SEF's recordkeeping obligations. 
Supporting Statement for New and Revised Information Collections, 
Core Principles and Other Requirements for Swap Execution 
Facilities, OMB Control Number 3038-0074, (Sept. 23, 2016), https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201609-3038-005.
---------------------------------------------------------------------------

f. Sec.  37.203(d)--Automated Trade Surveillance System
    Proposed Sec.  37.203(d) would eliminate the prescriptive automated 
trade surveillance system capabilities requirements enumerated in 
existing Sec.  37.203(d), except for the ability of a SEF to 
reconstruct sequence of market activity, and would instead require that 
a SEF's automated trade surveillance system be capable of detecting and 
``reconstructing'' potential trade practice violations.\940\
---------------------------------------------------------------------------

    \940\ The Commission notes that this proposed change is 
consistent with the proposed amendments to Sec. Sec.  37.205(b)(2)-
(3), as discussed below, that would similarly limit a SEF's 
electronic transaction history database and electronic analysis 
capability requirements. The Commission, however, emphasizes that a 
SEF must continue to have the capability to load and process all 
executed trades, including those resulting from orders entered by 
voice or certain other electronic communications, such as instant 
messaging and email.
---------------------------------------------------------------------------

    As a result, the proposed rule would provide each SEF with the 
flexibility to determine what capabilities its automated trade 
surveillance system must have, based on the nature of the SEF's trading 
systems or platforms, to satisfy its core principle compliance 
responsibilities. Although it is possible that SEFs use their 
discretion to decrease the information collections and related burden 
hours, SEFs would still be obligated to comply with the same underlying 
core principle obligations with which they must currently comply. As a 
result, the Commission estimates and assumes that SEFs would continue 
to fulfill their information collection burdens in a manner similar to 
the status quo. Accordingly, the Commission assumes that proposed Sec.  
37.203(d) would not impose new information collection burdens or 
substantively or materially affect SEFs' total burden hours.
g. Sec.  37.203(e)--Error Trade Policy
    Proposed Sec.  37.203(e) would require SEFs to establish an error 
trade policy that, among other things, would notify all market 
participants of (i) any swap transaction that is under review; (ii) any 
determination by the SEF that the swap transaction under review either 
has been determined to be or not to be an error trade; and (iii) the 
resolution of any error trade, including any trade term adjustment or 
trade cancellation. To the extent that SEFs currently are not 
explicitly required to provide market participants with notice of any 
of these events, proposed Sec.  37.203(e) would impose a new 
information collection burden on SEFs.\941\ The Commission

[[Page 62048]]

estimates that proposed Sec.  37.203(e) would increase a SEF's annual 
recurring information collection burden by approximately 15 burden 
hours, based on an estimate that a SEF on average would incur 
approximately 15 error trade reviews per year.\942\ Because most SEFs 
already have established and currently maintain the necessary personnel 
and systems to provide such notices to its market participants, the 
Commission believes that the proposed amendment would not require SEFs 
to expend initial, non-recurring burden hours in order to comply.
---------------------------------------------------------------------------

    \941\ The Commission notes that existing Sec.  37.203(e) 
provides SEFs with the authority to cancel or adjust prices for 
error trades if necessary to mitigate market disruption; in 
connection with this authority, existing Sec.  37.203(e) also 
requires SEFs to make any such adjustments and cancellations 
transparent to market participants. 17 CFR 37.203(e). To the extent 
that proposed Sec.  37.203(e) requires SEFs to provide notice to 
market participants for error trades in additional circumstances, 
the proposed amendment imposes a new collection of information.
    \942\ As noted above, proposed Sec.  37.203(e) would require a 
SEF to provide market participants with a first notice upon the 
initiation of a review of an alleged error trade, a second notice 
upon any determination as to whether such swap transaction is or is 
not an error trade, and a third notice upon the resolution of the 
review, including any trade term adjustment or trade cancellation. 
The Commission estimates that each notice requires about \1/3\ 
burden hours, for a total of 1 burden hour per error trade (\1/3\ 
burden hours x 3 notices = 1 burden hour per error trade for 
notices). Further, the Commission estimates that each SEF on average 
will have approximately 15 error trade reviews per year. 
Accordingly, 1 burden hour x 15 error trade reviews per year = 15 
burden hours per year. The Commission notes, however, that certain 
error trades may be resolved more quickly than 1 hour or take longer 
than 1 hour depending on the availability and coordination of the 
counterparties and relevant SEF personnel.
---------------------------------------------------------------------------

h. Sec.  37.205(a)--Audit Trail Required
    Proposed Sec.  37.205(a) would make several changes to SEFs' audit 
trail compliance obligations. First, the proposed amendment would 
replace the requirement that SEFs must ``detect, investigate, and 
prevent'' customer and market abuse with a requirement instead that 
SEFs must be able to ``reconstruct all trading on its facility, detect 
and investigate customer and market abuses, and take appropriate 
disciplinary action.'' Second, the Commission proposes to move the 
requirement that audit trail data shall be sufficient to reconstruct 
all indications of interest, requests for quotes, orders and trades, to 
the guidance to Core Principle 2 in Appendix B.\943\ Third, the 
Commission proposes to eliminate the requirement that SEFs capture 
post-execution allocation information in their audit trail data; in 
lieu of requiring the audit trail track a customer order through 
``fill, allocation, or other disposition,'' the Commission proposes to 
require SEFs to capture the audit trail data only through execution on 
the SEF since the Commission has learned from SEFs' representations 
that SEFs are unable to routinely obtain post-allocation information as 
required by Sec. Sec.  37.205(a) and (b)(2) from third parties, such as 
DCOs and SDRs.
---------------------------------------------------------------------------

    \943\ The Commission proposes to add this guidance to paragraph 
(a)(4) to Core Principle 2 in Appendix B. The Commission proposes to 
eliminate the existing language in paragraph (a)(4). See infra 
Section VII.E.2.--Sec.  37.206(b)--Disciplinary Program.
---------------------------------------------------------------------------

    To the extent that the Commission is providing SEFs with greater 
discretion in fulfilling their information collection obligations with 
respect to audit trail requirements under Sec.  37.205, the Commission 
estimates and assumes that SEFs would continue to fulfill their 
information collection burdens in a manner similar to the status quo. 
Accordingly, the Commission assumes that proposed Sec.  37.205(a) would 
not substantively or materially affect a SEF's total information 
collection burden hours.\944\
---------------------------------------------------------------------------

    \944\ As the Commission discussed above, certain existing 
requirements under Sec.  37.205(a) are either unfeasible or impose 
greater information collection burdens than the Commission 
originally had estimated, e.g., the requirement to collect post-
execution trade allocation information. Subsequently, Commission 
staff provided no-action relief with respect to such obligations. 
See, e.g., CFTC Letter No. 15-68, Re: No-Action Relief for Swap 
Execution Facilities from Certain Audit Trail Requirements in 
Commission Regulation 37.205 Related to Post-Execution Allocation 
Information (Dec. 22, 2015) (subsequently extended in CFTC Letter 
No. 17-54, Re: No-Action Relief for Swap Execution Facilities from 
Certain Audit Trail Requirements in Commission Regulation 37.205 
Related to Post-Execution Allocation Information (Oct. 31, 2017)). 
Accordingly, the 2016 Part 37 PRA Renewal took into consideration in 
its revised PRA burden hour estimates the unfeasibility with 
complying with such requirements and the corresponding no-action 
relief. As a result, the Commission's proposal to eliminate such 
information collections under the proposal would not result in a net 
change to a SEF's aggregate burden hours because the 2016 Part 37 
PRA Renewal already considered such relief and non-compliance with 
such requirements in its revised estimate. The Commission notes 
that, otherwise, the burden hour estimate in the 2016 Part 37 PRA 
Renewal would have been even greater.
---------------------------------------------------------------------------

i. Sec.  37.205(b)--Elements of an Acceptable Audit Trail Program
    Proposed Sec.  37.205(b) would narrow the scope of audit trail data 
that must be captured in a transaction history database under existing 
Sec.  37.205(b)(2) by eliminating the requirement that SEFs include in 
their electronic transaction history database ``all indications of 
interest, requests for quotes, and order and trades entered into'' a 
SEF's trading system or platform. Instead, the SEFs would be required 
to include only ``trades'' executed via voice or via entry into a SEF's 
electronic trading system but must include all ``orders'' that are 
entered into an electronic trading system. The Commission additionally 
proposes to eliminate the remaining requirements of Sec.  37.205(b)(2) 
detailing the information that must be included in transaction history 
database. Consistent with the changes to Sec.  37.205(b)(2), the 
Commission further proposes to amend Sec.  37.205(b)(3) to clarify that 
a SEF's electronic analysis capability must enable the SEF to 
reconstruct transactions, rather than ``indications of interest, 
requests for quotes, orders, and trades.''
    To the extent that the Commission is providing SEFs with greater 
discretion in fulfilling their information collection obligations with 
respect to audit trail requirements under Sec.  37.205, the Commission 
estimates and assumes that SEFs would continue to fulfill their 
information collection burdens in a manner similar to the status quo. 
Accordingly, the Commission assumes that proposed Sec.  37.205(b) would 
not substantively or materially affect a SEF's total information 
collection burden hours.
j. Sec.  37.205(c)--Audit Trail Reconstruction
    Proposed Sec.  37.205(c) would eliminate the existing requirements 
for a SEF to establish an annual audit trail review and a related 
enforcement program and instead require the SEF to ``establish a 
program to verify its ability to comprehensively and accurately 
reconstruct all trading on its facility. . . .'' The Commission 
believes that this change will provide SEFs with discretion regarding 
what records they must maintain in order to comply with their 
information collection requirements, i.e., to determine what components 
of their audit, if incomplete or inaccurate, could impair their ability 
to conduct effective surveillance, and to determine and implement the 
most effective means for enforcing compliance with their audit trail 
and recordkeeping requirements.\945\ The Commission also proposes to 
adopt guidance to Core Principle 2 in Appendix B specifying that an 
effective audit trail reconstruction program should annually review an 
adequate sample of executed and unexecuted orders and trades from each 
execution

[[Page 62049]]

method offered to verify compliance with Sec.  37.205(c).\946\
---------------------------------------------------------------------------

    \945\ Notwithstanding these proposed changes, the Commission 
notes that to comply with the general audit trail requirement under 
proposed Sec.  37.205(a), a SEF must capture all audit trail data 
necessary to reconstruct all trading on its facility, detect and 
investigate customer and market abuses, and take disciplinary 
action, the SEF must ensure that market participants are submitting 
accurate and complete audit trail data.
    \946\ The Commission proposes to add this guidance to paragraph 
(a)(5) to Core Principle 2 in Appendix B. 17 CFR part 37 app. B. As 
discussed below, the Commission proposes to eliminate the existing 
language in paragraph (a)(5) to Core Principle 2 in Appendix B, see 
supra Section VII.E.2.---Sec.  37.206(b)--Disciplinary Program.
---------------------------------------------------------------------------

    To the extent that the Commission is providing SEFs greater 
discretion in fulfilling their information collection obligations with 
respect to audit trail requirements under Sec.  37.205, the Commission 
estimates and assumes that SEFs would continue to fulfill their 
information collection burdens in a manner similar to the status quo. 
Accordingly, the Commission will assume that proposed Sec.  37.205(c) 
would not substantively or materially affect a SEF's total information 
collection burden hours.
k. Sec. Sec.  37.206(b)-(d)--Disciplinary Program
    The Commission proposes to eliminate the existing requirements 
under (i) Sec.  37.206(c), which currently specify certain minimum 
requirements for a SEF disciplinary hearing, including providing a 
transcript of the hearing to a respondent under certain conditions; and 
(ii) Sec.  37.206(d), which requires that a disciplinary panel render a 
written decision promptly following a hearing, along with a detailed 
list of information that the SEF must include in the decision. Proposed 
Sec.  37.206(b) would generally require a SEF to establish a 
disciplinary program to enforce its rules and provide the SEF with the 
discretion to administer that program through compliance staff instead 
of mandatory disciplinary panels. The Commission also proposes to add 
guidance to Core Principle 2 in Appendix B to specify that a SEF's 
rules governing the adjudication of a matter by the SEF's disciplinary 
panel should be fair, equitable, and publicly available and that a 
SEF's rules should require the disciplinary panel to promptly issue a 
written decision following a hearing or the acceptance of a settlement 
offer.\947\
---------------------------------------------------------------------------

    \947\ The Commission proposes to add this guidance as part of a 
new paragraph (a)(7) to Core Principle 2 in Appendix B.
---------------------------------------------------------------------------

    To the extent that the Commission is providing SEFs greater 
discretion in fulfilling their information collection requirements with 
respect to carrying out disciplinary hearing and issuing hearing 
decisions, the Commission estimates and assumes that SEFs would 
continue to fulfill their information collection burdens in a manner 
similar to the status quo. Accordingly, the Commission will assume that 
proposed Sec. Sec.  37.206(b)-(d) would not substantively or materially 
affect a SEF's total information collection burden hours.
l. Sec.  37.401--General Requirements for Monitoring of Trading and 
Trade Processing
    Proposed Sec.  37.401(b) would require that a SEF collect and 
evaluate data on its market participants' trading activity outside of 
the SEF ``as necessary'' rather than ``on an ongoing basis'' as 
currently required.\948\ Similarly, proposed Sec.  37.401(c) would 
require a SEF to monitor and evaluate general market data to detect and 
prevent manipulative activity ``as necessary.'' \949\ The Commission 
anticipates that this will reduce annual recurring information 
collection burden hours by approximately 50 burden hours per SEF.
---------------------------------------------------------------------------

    \948\ The proposed amendment would renumber existing subsection 
(a) to subsection (b).
    \949\ The proposed amendment would renumber existing subsection 
(b) to subsection (c).
---------------------------------------------------------------------------

m. Sec.  37.1301(b)--General Requirements for Financial Resources
    Proposed Sec.  37.1301(b) would permit SEFs that also operate as 
DCOs to file a single financial report under Sec.  39.11 that covers 
both the SEF and DCO. Because this proposed approach would streamline 
and simplify the SEF financial reporting requirement process under 
Sec.  37.1306, the Commission estimates that the proposed change would 
decrease annual recurring information collection burden by 5 burden 
hours. The Commission also estimates that 1 SEF will take advantage of 
this approach per year.
n. Sec.  37.1306--Financial Reporting to the Commission
    Proposed Sec.  37.1306 would make several changes that would affect 
SEFs' information collection burden hours. First, proposed Sec.  
37.1306(a) would require SEFs' quarterly financial statement to be 
prepare in accordance with GAAP.\950\ Because GAAP-compliant financial 
statements generally require additional effort compared to non-GAAP 
compliance financial statements, the Commission estimates that the 
proposed change would increase annual recurring information collection 
burden hours by 10 burden hours and not impose an initial, non-
recurring burden.
---------------------------------------------------------------------------

    \950\ Alternatively, if a SEF is not domiciled in the United 
States and is not otherwise required to prepare financial statements 
in accordance with GAAP, then proposed Sec.  37.1306(a)(2)(ii) would 
allow the SEF to submit financial statements prepared in accordance 
with either International Financial Reporting Standards issued by 
the International Accounting Standards Board, or a comparable 
international standard that the Commission may otherwise accept in 
its discretion.
---------------------------------------------------------------------------

    Second, proposed Sec.  37.1306(c), among other things, would 
require a SEF to determine all of the costs that a SEF would incur to 
wind down its operations and the amount of time for the projected wind-
down period, as well as explain the basis for its determinations. The 
Commission estimates that proposed Sec.  37.1306(c) will impose an 
initial, non-recurring information collection of 20 burden hours 
associated with the SEF's obligation to provide a description of the 
costs and timing of a projected wind-down scenario, along with the 
basis for its determination. Additionally, the Commission estimates 
that this information collection burden would impose 5 annual recurring 
information collection burden hours after the initial year to update 
this information.\951\
---------------------------------------------------------------------------

    \951\ The Commission notes that existing Sec.  37.1306(c) 
requires a SEF to provide ``[s]ufficient documentation'' explaining 
both the methodology it used to compute its financial resources 
requirement as well as the basis for its determinations regarding 
its liquidity requirements. In addition to the change discussed 
above, proposed Sec.  37.1306(c) would clarify the type of 
information that SEFs must include in the financial statements they 
submit to the Commission, including (i) list all of its expenses, 
without exclusion, and (ii) identification of all expenses that the 
SEF excluded or pro-rated in its projected operating cost 
calculations and explain the basis for excluding or pro-rating any 
expenses. The Commission believes that these changes are neither an 
addition nor modification to existing burden hours since the 
Commission is merely clarifying the type of documentation that must 
be provided to be deemed ``sufficient'' and are not intended to 
increase burden hours or the information that the Commission 
originally intended for SEFs to provide. Accordingly, other than as 
discussed above, the Commission believes that the proposed amendment 
to Sec.  37.1306(c) would not impose new information collection 
burdens on SEFs or substantively or materially modify existing 
burdens.
---------------------------------------------------------------------------

o. Sec.  37.1401(g)--Program of Risk Analysis and Oversight Technology 
Questionnaire
    Proposed Sec.  37.1401(g) would require a SEF to annually submit an 
up-to-date questionnaire that would be located in Appendix A to part 37 
(``Questionnaire'') based on the existing Operational Capability 
Technology Questionnaire located in Exhibit V to Form SEF in Appendix 
A.\952\ A SEF

[[Page 62050]]

would only need to submit new changes to the Questionnaire and would 
not need to resubmit any information that has not changed. An applicant 
for SEF registration is required to file the Questionnaire pursuant to 
Form SEF in order to demonstrate compliance with Core Principle 14 and 
Sec.  37.1401.\953\ The majority of the updated Questionnaire would 
remain unchanged, although the proposal would additionally include 
enterprise technology risk assessments, board of director and committee 
information, third-party service provider information, and 
cybersecurity threat intelligence capabilities in order to keep up-to-
date with the rapidly changing field of system safeguards and 
cybersecurity.
---------------------------------------------------------------------------

    \952\ The Commission notes that based on the proposed amendments 
to Form SEF in Appendix A, Exhibit V would be re-designated as 
Exhibit Q of Form SEF. The up-to-date questionnaire would be called 
the ``Program of Risk Analysis and Oversight Technology 
Questionnaire'' and would be located in Appendix A to part 37. To 
the extent that still-current information and documents were 
provided in the most recent update to the Questionnaire, a SEF 
responding to a System Safeguards Examination document request would 
be able to reference that fact, rather than resubmitting such 
information and documents.
    \953\ The current version of the Questionnaire requests 
documents and information pertaining to the following nine areas of 
an applicant's program of risk analysis and oversight, including: 
(i) Organizational structure, system descriptions, facility 
locations, and geographic distribution of staff and equipment, 
including organizational charts and diagrams; (ii) enterprise risk 
management program and governance, including information regarding 
the Board of Directors, audits, and third-party providers; (iii) 
information security, including storage of records, access controls, 
and cybersecurity threat intelligence capabilities; (iv) business 
continuity and disaster recovery plan and resources, including 
testing and recovery time objectives; (v) capacity planning and 
testing; (vi) system operations, including configuration management 
and event management; (vii) systems development methodology, 
including quality assurance; (viii) physical security and 
environmental controls; and (ix) testing, including vulnerability, 
penetration, and controls testing.
---------------------------------------------------------------------------

    The Commission believes that the aggregate burden hours imposed on 
SEFs are mitigated for several reasons. First, an annually-updated 
Questionnaire would limit the work required of SEFs in responding to a 
System Safeguards Examination document requests to providing updated 
information and documents for sections of Exhibit Q that have changed 
since the last annual filing. Second, SEFs currently must provide 
similar information under existing Sec. Sec.  37.1401(f)-(g).\954\ 
Third, much of the information comprising a SEF's annual compliance 
report would be able to be used for the Questionnaire. Accordingly, the 
Commission estimates that proposed Sec.  37.1401(g) would establish a 
new collection of information with annual recurring burden hours of 8 
burden hours per SEF.
---------------------------------------------------------------------------

    \954\ The Commission notes that proposed subsection (h) 
(renumbered from existing subsection (g)) requires a SEF to provide 
to the Commission system safeguards-related books and records, 
including (1) current copies of its business continuity-disaster 
recovery plans and other emergency procedures; (2) all assessments 
of its operational risks or system safeguards-related controls; (3) 
all reports concerning system safeguards testing and assessment 
required by this chapter; and (4) all other books and records 
requested by Commission staff in connection with Commission 
oversight of system safeguards or maintenance of a current profile 
of the SEF's automated systems. Moreover, Sec.  37.1401(f) requires 
a SEF to provide Commission staff with timely advance notice of all 
material planned changes to automated systems that may impact 
reliability, security, or adequate scalable capacity of such systems 
and planned changes to the SEF's program of risk analysis and 
oversight.
---------------------------------------------------------------------------

p. Sec.  37.1501(d)--Preparation of Annual Compliance Report
    Proposed Sec.  37.1501(d) \955\ would make several changes that 
would generally reduce burden hours for SEFs. First, under proposed 
Sec.  37.1501(d) a SEF would no longer need to include in its annual 
compliance report (``ACR'') either a review of all the Commission 
regulations applicable to a SEF or identify the written policies and 
procedures designed to ensure compliance with the Act and Commission 
regulations. Instead, the Commission believes that requiring an ACR to 
include a description and self-assessment of the effectiveness of the 
SEF's written policies and procedures to ``reasonably ensure'' 
compliance with the Act and applicable Commission regulations is more 
closely aligned with the corresponding provisions of Core Principle 15 
and would still allow the Commission to properly assess the SEF's 
compliance and self-regulatory programs. Accordingly, the Commission 
estimates that proposed Sec.  37.1501(d) would reduce annual recurring 
information collection burden hours by approximately 10 burden hours 
per SEF.
---------------------------------------------------------------------------

    \955\ The proposed amendment would renumber existing subsection 
(e) to subsection (d).
---------------------------------------------------------------------------

    Second, proposed Sec.  37.1501(d)(3) would maintain the current 
requirement that an ACR describe the ``financial, managerial, and 
operational resources'' set aside for compliance with the Act and 
Commission regulations, but would eliminate the requirement that a SEF 
specifically discuss its compliance staffing and structure; a catalogue 
of investigations and disciplinary actions taken over the last year; 
and a review of disciplinary committee and panel performance. The 
Commission estimates that proposed Sec.  37.1501(d)(3) would reduce 
annual recurring information collection burden hours by approximately 5 
burden hours per SEF.
    Third, to facilitate the Commission's ability to assess a SEF's 
written policies and procedures regarding compliance matters, proposed 
Sec.  37.1501(d)(4) would require a SEF to discuss only material 
noncompliance matters and explain the corresponding actions taken to 
resolve such matters.\956\ The Commission believes that requiring SEFs 
to focus on describing material non-compliance matters, rather than 
describing all compliance matters in similar depth, will streamline 
this requirement and provide more useful information to the Commission. 
Further, the Commission proposes to eliminate the enumerated mechanisms 
for identifying non-compliance issues, which conforms to the ability of 
a chief compliance officer (``CCO'') to establish procedures to address 
non-compliance issues through ``any means,'' as described above. 
Accordingly, the Commission estimates that this change would reduce 
annual recurring information collection burden hours per SEF by 3 
burden hours.
---------------------------------------------------------------------------

    \956\ The Commission proposes to renumber paragraph (e)(5) to 
paragraph (d)(4) and adopt the amendments as described above and 
other non-substantive amendments.
---------------------------------------------------------------------------

    Fourth, proposed Sec.  37.1501(d)(5) would limit a SEF CCO's 
certification of an ACR's accuracy and completeness to ``all material 
respects'' of the report. The Commission understands that CCOs have 
been hesitant to certify that an entire ACR is accurate and complete 
under the penalty of the law, without regard to whether a potential 
inaccuracy or omission would be a material error or not. Accordingly, 
since the Commission believes that the proposed change would entail 
fewer burdens for a CCO to collect the necessary information to enable 
the CCO to certify the ACR, the Commission estimates that this change 
would reduce annual recurring information collection burden hours per 
SEF/CCO by 10 burden hours.
q. Part 36--Trade Execution Requirement
    Proposed part 36 would address the swap trade execution requirement 
and would eliminate the MAT determination process under existing Sec.  
37.10 and Sec.  38.12, as well as the associated compliance schedules 
set forth under Sec.  37.11 and Sec.  38.11. Proposed Sec.  36.2 would 
require SEFs and DCMs to each respectively file a standardized form 
(``Form TER'') to the Commission that details the swaps that they list 
for trading that are subject to the trade execution requirement, as 
well as include such information on their respective websites. The 
Commission estimates that filing these forms and providing the related 
information on their website will create a new information collection 
with an initial, non-recurring burden of approximately 5 burden hours 
per SEF to complete and submit Form TER. Additionally, the Commission 
estimates that this

[[Page 62051]]

requirement will impose approximately 5 annual recurring burden hours 
per SEF related to updating, or confirming no changes need to be made 
to, Form TER. As noted above, there are 25 SEFs currently registered 
with the Commission, and the Commission expects up to another 60 SEFs 
to register as a result of the Commission's proposed application of the 
SEF registration requirement. Accordingly, the Commission estimates 
that the information collection burdens related to Form SEF will impose 
an aggregate of 425 initial, non-recurring burden hours across 85 
entities and an aggregate of 425 annual recurring burden hours across 
the same.\957\
---------------------------------------------------------------------------

    \957\ The current 25 registered SEFs + the 60 entities that the 
Commission expects would register as a result of the Commission's 
proposed application of the SEF registration requirement = 85 total 
entities. Accordingly, 85 total entities x 5 hours per entity = 425 
total hours for all SEF entities. The Commission notes that the 
related burden hours for the current MAT determination process are 
included in separate OMB control number 3038-0099, which estimates 5 
annual recurring responses that average 16 burden hours per 
response, for a total estimate of 80 annual recurring burden hours 
across all SEFs and DCMs. The Commission proposes to eliminate OMB 
control number 3038-0099 and transfer the relevant burden to OMB 
control numbers 3038-0052 and 3038-0074. While the Commission 
expects additional swap products and transactions would become 
subject to the Commission's revised interpretation of the trade 
execution requirement in CEA section 2(h)(8), the Commission also 
expects that 60 additional entities would register as SEFs as a 
result of the Commission's application of the SEF registration 
requirement. See supra Section XXIII.B.1.a.--Sec.  37.3(a)--
Requirements for Registration. Accordingly, the Commission expects 
that any additional burden hours associated with any increase in the 
number of swap products traded on SEF or in swap transaction volume 
would be covered by the additional burden hours associated with the 
60 new entities that the Commission expects to register as SEFs.
---------------------------------------------------------------------------

2. Information Collection Comments
    The Commission invites the public to comment on any aspect of the 
paperwork burdens discussed herein, particularly for those provisions 
for which the Commission proposes to eliminate specific requirements 
and instead provide SEFs with discretion in complying with their 
information collection obligations. Copies of the supporting statements 
for the collections of information from the Commission to OMB are 
available by visiting RegInfo.gov. Pursuant to 44 U.S.C. 3506(c)(2)(B), 
the Commission solicits comments in order to (i) evaluate whether the 
proposed collections of information are necessary for the proper 
performance of the functions of the Commission, including whether the 
information will have practical utility; (ii) evaluate the accuracy of 
the Commission's estimate of the burden of the proposed collections of 
information; (iii) determine whether there are ways to enhance the 
quality, utility, and clarity of the information proposed to be 
collected; and (vi) minimize the burden of the proposed collections of 
information on those who are to respond, including through the use of 
appropriate automated collection techniques or other forms of 
information technology.
    Those desiring to submit comments on the proposed information 
collection requirements should submit them directly to the Office of 
Information and Regulatory Affairs, OMB, by fax at (202) 395-6566, or 
by email at [email protected]. Please provide the Commission 
with a copy of submitted comments so that all comments can be 
summarized and addressed in the final rule preamble. Refer to the 
Addresses section of this notice of proposed rulemaking for comment 
submission instructions to the Commission.

C. Cost-Benefit Considerations

1. Introduction
    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders.\958\ Section 15(a) further 
specifies that the costs and benefits shall be evaluated in light of 
the following five broad areas of market and public concern: (1) 
Protection of market participants and the public; (2) efficiency, 
competitiveness, and financial integrity of futures markets; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. The Commission considers the costs and 
benefits resulting from its discretionary determinations with respect 
to the section 15(a) factors further below. Prior to the section 15(a) 
consideration for each set of rules, the Commission separately 
discusses the costs, benefits, and potential alternatives to the 
approach for the proposed regulations, organized in the following 
manner:
---------------------------------------------------------------------------

    \958\ 7 U.S.C. 19(a).

 SEF Registration
    (1) Application of SEF Registration Requirement
    (2) SEF Registration Process and Related Forms
 Market Structure and Trade Execution
    (1) Elimination of Minimum Trading Functionality and Execution 
Method Requirements
    (2) Trade Execution Requirement and Elimination of MAT Process
    (3) Pre-Execution Communications and Block Trades
    (4) Impartial Access
 Compliance and SRO Responsibilities
    (1) SEF Trading Specialists
    (2) Rule Compliance and Enforcement
    (i) Definition of ``Market Participant''
    (ii) Audit Trail and Surveillance Program
    (iii) Compliance and Disciplinary Programs
    (iv) Regulatory Service Provider
    (3) Error Trade Policy
    (4) Chief Compliance Officer
    (5) Recordkeeping, Reporting, and Information-Sharing
    (i) Equity Interest Transfer
    (ii) Confirmation and Trade Evidence Record
    (iii) Information-Sharing
    (6) System Safeguards
 Design and Monitoring of Swaps
    (1) Swaps Not Readily Susceptible to Manipulation
    (2) Monitoring of Trading and Trade Processing
 Financial Integrity of Transactions
 Financial Resources

    The Commission recognizes that the proposed rules may impose costs, 
but currently lacks the requisite data and information to reasonably 
estimate them. This lack of data and information is attributable in 
part to the discretion that a SEF would have under the proposed rules 
to achieve compliance by adopting different measures. Accordingly, the 
Commission cannot predict the approach that each SEF would adopt to 
achieve such compliance. Additionally, the initial and recurring 
compliance costs for any particular SEF or market participant would 
depend on the size, existing infrastructure, level of swap activity, 
and practices and cost structure of the relevant entity. Costs or 
benefits may be impacted, for example, if certain entities seek to 
avoid the regulations attendant to SEFs by reducing their swap 
activities. In situations where the Commission is unable to quantify 
the costs and benefits, the Commission identifies and considers the 
costs and benefits of the applicable proposed rules in qualitative 
terms.
    The Commission notes that this consideration is based on its 
understanding that the swaps market functions internationally with (i) 
transactions that involve U.S. firms occurring across different 
international jurisdictions; (ii) some entities organized outside the 
U.S. that are prospective Commission registrants; and (iii) some 
entities typically operating both within and outside the U.S. who 
follow substantially similar business practices wherever located. Where 
the Commission does not specifically refer to matters of location, the 
cost-benefit discussion below refers to the effects of the proposed 
rules on all subject swaps

[[Page 62052]]

activity, whether based on their actual occurrence in the U.S. or on 
their connection with, or effect on, U.S. commerce pursuant to CEA 
section 2(i).\959\
---------------------------------------------------------------------------

    \959\ Pursuant to CEA section 2(i), activities outside of the 
U.S. are not subject to the swap provisions of the CEA, including 
any rules prescribed or regulations promulgated thereof, unless 
those activities either have a direct and significant connection 
with activities in, or effect on, commerce of the United States; or 
contravene any rule or regulation established to prevent evasion of 
a Dodd-Frank Act-enacted provision of the CEA. 7 U.S.C. 2(i).
---------------------------------------------------------------------------

    The Commission generally requests comment on all aspects of its 
cost-benefit considerations, including the identification and 
assessment of any costs and benefits not discussed therein; the 
potential costs and benefits of the alternatives that the Commission 
discussed in this release; data and any other information to assist or 
otherwise inform the Commission's ability to quantify or qualitatively 
describe the costs and benefits of the proposed rules; and 
substantiating data, statistics, and any other information to support 
positions posited by commenters with respect to the Commission's 
discussion. Commenters may also suggest other alternatives to the 
proposed approach where the commenters believe that they would be 
appropriate under the CEA and would provide a more appropriate cost-
benefit profile.
2. Baseline
    The primary focus of the proposed rules is to amend requirements 
set forth for swap execution facilities under part 37 of the 
Commission's regulations; \960\ the process for a SEF or DCM to make a 
swap ``available to trade'' under parts 37 and 38, respectively; \961\ 
and related regulations under parts 39 and 43. Hence, the Commission 
believes that the baseline for the consideration of costs and benefits 
is the existing regulations set forth in part 37; Sec.  37.10 and Sec.  
38.12; Sec.  39.12(b)(7); and Sec.  43.2. For this reason, the 
Commission is considering the changes to costs and benefits, as 
compared to the baseline, resulting from the proposed regulations 
discussed herein. The Commission notes that some of the proposed rules 
would codify existing, time-limited no-action relief and other guidance 
issued by Commission staff that market participants and SEFs may have 
relied upon to alter their compliance practices with respect to certain 
existing rules. To the extent that market participants have relied upon 
such relief or staff guidance, the magnitude of the actual costs and 
benefits of the proposed rules may not be as significant. The 
Commission's cost-benefit discussion will note instances where the 
Commission believes that market participants or SEFs have operated 
under relevant no-action relief or staff guidance.
---------------------------------------------------------------------------

    \960\ The Commission adopted the part 37 regulations in 2013. 
Core Principles and Other Requirements for Swap Execution 
Facilities, 78 FR 33476 (Jun. 4, 2013) (``SEF Core Principles Final 
Rule'').
    \961\ The Commission adopted the regulation establishing the 
process for a SEF or DCM to make a swap ``available to trade'' in 
2013. Process for a Designated Contract Market or Swap Execution 
Facility To Make a Swap Available to Trade, Swap Transaction 
Compliance and Implementation Schedule, and Trade Execution 
Requirement Under the Commodity Exchange Act, 78 FR 33606 (Jun. 4, 
2013) (``MAT Final Rule'').
---------------------------------------------------------------------------

3. SEF Registration
a. Overview
(1) Application of SEF Registration Requirement
    The Commission proposes to apply the SEF registration requirements 
in CEA section 5h(a)(1) and Sec.  37.3(a)(1) to both (i) swaps broking 
entities, including interdealer brokers, that facilitate multiple-to-
multiple swaps trading away from SEFs; and (ii) Single-Dealer 
Aggregator Platforms that aggregate single-dealer pages. Accordingly, 
these entities would be required to either register as a SEF or become 
a part of an existing SEF. Other alternatives, however, include 
adjusting their activity to avoid the SEF registration requirement; or 
in the case of foreign swaps broking entities, which includes foreign 
interdealer brokers that currently facilitate trading, i.e., 
negotiation or arrangement, of swaps transactions for U.S. persons 
(``Eligible Foreign Swaps Broking Entities''), working with the 
appropriate regulator within their country of domicile to seek an 
exemption from registration pursuant to CEA section 5h(g).\962\
---------------------------------------------------------------------------

    \962\ Pursuant to CEA section 5h(g), the Commission may exempt 
facilities from SEF registration if the facility is subject to 
comparable, comprehensive supervision and regulation on a 
consolidated basis by the appropriate governmental authorities in 
the home country of the facility. 7 U.S.C. 7b-3(g).
---------------------------------------------------------------------------

    The Commission is also proposing to delay the compliance date of 
any final rule that applies the SEF registration requirement. For 
foreign swaps broking entities, the Commission proposes to delay the 
compliance date for a period of two years. This proposed delay would 
provide more time for the Commission to further develop its cross-
border regulatory regime, including clarifying the cross-border 
jurisdictional reach of the SEF registration requirement under CEA 
section 2(i). For U.S. swaps broking entities, including interdealer 
brokers, the Commission proposes to delay the compliance date for a 
period of six months in order to provide such entities time to obtain 
SEF registration.
(2) SEF Registration Process and Related Forms
    The Commission proposes several clarifying and streamlining 
amendments to Form SEF. Some of the proposed amendments would amend or 
eliminate several of the information requirements set forth in the 
existing exhibits. For example, the Commission is proposing to 
consolidate certain exhibits regarding governance (existing Exhibits C 
and G) and personnel (existing Exhibits E and F), as well as eliminate 
an exhibit regarding the financial resources of any affiliates 
(existing Exhibit J). The Commission is also proposing to clarify 
certain information requirements not explicitly enumerated in the 
existing requirements, but which have been incorporated in practice as 
part of the existing SEF application review process. For example, SEF 
applicants would need to provide additional information in Form SEF 
about, among other things, the asset classes the SEF applicant intends 
to list and submit for clearing (new Exhibit N). The Commission is also 
proposing to eliminate the requirement to use Form SEF to request an 
amended order of registration; under the proposed rules, a registered 
SEF would be able to file a request with the Commission for an amended 
order of registration.
    Finally, the Commission proposes to revise Sec.  37.4 to exclude 
product submissions from the SEF registration process. Section 37.4 
currently permits a SEF applicant to submit the terms and conditions of 
swaps that it intends to list for trading as part of its application 
for registration. Section 37.4 also requires the Commission to consider 
such swaps for approval at the time that the Commission issues a SEF's 
registration order or, for a dormant SEF, reinstatement of 
registration. As proposed, a SEF applicant would have to obtain 
registration prior to submitting product terms and conditions or 
related amendments under Sec.  40.2 or Sec.  40.3, which govern the 
submission of new product terms and conditions or related amendments by 
registered entities.
b. Benefits
(1) Application of SEF Registration Requirement
    The Commission believes that ensuring that all entities operating 
trading systems or platforms that facilitate swaps trading between 
multiple market participants are subject

[[Page 62053]]

to the SEF registration requirement would impart substantial benefits 
on the swaps market (emphasis added). Ensuring that ``multiple-to-
multiple'' swaps trading activity occurs on a registered SEF should 
concentrate the liquidity formation on SEFs and provide oversight 
benefits and efficiencies that enhance market integrity. The proposed 
application of the SEF registration requirement should help to ensure 
that the entire swaps trading process, including pre-trade and post-
trade protocols, occurs on a SEF in most cases; combined with the 
proposed interpretation of the trade execution requirement discussed 
below, which would require additional swaps to be executed on a SEF, 
the proposed application of the registration requirement should bring a 
material amount of swaps trading activity under SEF oversight. The 
transition of greater trading to a SEF should improve market oversight 
by allowing a SEF to monitor a broader swath of the swaps market, which 
would result in an enhancement of the Commission's own oversight 
capabilities.
    Further, increased swaps trading on a SEF also should benefit 
market participants, including, among other things, protections to 
mitigate abusive trading or other market disruptions via a facility's 
audit trail, trade surveillance, market monitoring, recordkeeping, and 
anti-fraud and market manipulation rules. Additionally, the use of SEF 
mechanisms would help to enhance post-trade efficiencies and facilitate 
compliance with related Commission requirements, including pre-trade 
credit screening and the submission of transactions for clearing and 
reporting. Among other things, the Commission believes that access to 
such services could benefit certain market participants more than 
others, in particular those who have not previously established access 
to such services.
(2) SEF Registration Process and Related Forms
    The proposed amendments to Form SEF may benefit potential SEF 
applicants, including those swaps broking entities and Single-Dealer 
Aggregator Platforms that the Commission anticipates would elect to 
register as SEFs, by making a more efficient and potentially less 
burdensome SEF registration process. The Commission anticipates that 
certain changes to Form SEF would reduce duplicative information 
requirements, while also continuing to ensure that it receives 
sufficient information to determine whether the applicant is in 
compliance with the core principles and Commission regulations. The 
additional proposed information requirements include information that 
Commission staff has been requesting in practice as part of the SEF 
registration process after applicants submit Form SEF. Thus, requiring 
this information on Form SEF should increase the efficiency of the SEF 
registration process by reducing the number of follow-up questions and 
requests. The Commission also anticipates that these proposed 
requirements will reduce the amount of time that the Commission needs 
to review a completed application.
    The Commission also proposes conforming amendments to Form SEF that 
are consistent with the proposed regulations. The proposed amendments 
prompting the revision or elimination of certain existing information 
requirements relate to, among other things, proposed amendments to 
existing execution method and financial resource requirements, as 
discussed below. The proposal to eliminate the temporary registration 
provisions that have expired should have no direct impact on costs or 
benefits. Additionally, the Commission proposes to exclude product 
submissions from the SEF application process. The Commission believes 
that separating these two processes would likely promote efficiency for 
both Commission staff and SEF applicants. Otherwise, the review of a 
SEF applicant's registration application could be unnecessarily delayed 
or stayed because Commission staff may require additional consideration 
or analysis of the novelty or complexity of the proposed product.
c. Costs
(1) Application of SEF Registration Requirement
    Any swaps broking entity or Single-Dealer Aggregator Platform that 
elects to register as a SEF would incur the costs of registering, 
owning, and operating a SEF. The Commission previously discussed the 
costs of registering and operating a SEF in the SEF Core Principles 
Final Rule; \963\ these costs and benefits are further modified by the 
proposed amendments described in the preamble above and cost-benefit 
considerations discussed further below.
---------------------------------------------------------------------------

    \963\ SEF Core Principles Final Rule at 33567.
---------------------------------------------------------------------------

    These entities are likely to incur initial setup costs to upgrade 
or create their existing systems or platforms to comply with the SEF 
core principles and Commission regulations applicable to SEFs, 
including the SEF registration requirement. The Commission recognizes 
that the additional ongoing marginal and fixed costs of maintaining a 
SEF could be significant for some of these entities. For example, some 
of these entities would have to educate their employees on SEF 
compliance practices; hire additional employees such as a CCO; and 
develop additional functions such as audit trail, trade surveillance, 
recordkeeping, and market monitoring.
    To avoid or mitigate some of these costs, some swaps broking 
entities may become a part of a SEF with whom they are affiliated, 
thereby leveraging existing resources; nevertheless, they would likely 
still incur one-time costs and some ongoing costs. The Commission also 
notes that many swaps broking entities are currently registered with 
the Commission as introducing brokers (``IBs''); as such, they already 
follow certain similar regulatory requirements, including those related 
to oversight and recordkeeping. Therefore, the SEF registration costs 
to these entities would likely be lower since they already adhere to 
similar regulatory obligations. A Single-Dealer Aggregator Platform 
also would need to register as or join a SEF, thereby likely incurring 
similar costs.\964\ Similarly, the Commission believes that the cost 
for an unaffiliated Single-Dealer Aggregator Platform to become a SEF 
or join a SEF would be greater than the cost for a Single-Dealer 
Aggregator Platform already affiliated with a SEF.
---------------------------------------------------------------------------

    \964\ The Commission is aware of one Single-Dealer Aggregator 
Platform that is currently affiliated with a SEF.
---------------------------------------------------------------------------

    The Commission estimates that there are approximately 40-60 swaps 
broking entities, including interdealer brokers, that would need to 
either register as a SEF or join a SEF as a result of the Commission's 
proposed application of the SEF registration requirement.\965\ For some 
of these entities, the cost to become a SEF or affiliate with a SEF may 
compel them to cease operating trading systems or platforms that 
facilitate multiple-to-multiple swaps trading between market 
participants. To mitigate these registration costs, the Commission is 
proposing a six-month delay to the compliance date for applicable U.S. 
swaps broking entities. This proposed delay would provide additional 
time for U.S. swaps broking entities to become registered as SEFs, 
thereby increasing the opportunity for

[[Page 62054]]

them to continue operating without interruption.
---------------------------------------------------------------------------

    \965\ These estimates are based on introducing broker 
information made available from the National Futures Association 
(``NFA''). The NFA information indicates that there more than 300 
registered IBs currently designated as a ``swap firm'' that broker 
swap products.
---------------------------------------------------------------------------

    Smaller swaps broking entities or smaller Single-Dealer Aggregator 
Platforms may be more likely than larger entities or platforms to 
abstain from SEF activities to avoid the SEF registration requirement. 
Smaller entities or platforms are less likely to have existing 
technology and procedures or available resources to comply with new SEF 
requirements; therefore, their initial costs of compliance with those 
requirements may be larger or have a proportionally greater effect on 
smaller entities. Market participants may also bear some costs if some 
entities abstain from SEF activities. For example, market participants 
who have utilized these entities to trade swaps would no longer be able 
to do so for swaps that must be traded on a SEF or swaps that they 
would otherwise want to execute on a SEF. Therefore, these participants 
would incur costs that could include search and transition costs to 
identify and onboard to new SEFs. In transitioning to a new platform, 
those market participants may incur less favorable financial terms or 
have access to reduced services.
    The Commission estimates that approximately 10-20 of the swaps 
broking entities that would potentially need to either register as a 
SEF or join a SEF are located outside of the U.S. or otherwise have 
operations outside of the U.S. (``Eligible Foreign Swaps Broking 
Entities''). To mitigate these registration costs, the Commission is 
proposing a two-year delay to the compliance date for Eligible Foreign 
Swaps Broking Entities. The proposed delay is likely sufficient for 
these entities either to register as SEFs in an orderly manner or to 
become subject to comparable and comprehensive supervision from their 
home regulators, and thus become eligible for an exemption to the SEF 
registration requirement pursuant to CEA section 5h(g). This proposed 
delay would also allow these entities more time to avoid operational 
disruptions, which should mitigate costs for these entities and limit 
disturbances in the swaps markets, while the Commission addresses the 
application of CEA section 2(i).
    The delayed compliance date for Eligible Foreign Swaps Broking 
Entities would also delay the prospective benefits discussed above for 
those swaps trading on these foreign entities. However, the Commission 
does not anticipate that this delay would draw trading volume away from 
domestic SEFs. The Commission understands that market participants 
generally use Eligible Foreign Swaps Broking Entities to trade swaps 
outside of standard business hours in the U.S. and/or to access 
liquidity in other non-U.S. markets. The proposed six-month 
implementation window for U.S. swaps broking entities would also delay 
the benefits discussed above, but the amount of time needed for an 
entity to obtain SEF registration renders the compliance with the 
registration requirement by the compliance date of any final rule 
impractical.
    Additionally, some customers of swaps broking entities and Single-
Dealer Aggregator Platforms may incur the costs of ``onboarding'' with 
a SEF, to the extent that these market participants are not currently 
customers of a SEF. The Commission's proposal to expand the trade 
execution requirement to include all swaps subject to the clearing 
requirement that are listed on a SEF would prevent market participants 
from trading these swaps off-SEF in most instances. Accordingly, those 
market participants who wish to continue to trade these swaps would 
have to onboard to a SEF. The Commission estimates that up to 807 
market participants in the interest rate swaps (``IRS'') market trade 
cleared swaps exclusively off-SEF and thus may need to onboard to a 
SEF.\966\ While the IRS market is the largest market by both trading 
volume and by notional amount outstanding \967\ among all swap asset 
classes, additional market participants trading cleared swaps in the 
credit asset class may also need to onboard to a SEF.\968\ Market 
participants that must onboard to a SEF would incur costs to integrate 
their system with a SEF's interface as well as to train personnel to 
comply with a SEF's rulebook. For some market participants, this may 
require programming new ways to view, receive, and export information. 
Onboarding would also subject these market participants and their 
trading to the SEF's jurisdiction, which market participants may view 
as another disadvantage. As a result of the costs related to onboarding 
and trading on SEFs, certain market participants may reduce their use 
of swaps.\969\
---------------------------------------------------------------------------

    \966\ To estimate the number of market participants in the IRS 
market that would choose to onboard with a SEF, the Commission first 
analyzed IRS trading during January 2018 and identified market 
participants who traded cleared IRS but did not trade an IRS on a 
SEF during that month. Then, the Commission compared the list of 
legal entity identifiers (``LEIs'') associated with those market 
participants to the LEIs of market participants who transacted on a 
SEF within the 2017 calendar year and identified the LEIs that have 
never transacted on a SEF during the sample period analyzed. The 
Commission identified 807 unique LEIs who traded a cleared IRS in 
January 2018 but did not trade an IRS on a SEF in 2017 or in January 
2018. The Commission notes that these 807 LEIs made up 21 percent of 
total IRS notional traded in January 2018 and accounted for 38 
percent of the trades.
    \967\ According to the International Swaps and Derivatives 
Association (``ISDA'') SwapsInfo, the notional volume of trading in 
IRS in 2017 was about $192 trillion, as compared to about $7 
trillion for credit. ISDA, ISDA SwapsInfo Weekly Analysis: Week 
Ending December 22, 2017, http://analysis.swapsinfo.org/2017/12/ird-and-cds-weekly-trading-volume-week-ending-december-22-2017/ (``2017 
ISDA SwapsInfo Weekly Analysis''). According to the Bank of 
International Settlement statistics on the global OTC derivatives 
market, IRS constitute 69 percent of the total OTC derivatives 
market, by notional. Bank of International Settlement, https://stats.bis.org/statx/srs/table/d5.1.
    \968\ The Commission has not estimated the number of additional 
market participants in the credit asset class (who do not also trade 
IRS) that may onboard to a SEF as a result of the proposal.
    \969\ Similar to the point made above regarding entities 
potentially refraining from SEF activities, any perceived 
disadvantages of transacting on SEFs may cause some market 
participants to alter their risk management processes to avoid or 
reduce their transactions on SEFs. If these market participants were 
to use more costly or less effective risk management strategies in 
place of swaps, this could increase the cost or reduce the 
effectiveness of risk management in general.
---------------------------------------------------------------------------

    To the extent that a market participant's swaps are already 
executed on a SEF after being arranged by a swaps broking entity, 
however, the Commission does not anticipate that the market participant 
would incur significant additional internal costs by using the SEF for 
the entire trading process. Some SEFs may charge higher fees for these 
trades due to the additional oversight the Commission contemplates that 
the SEF would provide.
(2) SEF Registration Process and Related Forms
    The Commission proposes to reduce some information requirements as 
part of the proposed Form SEF, but would require additional information 
in other areas. As a result, the Commission believes that some proposed 
changes to Form SEF would reduce costs while others would increase 
costs. However, the Commission believes that the cost of preparing Form 
SEF, as proposed to be amended, is likely to be comparable to the cost 
of preparing the existing Form SEF. Since the additional information 
required by Form SEF generally consists of information that the 
Commission has been requesting as part of the registration process, SEF 
applicants already likely incur the costs associated with providing 
that information. Additionally, the Commission proposes to remove the 
product submission process from the SEF application process. SEF 
applicants may incur additional administrative costs associated with 
completing the product submission apart from a SEF

[[Page 62055]]

application.\970\ However, the Commission believes these additional 
costs will mostly be related to the format and manner of submission, as 
the content of a product submission would materially remain the same.
---------------------------------------------------------------------------

    \970\ The Commission notes that this change--and the concomitant 
benefits and costs--also would affect dormant SEFs, which like SEF 
applicants currently may include proposed products as part of their 
process to obtain reinstatement of their registration from dormancy.
---------------------------------------------------------------------------

d. Section 15(a) Factors \971\
---------------------------------------------------------------------------

    \971\ The discussion here and in the other section 15(a) 
discussions below cover the proposed amendments that the Commission 
has identified as being relevant to the areas set out in section 
15(a) of the CEA: (i) Protection of market participants and the 
public; (ii) efficiency, competitiveness, and financial integrity of 
futures markets; (iii) price discovery; (iv) sound risk management 
practices; and (v) other public interest considerations. For 
proposed amendments that are not specifically addressed within the 
respective CEA section 15(a) factor discussion, the Commission has 
not identified any effects.
---------------------------------------------------------------------------

(1) Protection of Market Participants and the Public
    The Commission believes that the proposed application of the 
statutory SEF registration requirement to certain entities not 
currently registered as SEFs should protect market participants and the 
public by helping to ensure that entities that meet the SEF definition 
provide the protections associated with SEF core principles and the 
Commission's regulations. As noted above, these protections include 
audit trail, trade surveillance, market monitoring, recordkeeping, and 
anti-fraud and market manipulation rules. The proposed amendments to 
the SEF registration process should maintain the protection of market 
participants and the public by continuing to help ensure that SEF 
applicants provide the Commission with the information it needs to 
determine whether the SEF applicant will be able to comply with the SEF 
core principles and Commission regulations.
(2) Efficiency, Competitiveness, and Financial Integrity of Markets
    The Commission believes that the proposed application of the 
statutory SEF registration requirement to certain entities not 
currently registered should enhance the competitiveness and financial 
integrity of markets since these registered SEFs would be subject to 
relevant SEF core principles, including, among others, Core Principles 
2, 4, and 15. The Commission also believes that the proposal would 
subject entities providing similar services to comparable regulations, 
thus increasing the competitiveness of SEFs. The greater use of SEF 
functions, such as pre-trade credit screening, submission to DCOs for 
clearing, and reporting to SDRs should also enhance efficiencies in the 
swaps market. Proposed Form SEF should continue to provide a means for 
SEF applicants to demonstrate compliance with core principles related 
to financial integrity, including Core Principle 13 regarding SEF 
financial resources.
(3) Price Discovery
    The Commission believes that the application of the statutory SEF 
registration requirement to certain entities not registered as SEFs may 
further price discovery in swaps, given that more swap transactions 
would be traded on SEFs and more market participants would be 
participating on SEFs. This increased trading may enhance the liquidity 
of the swaps market on SEFs. The Commission believes that, generally, 
market participants would have access to better price discovery in more 
liquid markets.
(4) Sound Risk Management Practices
    The Commission believes that the proposed application of the 
statutory SEF registration requirement to certain entities not 
currently registered as SEFs may further sound risk management 
practices by helping to ensure that swaps trading occurs subject to the 
rules of the SEF and receive the protections associated with the SEF 
core principles and Commission regulations.
(5) Other Public Interest Considerations
    The Commission believes that the proposal that entities that meet 
the SEF definition must register as SEFs should further the public 
interest consideration of promoting trading of swaps on SEFs as stated 
in CEA section 5h(e).
Request for Comment
    The Commission requests comment on all aspects of the consideration 
of the costs and benefits of the provisions related to SEF 
registration. The Commission estimates that there would be 40 to 60 
newly-registered SEFs. For those newly-registered SEFs, and with the 
understanding that costs will vary depending on the entity, what would 
be the average cost for a newly-registered SEF to comply with the 
Commission's proposed new SEF regime? If possible, please provide 
itemized costs per requirement. What would be the on-going costs to 
comply with that regime?
    The Commission believes that many swaps broking entities, including 
interdealer brokers, are currently affiliates of a registered SEF. As a 
result, the cost of integrating a swaps broking entity's non-registered 
SEF into its current SEF registration regime will be significantly less 
than those of newly-registered SEFs, i.e., those entities that do not 
have a registered SEF as an affiliate. Is the Commission's assumption 
correct? If not, then why not? What would be the cost of integrating 
and updating an entity's compliance program to reflect the proposed 
rule's new and amended requirements? What would be the on-going costs 
to comply?
4. Market Structure and Trade Execution
a. Overview
(1) Elimination of Minimum Trading Functionality and Execution Method 
Requirements
    Based on its increased understanding of swaps trading dynamics and 
the increased scope of swaps that would become subject to the trade 
execution requirement, the Commission proposes to eliminate the 
prescribed execution methods under Sec.  37.9 for swaps subject to the 
trade execution requirement. In addition, the Commission proposes to 
eliminate the minimum trading functionality and Order Book provisions 
under Sec. Sec.  37.3(a)(2)-(3). As a result, for any swap that it 
lists, a SEF would be able to offer any execution method that is 
consistent with the SEF definition in CEA section 1a(50) and the 
general rules related to trading and execution consistent with the SEF 
core principles and proposed part 37 rules. In particular, a SEF would 
be allowed to offer flexible methods of execution for any swap that it 
lists for trading, regardless of whether or not the swap is subject to 
the trade execution requirement.
    In order to effect Core Principle 2, the existing rules under Sec.  
37.201 would be replaced with new general, disclosure-based trading and 
execution rules that would apply to any execution method offered by a 
SEF. Proposed Sec.  37.201(a) would require a SEF to specify (i) the 
protocols and procedures for trading and execution; (ii) the extent to 
which the SEF may use its ``discretion'' in facilitating trading and 
execution; and (iii) the sources and methodology for generating any 
market pricing information.
(2) Trade Execution Requirement and Elimination of MAT Process
    The Commission proposes to eliminate the ``Made Available to 
Trade'' (``MAT'') process and proposes to interpret the trade execution 
requirement in CEA section 2(h)(8) to require swaps to be executed on a 
SEF or DCM if a swap is both subject to the

[[Page 62056]]

clearing requirement in section 2(h)(1) of the Act and listed for 
trading on a SEF or DCM. The current rule, by contrast, creates a 
process for a swap to be categorized as ``MAT'' under Sec.  37.10 and 
Sec.  38.12 that is largely driven by a registered SEF or DCM.
    The Commission further proposes to use its authority pursuant to 
CEA section 4(c) \972\ to exempt four different types of swap 
transactions from the trade execution requirement. Specifically, the 
Commission proposes that counterparties be exempted from the trade 
execution requirement for (i) swap transactions involving swaps that 
are listed for trading only by an Exempt SEF (as opposed to a 
registered SEF or DCM); (ii) swap transactions that are subject to and 
meet the requirements of the clearing exception under 2(h)(7) of the 
Act or the clearing exceptions or exemptions under part 50 of the 
Commission's regulations; (iii) swap transactions that are executed as 
a component of a package transaction that includes a component that is 
a new issuance bond; and (iv) swap transactions between ``eligible 
affiliate counterparties'' (``inter-affiliate counterparties'') that 
elect to clear such transactions, notwithstanding their ability to 
elect the clearing exemption under Sec.  50.52.
---------------------------------------------------------------------------

    \972\ CEA section 4(c) empowers the Commission, if certain 
conditions are met and subject to certain limitations, to ``promote 
responsible economic or financial innovation and fair competition'' 
by exempting any transaction or class of transactions, including 
swaps, from the provisions of the CEA. 7 U.S.C. 6(c).
---------------------------------------------------------------------------

    To facilitate compliance with the proposed interpretation of the 
trade execution requirement, the Commission proposes a compliance 
schedule, based on participant type, for the additional swaps that 
would become subject to the trade execution requirement. Under the 
proposal, entities would fall into categories based on their swaps 
trading experience and resources: Category 1 entities would have a 90-
day compliance timeframe; Category 2 entities would have 180 days, and 
all other relevant entities would have 270 days to allow them to 
onboard onto a SEF, a DCM, or an Exempt SEF and to comply with the 
trade execution requirement. The Commission also is proposing to 
establish a centralized registry on its website to identify those SEFs 
and DCMs that list swaps subject to the trade execution requirement and 
the particular swaps listed on each entity. To establish the registry, 
the Commission is proposing to require SEFs and DCMs to file a 
standardized Form TER, concurrently with any Sec.  40.2 or Sec.  40.3 
product filing, that would detail the swaps that they list for trading 
that are subject to the clearing requirement. In turn, Form TER would 
provide a streamlined process to allow the Commission to provide market 
participants with a public registry of the SEFs and DCMs that list 
particular swaps for trading. Finally, the Commission is also proposing 
that DCMs and SEFs be required to publicly post their Form TER on their 
respective websites.
(3) Pre-Execution Communications and Block Trades
    For swaps subject to the trade execution requirement, proposed 
Sec.  37.201(b) would require a SEF to prohibit its market participants 
from engaging in pre-execution communications away from its facility, 
including negotiating or arranging the terms and conditions of a swap 
prior to its execution on the SEF via the SEF's methods of execution. 
In conjunction with prohibiting pre-execution communications and pre-
arranged trading under Sec.  37.203, the Commission is eliminating the 
fifteen-second time delay requirement under Sec.  37.9(b). Under 
proposed Sec.  37.203, SEFs must prohibit pre-arranged trading for 
trading systems or platforms such as Order Books, where pre-arranged 
trading would be considered to be an abusive trading practice. This 
prohibition, however, would be subject to certain proposed exceptions. 
First, swap transactions that are not subject to the trade execution 
requirement would be excluded from the proposed prohibition. Second, 
package transactions that also include components that are not subject 
to the trade execution requirement would also be excluded from that 
proposed prohibition.
    The Commission also proposes to revise the definition of ``block 
trade'' in existing Sec.  43.2 to eliminate the ``occurs away'' 
requirement for swap block trades on SEFs. Pursuant to the revised 
definition, counterparties that seek to execute swaps at or above the 
block trade size on a SEF must do so on a SEF's trading system or 
platform, rather than away from the SEF pursuant to its rules as 
currently required. For swaps subject to the trade execution 
requirement, counterparties would not be able to conduct pre-execution 
communications to negotiate or arrange a block trade away from the 
SEF.\973\ Commission staff has provided time-limited no-action relief 
from the ``occurs away'' requirement of the block trade definition 
under Sec.  43.2, and the Commission understands that some market 
participants have elected to execute their block trades on-SEF pursuant 
to that relief.\974\
---------------------------------------------------------------------------

    \973\ The Commission notes that market participants may pre-
negotiate or pre-arrange block trades for swaps that are not subject 
to the trade execution requirement subject to an exception to the 
proposed prohibition on pre-execution communications under proposed 
Sec.  37.201(b).
    \974\ CFTC Letter No. 17-60, Re: Extension of No-Action Relief 
for Swap Execution Facilities from Certain ``Block Trade'' 
Requirements in Commission Regulation 43.2 (Nov. 14, 2017).
---------------------------------------------------------------------------

(4) Impartial Access
    Proposed Sec.  37.202 would modify the impartial access 
requirements to allow a SEF to devise its participation criteria based 
on its own trading operations and market. Specifically, a SEF would be 
required to establish rules that set forth impartial access criteria 
for accessing its markets, market services, and execution methods; such 
impartial access criteria must be transparent, fair, and non-
discriminatory and applied to all similarly situated market 
participants. Based on this approach, the Commission would not require 
a SEF to maintain impartial access in a manner that promotes an ``all-
to-all'' trading environment. Rather, a SEF would be allowed to serve 
different types of market participants or have different access 
criteria for different execution methods in order to facilitate trading 
for a desired market.
    In addition to amending the impartial access requirement, the 
Commission also proposes several other related amendments. Under 
proposed Sec.  37.202(a)(1), a SEF would no longer be required to 
provide impartial access to ISVs. Further, under proposed Sec.  
37.202(a)(2), a SEF would be allowed to establish fee structures in a 
fair and non-discriminatory manner. This revision would eliminate the 
existing requirement under Sec.  37.202(a)(3), which requires a SEF to 
set ``comparable fees'' for ``comparable access.''
b. Benefits
(1) Elimination of Minimum Trading Functionality and Execution Method 
Requirements
    The Commission believes that eliminating the minimum trading 
functionality requirement would provide several benefits. Based on its 
experience, the Commission has observed that market participants have 
generally not used Order Books for swaps trading on SEFs despite their 
availability for all SEF-listed swaps.\975\

[[Page 62057]]

The Commission recognizes that market participants view Order Books as 
unsuitable for trading in a large segment of the swaps market and 
believes that eliminating this requirement would reduce costs by 
enabling SEFs to discontinue their use as a method of execution or 
limit their availability, based on their own discretion, to swaps that 
are liquid enough to support such trading.\976\ Moreover, new SEFs 
would be able to register without setting up an Order Book, which 
should significantly reduce the cost of establishing a SEF.
---------------------------------------------------------------------------

    \975\ A recent research study finds that for index CDS, a 
minimal amount of trading activity on the two highest-volume SEFs 
occurs via an order book. Lynn Riggs, Esen Onur, David Reiffen & 
Haoxiang Zhu, Mechanism Selection and Trade Formation on Swap 
Execution Facilities: Evidence from Index CDS 10 (2017), https://www.cftc.gov/idc/groups/public/@economicanalysis/documents/file/oce_mechanism_selection.pdf (``2017 Riggs Study'').
    \976\ The Commission notes that additional factors, such as the 
use of name give-up and the lack of certain trading features, may 
have also contributed to the limited use of Order Books.
---------------------------------------------------------------------------

    The Commission also believes that eliminating the required methods 
of execution for swaps subject to the trade execution requirement and 
instead allowing flexible means of execution on SEFs together with 
expanding the scope of swaps subject to the trade execution 
requirement, may further the statutory goal of promoting the trading of 
swaps on SEFs more effectively than the current SEF framework. As a 
result of their bespoke or customized structure, the Commission 
recognizes that swaps that currently are not MAT, but that would become 
subject to the trade execution requirement under the Commission's 
proposal, may be less liquid than current MAT swaps, and therefore, may 
be less suited for execution via an Order Book or a request-for-quote 
system that sends a quote to no less than three unaffiliated market 
participants and operates in conjunction with an Order Book (``RFQ 
System'').
    Under the proposed approach, market participants would be allowed 
to utilize execution methods that best suit their trading needs and the 
swap being traded.\977\ These needs may include the desire to minimize 
potential information leakage and front-running risks and/or the need 
to account for market conditions for those swaps at a given time.\978\ 
Allowing market participants to choose the appropriate method of 
execution for their trading needs may increase market efficiency and 
lower transaction costs since market participants are expected to seek 
out the most efficient and cost-effective method of execution to carry 
out their swaps trading needs and to select the appropriate level of 
pre-trade transparency for their transactions.\979\ For example, a 
market participant whose primary goal is obtaining best execution in 
the market can choose the execution method that provides the 
appropriate degree of pre-trade transparency, based on the swap's 
characteristics and the trader's execution options and their individual 
trading needs, including submitting a RFQ to more than three liquidity 
providers. A market participant that perceives benefits from 
maintaining a relationship with a particular liquidity provider (such a 
relationship may extend beyond the swap market) can choose an execution 
method that facilitates that goal.\980\
---------------------------------------------------------------------------

    \977\ For example, Michael Barclay, Terrence Hendershott and 
Kenneth Kotz studied mechanism choice for U.S. Treasury securities 
and have found that Treasury securities move from primarily 
electronic trading to primarily voice trading when there is an 
exogenous decline in trading volume. Michael Barclay, Terrence 
Hendershott, Terrence & Kenneth Kotz, Automation versus 
intermediation: Evidence from Treasuries going off the run, 61 J. 
Fin. 2395-14 (2006).
    \978\ The 2017 Riggs Study finds that in the index CDS market 
customers exercise discretion over transacting via RFQ versus 
streaming quotes depending on the size of their trades or the 
urgency of their trading needs. The study also shows that customers 
can choose to send RFQs to more than the minimum required number of 
three participants when their trade size is smaller and again when 
their transactions are more urgent. 2017 Riggs Study at 10.
    \979\ Terrence Hendershott and Ananth Madhavan looked at trading 
in corporate bonds where customers can trade bonds either through 
voice solicitation of dealer quotes or through an electronic 
exchange that initiates an RFQ. Broadly speaking, Hendershott and 
Madhavan find that bonds that have characteristics associated with 
more frequent trading are more likely to be traded through the RFQ 
process, while trading tends to move to a voice mechanism when bonds 
go off-the-run and liquidity falls. Comparing the costs between 
execution methods, they found that electronic trades are associated 
with lower trading costs for small trades, but that voice 
solicitation is cheaper for larger trades. Terrence Hendershott & 
Ananth Madhavan Click or call? Auction versus search in the over-
the-counter market, 70 J. Fin. 419-47 (2015).
    \980\ The 2017 Riggs Study finds that in the index CDS market, 
customers are more likely to seek quotes via the RFQ process from 
dealers affiliated with their clearing members, as well as from 
dealers who make up a larger fraction of the customer's past trading 
volume. 2017 Riggs Study at 27.
---------------------------------------------------------------------------

    SEFs would have broader latitude to innovate and develop new and 
different methods of execution tailored to their markets. Accordingly, 
the proposed flexibility would enable SEFs to provide their market 
participants with additional choices for executing swaps subject to the 
trade execution requirement beyond the Order Book or RFQ System. Such 
methods could be more efficient for a broader range of swaps and 
various market liquidity conditions, which may allow SEFs to 
effectively promote appropriate counterparty and swap-specific levels 
of pre-trade price transparency.\981\ This potential innovation of 
efficient, transparent, and cost-effective trading means would 
facilitate natural market evolution via SEFs, which may ultimately 
lower transaction costs and increase trading efficiency.
---------------------------------------------------------------------------

    \981\ For example, Darrell Duffie and Haoxiang Zhu suggest that 
work-ups can sometimes be a more efficient means of transacting than 
a limit order book. See Darrell Duffie & Haoxiang Zhu, Size 
Discovery, 30 Rev. Fin. Stud. 1095-1150 (2017).
---------------------------------------------------------------------------

    This approach may also increase SEF competition as SEFs seek to 
differentiate from one another based on execution methods that they 
offer. The Commission believes that such increased competition may lead 
to reduced costs and increased transparency for market participants. 
The Commission further believes that flexible means of execution may 
provide opportunities for new entrants in the SEF market. New entrants 
would be able to utilize unique or novel execution methods that are not 
currently offered by incumbent SEFs. The Commission believes that new 
entrants would help increase competition in the market, which may lead 
to reduced transaction costs.
    The Commission anticipates that SEFs with active Order Books would 
continue to offer them, such that customers who wish to transact on 
Order Books would continue to be able to do so. The Commission also 
notes that swap transactions on SEFs will continue to be subject to the 
part 43 real-time reporting requirements, so market participants would 
continue to benefit from the post-trade transparency associated with 
access to information about the most recent transaction price.
    While the Commission is proposing to allow SEFs to utilize flexible 
methods of execution, the Commission is concurrently proposing under 
Sec.  37.201(a) to require that SEFs implement various trading and 
execution-related rules, which would require SEFs to disclose in their 
rulebook the protocols and procedures of the execution methods they 
offer, including any discretion the SEF may have in facilitating 
trading and execution, e.g., in regards to price formation or bid/offer 
matching. The Commission believes that these rules should provide 
market participants a requisite level of transparency by requiring SEFs 
to disclose information regarding their execution methods, trading 
systems, and operations. By requiring such disclosure, the Commission 
believes that SEFs would provide market participants with a consistent 
level of information so that they are better able to make fully 
informed decisions when selecting a SEF or particular execution method.

[[Page 62058]]

The Commission believes that promoting such transparency also helps 
promote market efficiency and integrity.
(2) Trade Execution Requirement and Elimination of MAT Process
    The Commission believes that expanding the scope of swaps that must 
be traded and executed on SEFs or DCMs would directly promote more SEF 
trading, which is one of the Dodd-Frank Act's statutory goals. As noted 
above, data analyzed by Commission staff indicates that the percentage 
of IRS trading volume that is subject to the trade execution 
requirement declined from approximately 10 to 12 percent of total 
reported IRS volume in 2015 to approximately 7 to 9 percent of total 
reported IRS volume in 2017 and the first half of 2018.\982\ According 
to an ISDA analysis, the share of total reported IRS volumes that 
occurred on SEFs since 2015 has ranged between approximately 55 to 57 
percent of total reported IRS volumes.\983\
---------------------------------------------------------------------------

    \982\ Commission staff conducted an analysis of publicly 
available data accessed via Clarus Financial Technology 
(``Clarus''). In a separate analysis, ISDA found that only 5 percent 
of trading volume in IRS during 2015 and the first three quarters of 
2016 consisted of IRS subject to the trade execution requirement. 
ISDA, ISDA Research Note: Trends in IRD Clearing and SEF Trading 1, 
3, 11 (Dec. 2016), https://www.isda.org/a/xVDDE/trends-in-ird-clearing-and-sef-trading1.pdf (``2016 ISDA Research Note'').
    \983\ See, e.g., ISDA, ISDA SwapsInfo Weekly Analysis: Week 
Ending October 19, 2018, http://analysis.swapsinfo.org/2018/10/interest-rate-and-credit-derivatives-weekly-trading-volume-week-ending-october-19-2018/ (``2018 ISDA SwapsInfo Weekly Analysis''); 
ISDA, ISDA SwapsInfo Weekly Analysis: Week Ending December 22, 2017, 
http://analysis.swapsinfo.org/2017/12/ird-and-cds-weekly-trading-volume-week-ending-december-22-2017/ (``2017 ISDA SwapsInfo Weekly 
Analysis''); ISDA, ISDA SwapsInfo Weekly Analysis: Week Ending 
December 24, 2015, http://analysis.swapsinfo.org/2015/12/ird-and-cds-weekly-analysis-week-ending-december-24-2015/ (``2015 ISDA 
SwapsInfo Weekly Analysis'').
---------------------------------------------------------------------------

    A recent ISDA analysis also shows that more than 85 percent of IRS 
trading volume is subject to the clearing requirement.\984\ The 
Commission believes that much, but not all, of that trading volume 
consists of swaps that are listed for trading on a SEF. With respect to 
credit default swaps (``CDS''), ISDA's analysis has shown that 71 to 79 
percent of trading volume in index CDS has occurred on SEFs since 
2015,\985\ while just over 89 percent of CDS trading volume is subject 
to the clearing requirement.\986\ Since only a portion of IRS and CDS 
trading that is also subject to the clearing requirement has occurred 
on SEFs, the Commission believes that additional IRS and CDS trading 
may transition to SEFs as a result of the proposed expansion of the 
trade execution requirement to cover all swaps that are subject to the 
clearing requirement and listed for trading on a SEF or DCM.
---------------------------------------------------------------------------

    \984\ ISDA, ISDA Research Note: Actual Cleared Volumes vs. 
Mandated Cleared Volumes: Analyzing the US Derivatives Market 3 
(July 2018), https://www.isda.org/a/6yYEE/Actual-Cleared-Volumes-vs-Mandated-Cleared-Volumes.pdf (``2018 ISDA Research Note'').
    \985\ See, e.g., 2018 ISDA SwapsInfo Weekly Analysis; 2017 ISDA 
SwapsInfo Weekly Analysis; 2015 ISDA SwapsInfo Weekly Analysis. 
These market share estimates are based on total SEF volume in the 
asset class divided by total volume in the asset class. In both 
cases, the volume is expressed in notional amount and includes both 
cleared and uncleared swaps. Since ISDA uses part 43 data that 
contains capped notional amounts pursuant to Sec.  43.4(h), while 
the actual notional amounts are not capped, the Commission notes 
that these estimates likely overstate SEF market share.
    \986\ 2018 ISDA Research Note at 15-16.
---------------------------------------------------------------------------

    The Commission believes that the expanded trade execution 
requirement would ensure that more swaps trading occurs on SEFs. In 
turn, increased swaps trading on SEFs would help foster and concentrate 
liquidity and price discovery on SEFs. This may help increase market 
efficiency and competition between market participants, which would 
further decrease transaction costs. Further, the Commission believes 
that a broad trade execution requirement, in conjunction with the 
proposed prohibition on pre-execution communications, would ensure that 
swaps trading occurs on SEFs, which may further amplify the preceding 
benefits.
    Bringing more swaps trading on to SEFs, including the entire 
liquidity formation process, would allow these swap trades to directly 
benefit from SEF oversight (including audit trail, trade surveillance, 
market monitoring, recordkeeping, and anti-fraud and market 
manipulation rules) and services that enhance market integrity 
(including pre-trade credit checks, straight through processing, and 
reporting to SDRs). Additionally, the Commission expects liquidity 
pools on SEFs to improve for various products that would become subject 
to the expanded trade execution requirement as a result of an increase 
in the number of market participants. This may further improve 
liquidity, and an increase in the number of products traded on SEFs, 
which would allow market participants to have direct access to more 
price observations for these products compared to the current SEF 
framework. With an increase in the amount of transactions on SEFs, the 
Commission also believes, that since SEFs would have more market data, 
they may be better equipped to fulfill their Core Principle 4 duties, 
as discussed further below. As such, the Commission believes that with 
direct access to more trades, a SEF may be better situated to prevent 
manipulation, price distortion, or disruptions to the functioning of an 
orderly market, which is likely to benefit all market participants.
    In conjunction with the Commission's proposed interpretation of the 
trade execution requirement, the Commission is proposing to exempt 
certain transactions from this requirement. The proposed exemptions in 
CEA section 4(c) cover (i) swap transactions involving swaps that are 
listed for trading only by an Exempt SEF; (ii) swap transactions that 
are subject to and meet the requirements of the clearing exception in 
CEA section 2(h)(7) or the clearing exceptions or exemptions under part 
50 of the Commission's regulations; (iii) swap transactions that are 
executed as a component of a package transaction that includes a 
component that is a new issuance bond; \987\ and (iv) swap transactions 
between inter-affiliate counterparties that elect to clear such 
transactions, notwithstanding their ability to elect the clearing 
exemption under Sec.  50.52. The Commission believes that exempting 
these swap transactions that would otherwise be subject to the trade 
execution requirement would be beneficial for the swaps markets. These 
exemptions would appropriately calibrate the trade execution 
requirement to appropriate market participants and swap transactions, 
which can reduce the cost of trading.
---------------------------------------------------------------------------

    \987\ The Commission understands that a bond issued and sold in 
the primary market that may constitute part of a package transaction 
is a ``security,'' as defined in section 2(a)(1) of the Securities 
Act of 1933 or section 3(a)(10) of the Securities Exchange Act of 
1934. To the extent that counterparties may be facilitating package 
transactions that involve a security, or any component agreement, 
contract, or transaction over which the Commission does not have 
exclusive jurisdiction, the Commission does not opine on whether 
such activity complies with other applicable law and regulations.
---------------------------------------------------------------------------

    The Commission is proposing to exempt swaps that are listed only by 
an Exempt SEF from triggering the trade execution requirement. Since it 
may be burdensome for a U.S. person to identify and onboard with an 
Exempt SEF that is the only platform listing a swap that is subject to 
the expanded trade execution requirement, the Commission believes that 
exempting these swaps from the trade execution requirement until they 
are listed by a registered SEF or a DCM would reduce such burdens.
    The Commission is also proposing to exempt from the expanded trade 
execution requirement those transactions that are excepted or exempted 
from the clearing

[[Page 62059]]

requirement. The Commission believes that swap transactions exempted 
from the clearing requirement may benefit from the proposed exemption 
by providing counterparties with flexibility regarding where they can 
trade or execute such swaps, which the Commission believes may help 
counterparties reduce transaction costs that they would otherwise incur 
from mandatory trading or execution on a SEF.
    Furthermore, the Commission is proposing to exempt ``package 
transactions'' that involve swap and new issuance bond components. In 
light of the involvement of the bond issuer and the underwriter in 
arranging and executing a package transaction in conjunction with a new 
issuance bond and the unique negotiation and fit-for-purpose nature of 
these package transactions, the Commission understands that it remains 
difficult or impossible to trade these package transactions on a SEF. 
Market participants currently may rely on Commission staff's temporary 
no-action relief to trade MAT swaps that involve new issuance bonds 
away from a SEF.\988\ The proposed rule would ensure that package 
transactions involving new issuance bonds can be traded off-SEF on an 
ongoing basis.
---------------------------------------------------------------------------

    \988\ See CFTC Letter No. 17-55, Re: Extension of No-Action 
Relief from Sections 2(h)(8) and 5(d)(9) of the Commodity Exchange 
Act and from Commission Regulations 37.3(a)(2) and 37.9 for Swaps 
Executed as Part of Certain Package Transactions (Oct. 31, 2017) 
(``NAL No. 17-55'').
---------------------------------------------------------------------------

    Finally, the Commission proposes to exempt from the trade execution 
requirement any swap transaction between inter-affiliate counterparties 
that elect to clear such transactions, notwithstanding their ability to 
elect the clearing exemption under Sec.  50.52. Under the current 
rules, inter-affiliate transactions are only exempt from the trade 
execution requirement if the inter-affiliate counterparties elect not 
to clear the transaction. However, despite these transactions not being 
intended to be price-forming or arm's length and therefore not suitable 
for trading on SEFs, inter-affiliate counterparties that elect to clear 
their inter-affiliate transactions are subject to the trade execution 
requirement. This proposal instead would treat cleared and uncleared 
inter-affiliate swap transactions the same with respect to the trade 
execution requirement. The Commission believes that this approach would 
be beneficial because inter-affiliate swap transactions do not change 
the ultimate ownership and control of swap positions (or result in 
netting) and permitting them to be executed internally (provided that 
they qualify for the clearing exemption under existing Sec.  50.52) may 
reduce costs relative to requiring that they be executed on SEF. 
Finally, the Commission believes that this exemption may help ensure 
that inter-affiliate counterparties are not discouraged from clearing 
their inter-affiliate swap transactions in order to avoid having to 
trade them on SEFs subject to the trade execution requirement, which 
may have systemic risk benefits.\989\
---------------------------------------------------------------------------

    \989\ The Commission notes that the Division of Market Oversight 
had previously provided no-action relief that mirrors this proposal 
so these benefits may have already been realized. See CFTC Letter 
No. 17-67, Re: Extension of No-Action Relief from Commodity Exchange 
Act Section 2(h)(8) for Swaps Executed Between Certain Affiliated 
Entities that Are Not Exempt from Clearing Under Commission 
Regulation 50.52 (Dec. 14, 2017) (``NAL No. 17-67'').
---------------------------------------------------------------------------

    The proposed trade execution requirement compliance schedule is 
intended to recognize that different categories of counterparties have 
different abilities and resources for achieving compliance with the 
trade execution requirement. As such, a phased compliance schedule 
should benefit counterparties by providing them with more time to adapt 
to the expanded trade execution requirement.
    Proposed Form TER, which would provide for a uniform submission by 
SEFs and DCMs of information on swaps subject to the clearing 
requirement that are listed by such SEFs and DCMs, is intended to 
provide the Commission with the information needed to create a trade 
execution registry. This registry, in combination with the proposal 
requiring that DCMs and SEFs publicly post their Form TER on their 
websites, should benefit market participants and the public by 
facilitating determinations of whether a swap is subject to the trade 
execution requirement.
(3) Pre-Execution Communications and Block Trades
    The Commission proposes to prohibit pre-execution communications 
for transactions subject to the trade execution requirement. The 
Commission believes that this prohibition would ensure that for swaps 
subject to the trade execution requirement, the trading of such swaps 
actually occurs within the confines of the SEF, which the Commission 
believes, in conjunction with the proposed interpretation of the trade 
execution requirement, would help foster and concentrate liquidity and 
price discovery which may help increase market efficiency and decrease 
transaction costs, as discussed above. Further, the Commission believes 
that with trading occurring within the SEF, market participants would 
receive the protections associated with SEF trading, as discussed 
above. With an expanded scope of swaps subject to the trade execution 
requirement, the Commission is concerned that allowing a 
disproportionate amount of SEF transactions to be pre-arranged or pre-
negotiated away from the facility under the pretense of trading 
flexibility would undercut the impact of the expansion of the 
requirement. Without a limitation on pre-execution communications that 
occur away from the SEF, the SEF's role in facilitating swaps trading 
would be diminished, undermining the statutory goals of promoting 
greater swaps trading on SEFs and pre-trade price transparency.
    The Commission does not intend to impose this prohibition on swap 
transactions not subject to the trade execution requirement and certain 
package transactions. These exceptions would allow those participants 
who wish to voluntarily execute such trades on a SEF to do so without 
having to alter their current trading practices. These exceptions are 
intended to recognize the practical realities of executing these types 
of swaps, which are often highly customized, on SEFs.
    The Commission also proposes to amend the block trade definition to 
require that counterparties that seek to execute swaps that are above 
the block trade size on a SEF must do so on a SEF's trading system or 
platform and not away from the SEF pursuant to its rules. Requiring 
market participants to execute swap block trades on a SEF should help 
SEFs facilitate the pre-execution screening by futures commission 
merchants (``FCM'') of transactions against risk-based limits in an 
efficient manner through SEF-based mechanisms. Further, the proposed 
amendments regarding block trades on SEFs would promote the statutory 
goal in CEA section 5h(e) of promoting swaps trading on SEFs. The 
Commission notes that many market participants currently rely on no-
action relief under which some block trades currently trade on-SEFs, 
and that this benefit has largely already been realized for these 
swaps.\990\
---------------------------------------------------------------------------

    \990\ See CFTC Letter No. 17-60, Re: Extension of No-Action 
Relief for Swap Execution Facilities from Certain ``Block Trade'' 
Requirements in Commission Regulation 43.2 at 2 (Nov. 14, 2017) 
(``NAL No. 17-60'').
---------------------------------------------------------------------------

(4) Impartial Access
    Proposed Sec.  37.202 would allow SEFs greater discretion to 
establish certain

[[Page 62060]]

types of trading markets for certain types of participants through the 
use of access criteria, including fees. The Commission recognizes that 
many SEFs believe they are limited in the types of trading markets and 
services that they can develop and maintain because the current 
impartial access rule can be applied to promote an ``all-to-all'' 
trading environment, which is neither required under Core Principle 2 
nor is consistent with swaps market structure. The Commission 
recognizes that some SEFs would like to target specific sectors of the 
swaps market and tailor their trading systems or platforms, as well as 
swap products, for trading among certain types of market participants. 
The Commission believes that affirmatively allowing SEFs the ability to 
target and design their SEFs to cater to certain market participants 
should result in an overall increase in swap market liquidity.
    The proposed clarification to the impartial access requirement 
should allow SEFs to adapt to existing trading practices in the swaps 
market, which feature different types of access-related practices. For 
example, the Commission recognizes that some entities in the dealer-to-
dealer market, e.g., interdealer broker operations, operate based on 
fee structures that account for a host of business considerations, 
including discounts based on past or current trading volume 
attributable to the market participant, market maker participation, or 
pricing arrangements related to services provided by a SEF-affiliated 
entity involving other non-swap products. The Commission's proposed 
approach to fee requirements under Sec.  37.202(a)(2) would allow these 
types of entities, which would be subject to the SEF registration 
requirement under the Commission's clarification of Sec.  37.3(a), to 
continue to facilitate certain trading markets and maintain existing 
pools of liquidity. Maintaining certain types of markets, such as the 
dealer-to-dealer market, should be beneficial to all market 
participants, including participants in the dealer-to-client market. In 
particular, the availability of liquidity and certain pricing to a 
dealer's clients in the dealer-to-client market may be dependent upon 
the ability of dealers to operate in a dealer-to-dealer market, where 
it is easier to offload risk. The Commission expects that continuing to 
apply the existing approach--``comparable fees'' for ``comparable 
services''--to the dealer-to-dealer environment may diminish the 
economic benefits of, and therefore impede, SEFs from developing 
additional services to facilitate trading.
    The Commission notes that the benefits from this proposed change 
may already be realized to some degree as de facto dealer-to-dealer 
SEFs already exist under the current rule, and it is difficult to 
predict what innovative services, if any, SEFs may offer in the future. 
However, the proposed rule would explicitly allow SEFs to provide 
tailored services, as long as they meet the requirement that their 
access rules are transparent, fair, and non-discriminatory.
c. Costs
(1) Elimination of Minimum Trading Functionality and Execution Method 
Requirements
    The Commission proposes to eliminate the minimum trading 
functionality requirement that SEFs offer an Order Book for all swap 
transactions. The Commission notes that some market participants may 
not perceive a significant cost from the lack of availability of an 
Order Book because the Order Books on many SEFs exhibit little or no 
trading activity and contain few or no bids and offers, despite SEFs 
maintaining them over the past few years. This suggests that market 
participants are not currently using the available Order Books and may 
therefore not perceive a cost if the Order Books are eliminated.\991\ 
As noted above, the Commission anticipates that SEFs with active Order 
Books would continue to offer them; however, the Commission also 
believes that these existing Order Books, as a result of greater 
flexibility in execution methods, may see a negative impact to 
liquidity, which may be offset by an increase in liquidity on SEFs that 
offer other means of execution. Market participants may incur costs to 
integrate their systems with the new trading methodologies offered by 
SEFs. For some market participants, this may require programming new 
ways to interact with SEFs. Expanding the requirement to use SEFs for 
swap transactions would also increase the extent of SEFs' jurisdiction 
over market participants' trading, which market participants may view 
as a disadvantage or an increased cost. If market participants react to 
this by using other means of risk management in place of the swaps that 
are required to be traded on SEF, then their risk management processes 
may be more disadvantageous or costlier.
---------------------------------------------------------------------------

    \991\ To the extent that requiring SEFs to offer Order Books 
facilitates their eventual use, the proposed elimination of the 
minimum trading functionality under Sec.  37.3 creates a potential 
decrease in future pre-trade price transparency. If SEFs decide to 
stop offering Order Books pursuant to this proposal, some swaps 
markets may not be able to move onto an Order Book even if there is 
future interest from some market participants. This cost would be 
mitigated to the extent that SEFs can always reinstate their order 
books in response to customer demand or offer other execution 
methods that provide similar pre-trade price transparency benefits.
---------------------------------------------------------------------------

    As noted above, the Commission anticipates that competitive 
pressures may drive SEFs to offer flexible execution methods, which may 
impose additional costs on SEFs. The Commission believes that these 
additional costs may be mitigated, as SEFs would have the option, under 
the proposal, of continuing their existing execution practices.
    The Commission recognizes that the overall amount of pre-trade 
price transparency in swap transactions currently subject to the trade 
execution requirement may decline if the Order Book and RFQ-to-3 
requirement under existing Sec.  37.9 are eliminated. This potential 
reduction in pre-trade price transparency could reduce the liquidity of 
certain swaps trading on SEFs and increase the overall trading costs. 
The Commission believes that this increased cost may be most severe for 
smaller customers that trade infrequently, and therefore may not be 
aware of current swaps pricing without pre-trade price transparency.
    The purpose of the Sec.  37.9 requirement that transactions in 
swaps subject to the trade execution requirement be executed using an 
Order Book or an RFQ System is to ensure that all activity in these 
swaps benefit from a baseline amount of pre-trade price transparency, 
i.e., knowledge of multiple bids and offers that may be available. 
While the proposal may result in a reduction of the benefits from the 
existing system, this cost may be mitigated because every SEF still has 
the option of offering an Order Book and continuing to offer market 
participants the ability to submit RFQs to multiple liquidity providers 
on the SEF. Accordingly, the Commission anticipates that market 
participants would not need to forgo the pre-trade transparency 
associated with these means of execution. Further, the Commission notes 
that to the extent that SEFs and other market participants respond to 
the proposed approach by offering flexible execution methods, market 
participants should benefit by having the opportunity to choose an 
execution method with a more appropriate level of pre-trade 
transparency for their transactions and their swaps trading needs.

[[Page 62061]]

    According to a Commission staff research paper \992\ that analyzed 
SEF trading in index CDS \993\ subject to the trade execution 
requirement, approximately 45 percent of the RFQs were sent to three 
liquidity providers and the remaining 55 percent were sent to four or 
more. The mean number of RFQ recipients was 4.12.\994\ The Commission 
anticipates that all or most of the market participants making RFQs to 
four or more liquidity providers would continue to send RFQs to 
multiple participants, even absent a rule requiring them to do so. Some 
percentage of those market participants currently sending RFQs to 
exactly three liquidity providers would probably send requests to only 
one or two liquidity providers if they were allowed to, but the 
Commission is unable to estimate what percentage of market participants 
would choose to send RFQs to fewer liquidity providers. As noted, those 
market participants sending RFQs to only one liquidity provider would 
be forgoing pre-trade transparency, but would be doing so voluntarily.
---------------------------------------------------------------------------

    \992\ 2017 Riggs Study at 11.
    \993\ The Commission has not performed a similar analysis for 
IRS.
    \994\ The Commission understands that one of the two SEFs 
analyzed currently limits the number of liquidity providers 
receiving a single RFQ-to-five participants.
---------------------------------------------------------------------------

    The Commission notes that the cost of a potential decline in pre-
trade price transparency may be offset by the possible benefits from 
greater liquidity by permitting SEFs to offer other execution methods 
in episodically liquid markets. Additional execution methods like 
auction systems, to the extent SEFs decide to offer them, and other 
potential execution methods may be offered in response to the proposal 
and could be used to facilitate pre-trade price transparency at lower 
costs, particularly if SEFs also offer indicative quotes or indicative 
market clearing prices to participants.\995\
---------------------------------------------------------------------------

    \995\ The Commission is aware of existing periodic auction 
mechanisms that aim to aggregate the buy and sell interests for a 
given swap and to clear the market by displaying the market mid-
price to the market participants and allowing them to transact on 
that price.
---------------------------------------------------------------------------

    Proposed Sec.  37.201(a), which would require SEFs to disclose in 
their rulebook the protocols and procedures of execution methods they 
offer, including any discretion in facilitating trading and execution 
would impose administrative costs on SEFs. The Commission believes that 
those costs are similar to those imposed by existing Sec.  37.201(a), 
which establishes similar disclosure requirements, but would be more 
tailored to existing SEF execution methods.
(2) Trade Execution Requirement and Elimination of MAT Process
    The proposed elimination of Sec.  37.10 and Sec.  38.12 and the 
proposed interpretation of the trade execution requirement as codified 
under Sec.  36.1(a) would likely require some market participants to 
onboard to a SEF or DCM, if they have not already done so, in order to 
continue trading swaps. The costs for a market participant to onboard, 
along with the time various market participants would have to join a 
SEF or DCM under the compliance schedule, and trade on a SEF, discussed 
above, are also relevant.
    To the extent more swaps are traded on SEFs or DCMs as a result of 
the proposed interpretation of the trade execution requirement as set 
out under Sec.  36.1(a), SEFs and DCMs may incur additional costs, as 
part of their normal course of business, to update their systems to 
accommodate the increased number of products listed. Because this would 
be an expansion built on top of existing systems, the Commission does 
not expect the costs associated with this expansion to be substantial. 
Additionally, the Commission believes that the proposed exemptions for 
certain swaps from the trade execution requirement would not impose new 
costs on market participants or on SEFs.
    The Commission expects there to be some cost to SEFs and DCMs 
related to the proposed Form TER requirement, where they would have to 
submit the specific relevant economic terms of the swaps they list for 
trading to the Commission (and posted on the website) in a timely 
manner. These costs are discussed in relation to the Commission's 
analysis above of information collection burdens under the PRA that are 
affected by the proposed rules.
(3) Pre-Execution Communications and Block Trades
    Under the proposal, pre-execution communications for swaps subject 
to the trade execution requirement would have to occur within the 
confines of a SEF and could not occur outside of the SEF's facilities. 
In practice, this would mean that pre-execution communications between 
dealers and their customers could not occur through non-SEF telephones, 
email systems, instant messaging systems, or other means of 
communication outside of the SEF. SEFs would incur costs if they choose 
to set up telephone conference lines, proprietary instant messaging or 
email systems, or any other system within the SEF to facilitate pre-
execution communications within the confines of the SEF.
    SEFs could potentially use existing technology to facilitate pre-
execution communications on SEF, thus mitigating some potential costs. 
The proposal could also impose costs on dealers and their customers 
since they commonly communicate via telephone or other systems today 
and may have to change their communication or trading practices to 
comply with the proposed rule. The costs for market participants would 
be mitigated to the extent that SEFs elect to incur the costs of 
providing telephone or other systems for their market participants to 
use for pre-execution communications, but costs may then increase 
correspondingly for SEFs.
    The proposed amendment to the block trade definition to require 
that counterparties that seek to execute swaps that are above the block 
trade size on a SEF must do so on a SEF's trading system or platform 
would cause these transactions to incur the costs of trading on a SEF 
as discussed above. To the extent market participants react to these 
costs by reducing their use of block trades, they may be disadvantaged, 
incur additional costs, or hinder the effectiveness of their risk 
management program.
(4) Impartial Access
    The proposed changes to the impartial access requirement, which 
would not require an ``all-to-all'' market as envisioned by the current 
rules, may inhibit the ability of certain market participants to access 
certain trading markets and liquidity pools. Under the proposed 
changes, SEFs may be able to offer markets that feature levels of 
liquidity and competitive pricing that only a limited category of 
participants could access. For example, SEFs that desire to serve the 
dealer-to-dealer segment of the market may have access criteria that 
certain participants cannot meet, thus preventing those participants 
from onboarding and from providing bids and offers, which could be 
disadvantageous to those participants and otherwise reduce access to 
favorable prices and impede price competition. Although the proposed 
changes to impartial access would require a SEF to allow those who seek 
and are able to meet set criteria to participate on its trading system 
or platform, this approach may still permit SEFs to impose barriers to 
access.
    Additionally, allowing different trading markets to operate and 
accommodate a limited set of market participants for similar or the 
same swaps may impose costs through

[[Page 62062]]

information asymmetries. For example, a SEF that serves a dealer-to-
dealer segment and a SEF that services a dealer-to-client segment may 
feature different pricing for certain standardized IRS. Participants in 
the dealer-to-client market, who do not have access to the pricing and 
volume information of these dealer-to-dealer SEFs, may not have 
beneficial pricing information available on the latter that would 
otherwise help to inform their trading. This may increase costs for 
those market participants with information disadvantages.
    The Commission notes, however, that the current SEF market 
structure and participation have generally continued to develop along 
these traditional market segments, absent the proposed access criteria. 
Therefore, the Commission anticipates that costs to market participants 
may not change much from the current situation.
d. Section 15(a) Factors
(1) Protection of Market Participants and the Public
    The Commission anticipates that the proposed interpretation of the 
trade execution requirement, which may result in an expanded scope of 
swaps being required to trade on SEFs, coupled with the proposed ban on 
pre-execution communications for swaps subject to the trade execution 
requirement away from the facility, would help improve the protection 
of market participants and the public by allowing SEFs to more 
effectively surveil their markets and prevent manipulation and 
disruption to the functioning of an orderly swaps market. The proposed 
rules are expected to facilitate more transactions on SEFs, ensure that 
such transactions are executed entirely on SEFs, and facilitate more 
market participants trading on SEFs, effectively allowing SEFs to have 
direct access to more data and have direct visibility to a larger 
portion of the market.
    The Commission anticipates that the proposed exemptions for certain 
swaps from the trade execution requirement should not materially affect 
the protection of market participants and the public. The proposed 
exemptions are intended to allow a limited number of swap transactions 
otherwise subject to the trade execution requirement to occur off-SEF 
where there is good reason to do so. These include transactions that 
involve end-users who are eligible for the end-user exception to both 
the clearing requirement and the trade execution requirement, 
transactions that are currently exempt under Part 50 from the clearing 
requirement, and transactions that cannot readily be executed on a 
registered SEF, even in light of the proposed rules allowing 
flexibility of execution methods.
    The Commission believes that the proposed flexible execution 
methods should promote protection of market participants and the public 
by facilitating the trading of swaps on SEFs, including those swaps 
newly subject to the trade execution requirement. The Commission also 
believes that the proposed amendment to the block trade definition 
should help protect market participants and the public by moving block 
trades to SEFs with the associated protections described above. The 
proposal to prohibit pre-execution communications for transactions 
subject to the trade execution requirement away from the facility 
should help to ensure that the entire process of trading and executing 
a transaction would occur on SEF. Swaps traded on SEFs receive the 
protections associated with the SEF core principles and Commission 
regulations, including, among other things, monitoring of trading and 
prohibitions against manipulation and other abusive trading practices. 
The Commission believes that proposed Sec.  37.201(a), which would 
require SEFs to disclose in their rulebook the protocols and procedures 
of execution methods they offer, including any discretion in 
facilitating trading and execution, should help protect market 
participants and the public by ensuring that they are informed about 
how these various execution methods operate.
    The elimination of the mandatory Order Book and RFQ System 
execution methods for Required Transactions may reduce the benefits 
associated with pre-trade price transparency. In the absence of pre-
trade price transparency, a counterparty may not obtain swaps at 
current market prices. However, the Commission believes that the 
approach taken in the proposed rule should promote pre-trade price 
transparency in the swaps market by allowing execution methods that 
maximize participation and concentrate liquidity during times of 
episodic liquidity.
(2) Efficiency, Competitiveness, and Financial Integrity of Markets
    The Commission anticipates that the proposed interpretation of the 
trade execution requirement, which may result in an expanded scope of 
swaps being required to trade on SEFs, should improve the efficiency 
and competitiveness of the swaps markets. Although SEFs and market 
participants may incur costs in trading an expanded scope of swaps on 
SEFs, the Commission expects that markets would become more efficient 
as a whole, since an increase in the number of market participants 
trading on SEFs should allow liquidity demanders to more efficiently 
locate liquidity providers and trade with them. These efficiency gains 
may be attenuated, however, if the costs of SEF trading are higher than 
expected or if market participants respond to the expanded trading 
requirement by reducing their use of swaps that are required to be 
traded on SEF.
    The Commission believes competitiveness can also improve through 
more market participants trading on SEFs that offer a variety of 
trading mechanisms, some of which can be designed to improve 
competitiveness and liquidity formation in the market. To the extent 
these market participants did not have access to such trading 
mechanisms, they should benefit from increased competition and 
liquidity formation. Improvements in competiveness would be attenuated, 
however, if the increase in trading on SEFs is less than anticipated.
    The Commission anticipates that the proposed exemptions from the 
trade execution requirement, as discussed above, may maintain the 
current efficiency of those trades and thus maintain the financial 
integrity of the counterparties. The Commission believes that the 
proposed exemptions are narrowly tailored and thus, should not 
materially affect the competitiveness of the swap markets.
    The Commission believes that the proposed rules allowing flexible 
execution methods should enhance the efficiency and financial integrity 
of markets by providing an opportunity for SEFs to offer more execution 
methods that may be more efficient and cost-effective for their 
customers than those currently offered. The proposal to prohibit pre-
execution communications for transactions subject to the trade 
execution requirement away from the facility should enhance the 
financial integrity of markets by helping to ensure that such 
communications receive the protections to financial integrity 
associated with SEF core principles, including Core Principle 7. Under 
the proposal, market participants should continue to have access to 
pre-trade price transparency, which should continue to promote 
competitive bid-ask spreads, e.g., by submitting RFQs to multiple 
liquidity providers or by using additional execution methods that 
should be just as good at promoting pre-

[[Page 62063]]

trade price transparency as order books and RFQ systems.\996\
---------------------------------------------------------------------------

    \996\ As noted above, however, to the extent that the Order Book 
and other methods of execution mandated by the current rule promote 
pre-trade price transparency, the proposed elimination of this 
mandate may impair competition if it reduces market participants' 
ability to observe pre-trade prices, and thereby lose insight into 
competitive conditions in the market.
---------------------------------------------------------------------------

    Additionally, the Commission's proposal to create and publish the 
trade execution requirement registry on its website should benefit 
market participants and increase efficiency by reducing uncertainty 
about whether a swap is required to be traded on a certain platform. 
Similarly, the Commission's proposal that a SEF publicly post its Form 
TER on its website also reinforces the efficiency benefit for market 
participants, albeit at the expense incurred by DCMs and SEFs related 
to Form TER filings, as discussed above.
    The Commission believes that the proposed changes to impartial 
access may enhance the efficiency, competitiveness, and financial 
integrity of markets by allowing SEFs to develop trading platforms and 
fee structures that better reflect the underlying features of the 
products traded on the SEF and customer needs. This can facilitate 
competition between liquidity providers, leading to better pricing for 
all traders that participate in the relevant segment of the market. The 
proposed revision to the impartial access rule might impair competition 
by preventing some traders from providing or accessing liquidity on 
some SEFs or having access to the most up-to-date pricing information. 
Impaired access to liquidity or pricing information may result in some 
market participants transacting in swaps at uncompetitive terms.
(3) Price Discovery
    The Commission believes that in general market participants should 
have access to better price discovery in more liquid markets under the 
proposed rule, because it should result in a higher number of products 
being traded on SEFs by an increased number of market participants. 
With increased transactions on SEFs, through an increase in number of 
products as well as in market participants, SEFs would offer more price 
points on the same or comparable products and potentially more bids and 
offers. This increased trading on SEFs may also offset any impairment 
to price discovery resulting from a loss in pre-trade price 
transparency from the elimination of the mandate to offer specified 
trading methods. The Commission expects all of these improvements to 
culminate in better and faster price discovery for market participants, 
although improvements in price discovery may be attenuated if the 
increase in trading on SEFs is less than anticipated.
    While, as a general matter, the Commission believes that price 
discovery in swaps subject to the trade execution requirement should 
occur on SEFs, the Commission nevertheless believes that the proposed 
exemptions from the trade execution requirement should not materially 
impact price discovery in the U.S. swaps markets. Many of the 
transactions eligible for the exemptions, such as inter-affiliate 
trades, are not price-forming or involve end-users, while other 
eligible transactions in swaps that are only listed by Exempt SEFs 
cannot readily be traded on a registered SEF.
    The Commission believes that the proposal to prohibit pre-execution 
communications for transactions subject to the trade execution 
requirement away from the facility should further price discovery on 
SEFs by helping to ensure that all negotiations related to price 
discovery occur on SEFs. The proposed amendment to the block trade 
definition would also tend to encourage more price discovery on SEFs. 
The proposed flexible execution methods would provide SEFs an 
opportunity to develop innovative execution methods that could enhance 
the price discovery process.
    To the extent that the revised impartial access rules lead to a 
less competitive market, the market also may suffer from reduced price 
discovery.
(4) Sound Risk Management Practices
    The Commission believes the proposed expansion of the trade 
execution requirement may further sound risk management practices by 
requiring that a larger set of swap transactions are negotiated, 
arranged, and executed in a manner that is subject to the rules of a 
SEF and that those trades receive the protections associated with SEF 
core principles and Commission regulations.
    The Commission anticipates that the proposed exemptions from the 
trade execution requirement should not significantly impair the 
furtherance of sound risk management practices because firms using the 
exemptions should continue to be able to move swap positions between 
affiliates and take advantage of the statutory end-user exception from 
the clearing requirement. Exempting certain transactions that cannot 
readily be executed on a SEF, such as package transactions involving 
new issuance bonds and transactions in swaps that are only listed by 
Exempt SEFs, should allow entities using these swaps to continue their 
sound risk management practices.
    The Commission believes that the proposed rules enabling flexible 
execution methods and requiring that pre-execution communications for 
transactions subject to the trade execution requirement occur on-SEF 
may further sound risk management practices by requiring that these 
trades are negotiated, arranged, and executed on a SEF and that these 
trades receive the protections associated with SEF core principles and 
Commission regulations. Similarly, the Commission believes that the 
proposed rules enabling flexible execution methods should promote 
trading on SEFs and increase the number of transactions receiving these 
protections, thereby facilitating greater choice by market participants 
in execution methods that better suit their risk management needs, 
including allowing market participants to reduce potential information 
leakage and front-running risks. These improvements may be attenuated 
if the increase in trading on SEFs is less than anticipated. The 
proposed amendment to the block trade definition may further sound risk 
management practices by requiring block trades to occur on SEFs, while 
still allowing reporting delays pursuant to Part 43, which may give 
liquidity providers time to hedge such block trades before they are 
reported.
(5) Other Public Interest Considerations
    The Commission believes the proposed interpretation of the trade 
execution requirement and the proposed flexibility in execution methods 
would further the public interest consideration of promoting trading on 
SEFs as stated in CEA section 5h(e), while also continuing to provide 
market participants with access to the pre-trade price transparency 
offered by certain SEF execution methods. While the Commission is 
proposing to eliminate the minimum trading functionality requirement 
that SEFs offer an Order Book or other prescribed trading methods for 
all swap transactions, the Commission anticipates that market 
participants would still be able to realize pre-trade price 
transparency by sending RFQs to multiple market participants or using 
other multiple-to-multiple execution methods offered by SEFs that seek 
to encourage transparency and concentrate liquidity formation.
    The Commission believes that the proposal to prohibit pre-execution

[[Page 62064]]

communications for transactions subject to the trade execution 
requirement away from the facility and the proposed amendment to the 
block trade definition should also further the public interest 
consideration of promoting trading on SEFs by moving additional trading 
activity to SEFs.
Request for Comment
    The Commission requests comment on all aspects of the consideration 
of the costs and benefits of the provisions related to market structure 
and trade execution.
5. Compliance and SRO Responsibilities
a. Overview
(1) SEF Trading Specialists
    The Commission is proposing to adopt regulations under Sec.  
37.201(c) that would categorize certain persons employed by a SEF as a 
``SEF trading specialist.'' The Commission proposes to define a SEF 
trading specialist as any natural person who, acting as an employee (or 
in a similar capacity) of a SEF, facilitates the trading or execution 
of swaps transactions (other than in a ministerial or clerical 
capacity), or who is responsible for direct supervision of such 
persons. The Commission proposes to require a SEF to ensure that its 
SEF trading specialists are not subject to a statutory disqualification 
under sections 8a(2) or 8a(3) of the Act, have met certain proficiency 
requirements, and undergo ethics training on a periodic basis. Proposed 
Sec.  37.201(c) also would require a SEF to establish standards of 
conduct for its SEF trading specialists, and to diligently supervise 
their activities.
    Proposed Sec.  37.201(c)(2) would prohibit a SEF from permitting a 
person who is subject to a statutory disqualification under section 
8a(2) or 8a(3) of the Act to serve as a SEF trading specialist if the 
SEF knows, or in the exercise of reasonable care should know, of the 
statutory disqualification. There are certain exceptions for persons 
who have retained registration in other categories despite the 
disqualification.\997\
---------------------------------------------------------------------------

    \997\ Specifically, the Commission proposes an exception to the 
prohibition under Sec.  37.201(c)(2) for any person listed as a 
principal or registered with the Commission as an associated person 
of a futures commission merchant, retail foreign exchange dealer, 
introducing broker, commodity pool operator, commodity trading 
advisor, or leverage transaction merchant, or any person registered 
as a floor broker or floor trader, notwithstanding that such person 
is subject to a disqualification from registration under sections 
8a(2) or 8a(3) of the Act. The Commission is proposing an additional 
exception to the requirement under Sec.  37.201(c)(2) for any person 
otherwise subject to a disqualification from registration for whom a 
registered futures association (``RFA''), provides a notice stating 
that if the person applied for registration with the Commission as 
an associated person, the registered futures association would not 
deny the application on the basis of the statutory disqualification.
---------------------------------------------------------------------------

    Proposed Sec.  37.201(c)(3) would require a SEF to establish and 
enforce standards and procedures, including taking and passing an 
examination \998\ to ensure that its SEF trading specialists have the 
proficiency and knowledge necessary to fulfill their responsibilities 
to the SEF as SEF trading specialists; and comply with applicable 
provisions of the Act, Commission regulations, and the rules of the 
SEF.
---------------------------------------------------------------------------

    \998\ Such an examination would be developed and administered by 
an RFA.
---------------------------------------------------------------------------

    Proposed Sec.  37.201(c)(4) would require a SEF to establish and 
enforce policies and procedures to ensure that its SEF trading 
specialists receive ethics training on a periodic basis.
    Proposed Sec.  37.201(c)(5) would require a SEF to establish and 
enforce policies and procedures that require its SEF trading 
specialists, in dealing with market participants and fulfilling their 
responsibilities to the SEF, to satisfy standards of conduct as 
established by the SEF.
    Finally, proposed Sec.  37.201(c)(6) would require a SEF to 
diligently supervise the activities of its SEF trading specialists in 
facilitating trading on the SEF.
(2) Rule Compliance and Enforcement
(i) Definition of ``Market Participant''
    Proposed Sec.  37.2(b) would define ``market participant.'' Part 37 
specifies that a SEF's jurisdiction applies to various market 
participants who may be involved in trading or executing swaps on its 
facility; to date, SEFs have been relying on preamble language 
describing a ``market participant'' provided in the SEF Core Principles 
Final Rule to determine the scope of jurisdiction. By clarifying and 
codifying the market participant definition in the part 37, the 
Commission would maintain the existing recordkeeping responsibilities 
of traders that meet the proposed definition, as well as the 
jurisdiction SEFs have with respect to those traders. For example, 
under Sec.  37.404(b), a SEF is required to adopt rules that require 
its market participants to keep records of their trading, including 
records of their activity in any index or instrument used as a 
reference price, the underlying commodity, and related derivatives 
markets. In addition, a SEF is required to have means to obtain that 
information.
    The key change to the proposed definition of market participant 
from the existing approach under part 37 is the exclusion of clients of 
asset managers or other similar situations. As noted above, ``market 
participants'' are subject to certain recordkeeping requirements, and 
under this definition, such clients would not be subject to these 
recordkeeping requirements.
(ii) Audit Trail and Surveillance Program
    The Commission proposes a number of changes to the existing rules 
regarding SEF audit trail and surveillance programs. First, the 
Commission proposes amending the audit trail requirements by moving 
certain Sec.  37.205(a) requirements to guidance to Core Principle 2 in 
Appendix B. This guidance would state that audit trail data should be 
sufficient to reconstruct all indications of interest, requests for 
quotes, orders, and trades. The Commission also proposes to remove the 
requirement to capture post-trade allocation information. Second, the 
Commission proposes to eliminate the prescriptive requirements that 
specify the nature and content of the original source documents under 
Sec.  37.205(b)(1). Third, the Commission would replace Sec.  
37.205(c)'s audit trail enforcement requirement with an audit trail 
reconstruction requirement, which would be focused on verifying a SEF's 
ability to reconstruct audit trail data rather than enforcing audit 
trail requirements on market participants. Fourth, the Commission 
proposes amending Sec.  37.203(d), Sec.  37.205(b)(2), and Sec.  
37.205(b)(3) to relieve a SEF's obligation to conduct automated 
surveillance on orders that are not entered into an electronic trading 
system or platform, e.g., orders entered by voice or certain other 
electronic communications, such as instant messaging and email.\999\ 
Fifth, the Commission proposes amending Sec.  37.203(d) to eliminate 
the enumerated capabilities that every automated surveillance system 
must have and to instead require that the automated surveillance system 
be able to detect and reconstruct potential trade practice violations.
---------------------------------------------------------------------------

    \999\ Sections 37.203(d), 37.205(b)(2), and 37.205(b)(3) require 
a SEF that offers any form of voice trading functionality, as a 
condition to its registration, to establish a voice audit trail 
surveillance program to ensure that it can reconstruct a sample of 
voice trades and review such trades for possible trading violations.
---------------------------------------------------------------------------

(iii) Compliance and Disciplinary Programs
    The Commission proposes several amendments to the rules that 
address a SEF's compliance program. First, the

[[Page 62065]]

Commission proposes to amend Sec.  37.203(f)(1) to state that SEFs must 
establish and maintain procedures requiring compliance staff to conduct 
investigations, including the commencement of an investigation upon the 
receipt of a request from Commission staff or upon the discovery or 
receipt of information by the SEF that indicates the existence of a 
reasonable basis for finding that a violation may have occurred or will 
occur.\1000\ Second, the Commission proposes eliminating existing Sec.  
37.203(f)(2)'s 12-month requirement for completing investigations and 
providing SEFs the ability instead to complete investigations in a 
timely manner taking into account the facts and circumstances of the 
investigation.\1001\
---------------------------------------------------------------------------

    \1000\ The Commission proposes adding language in the guidance 
to Core Principle 2 in Appendix B stating that compliance staff 
should submit all investigation reports to the CCO or other 
compliance department staff responsible for reviewing such reports 
and determining next steps in the process, and that the CCO or other 
responsible staff should have reasonable discretion to decide 
whether to take any action, such as presenting the investigation 
report to a disciplinary panel for disciplinary action. 17 CFR part 
37 app. B.
    \1001\ For purposes of Sec.  37.203(f)(2), the Commission 
proposes to provide SEFs with reasonable discretion to determine the 
timely manner in which to complete investigations pursuant to the 
guidance to Core Principle 2 in Appendix B. 17 CFR part 37 app. B.
---------------------------------------------------------------------------

    Third, the Commission proposes several amendments to the rules that 
address a SEF's disciplinary program. Proposed Sec.  37.206(b) requires 
that a SEF administer its disciplinary program through one or more 
disciplinary panels, as currently allowed, or through its compliance 
staff. The Commission also proposes to simplify a SEF's disciplinary 
procedures by eliminating the following requirements: (1) Existing 
Sec.  37.206(c), which sets forth minimum requirements for a hearing, 
and (2) existing Sec.  37.206(d)'s requirement that a disciplinary 
panel render a written decision promptly following a hearing, along 
with detailed items required to be included in the decision, and 
replacing it with guidance for proposed Sec.  37.206(b) to specify that 
a SEF's rules should require the disciplinary panel to promptly issue a 
written decision following a hearing or the acceptance of a settlement 
offer. Consistent with the changes to Sec.  37.206(b), the Commission 
proposes to eliminate paragraphs (a)(11)-(12) from the guidance to Core 
Principle 2 in Appendix B addressing Sec.  37.206(b), which provides 
specific guidelines for a SEF's ability to provide rights of appeal to 
respondents and issue a final decision.
    Additionally, proposed Sec.  37.206(c) would establish certain 
requirements for warning letters that already apply to sanctions, and 
would allow more than one warning letter within a rolling 12-month 
period for entities, as well as for individuals for rule violations 
related to minor recordkeeping or reporting infractions. As a 
streamlining and conforming change, the Commission also proposes to 
eliminate the existing warning letter requirement from Sec.  
37.203(f)(5), and combine this requirement into proposed Sec.  
37.206(c).
(iv) Regulatory Service Provider
    The Commission proposes several amendments to the rules that 
address a SEF's use of regulatory service providers. Proposed Sec.  
37.204(a) expands the scope of entities that may provide regulatory 
services to include any non-registered entity approved by the 
Commission. The Commission also proposes to combine and amend existing 
Sec. Sec.  37.204(b)-(c), resulting in several changes to the 
supervision requirements of a regulatory services provider (``RSP''). 
First, proposed Sec.  37.204(b) eliminates the requirement that the SEF 
hold regular meetings and conduct periodic reviews of the provider and 
instead allows SEFs to determine the necessary processes for 
supervising their RSP. Second, under proposed Sec.  37.204(b) a SEF may 
allow its RSP to make substantive decisions, provided that, at a 
minimum, the SEF is involved in such decisions. Third, the Commission 
proposes to eliminate the requirement under Sec.  37.204(c) that a SEF 
document where its actions differ from the RSP's recommendations, 
deferring instead to the SEF and its RSP to mutually agree on the 
method it will use to document substantive decisions.
(3) Error Trade Policy
    Proposed Sec.  37.203(e) would require that SEFs establish and 
maintain rules and procedures that facilitate the resolution of error 
trades in a fair, transparent, consistent, and timely manner as opposed 
to the requirement in existing Sec.  37.203(e) that SEFs have the 
authority to adjust trade prices or cancel trades in certain 
situations. The definition of ``error trade'' under Sec.  37.203(e) 
would include any swap transaction executed on a SEF that contains an 
error in any term of the swap transaction, including price, size, or 
direction. However, this definition would not include a swap that is 
rejected from clearing for credit reasons, and a SEF's error policy 
would not apply.\1002\ At a minimum, such error policy would have to 
provide the SEF with the authority to adjust an error trade's terms or 
cancel the error trade, and specify the rules and procedures for market 
participants to notify the SEF of an error trade, including any time 
limits for notification. The proposed rule would also impose the new 
requirement that a SEF notify all of its market participants, as soon 
as practicable of (i) any swap transaction that is under review 
pursuant to the SEF's error trade rules and procedures; (ii) a 
determination that the trade under review is or is not an error trade; 
and (iii) the resolution of any error trade, including any trade term 
adjustment or cancellation.
---------------------------------------------------------------------------

    \1002\ Consistent with proposed Sec.  37.702(b)(1), a SEF would 
deem any swap that is rejected from clearing for credit reasons as 
void ab initio.
---------------------------------------------------------------------------

(4) Chief Compliance Officer
    The Commission proposes several amendments to the chief compliance 
officer (``CCO'') regulations. First, the Commission proposes to allow 
the senior officer \1003\ of a SEF to have the same oversight 
responsibilities with respect to the CCO as the SEF's board of 
directors. Specifically, the Commission proposes to (i) amend existing 
Sec.  37.1501(b)(1)(i) to allow a CCO to consult with either the board 
of directors or senior officer of the SEF as the CCO develops the SEF's 
policies and procedures; (ii) amend existing Sec.  37.1501(c)(1)(iii) 
\1004\ to allow a CCO to meet with either the senior officer of the SEF 
or the board of directors on an annual basis; (iii) amend existing 
Sec.  37.1501(c)(1)(iv) \1005\ to allow the CCO to provide self-
regulatory program information to the SEF's senior officer or to the 
board of directors; and (iv) eliminate the restriction under existing 
Sec.  37.1501(c)(3) that removal of the CCO requires approval of a 
majority of the board of directors or a senior officer if the SEF does 
not have a board of directors, and instead permit the board of 
directors or the senior officer to remove the CCO under Sec.  
37.1501(b)(3)(i).
---------------------------------------------------------------------------

    \1003\ As discussed below, the Commission proposes to define 
``senior officer'' to mean the chief executive officer or other 
equivalent officer of the swap execution facility.
    \1004\ This requirement is in proposed Sec.  37.1501(b).
    \1005\ This requirement is in proposed Sec.  37.1501(b)(6).
---------------------------------------------------------------------------

    Second, the Commission proposes to consolidate and amend existing 
Sec. Sec.  37.1501(d)(5)-(6) \1006\ to allow a CCO to identify 
noncompliance matters through ``any means,'' in addition to the 
currently prescribed detection methods,

[[Page 62066]]

and to clarify that the procedures followed to address noncompliance 
issues must be ``reasonably designed'' by the CCO to handle, respond, 
remediate, retest, and resolve noncompliance issues identified by the 
CCO. The Commission also proposes to amend the CCO's duty to resolve 
conflicts of interest under existing Sec.  37.1501(d)(2).\1007\ The 
Commission proposes to refine the scope of the CCO's duty to address 
``reasonable steps'' to resolve ``material'' conflicts of interest that 
may arise.
---------------------------------------------------------------------------

    \1006\ This requirement is in proposed Sec.  37.1501(c)(5).
    \1007\ This requirement is in proposed Sec.  37.1501(c)(2).
---------------------------------------------------------------------------

    Third, the Commission is proposing certain amendments to the annual 
compliance report (``ACR'') regulations in existing Sec.  
37.1501(e),\1008\ that would eliminate duplicative or unnecessary 
information requirements and streamline existing requirements. The 
Commission proposes to eliminate existing Sec.  37.1501(e)(2)(i), which 
requires an ACR to include a review of all of the Commission 
regulations applicable to a SEF and identify the written policies and 
procedures designed to ensure compliance with the Act and Commission 
regulations and eliminate certain specific content required under 
existing Sec.  37.1501(e)(4).\1009\ The Commission also proposes to 
amend existing Sec.  37.1501(e)(5) \1010\ to require a SEF to only 
discuss material noncompliance matters and explain the corresponding 
actions taken to resolve such matters, rather than describing all 
compliance matters. The Commission proposes to amend existing Sec.  
37.1501(e)(6) \1011\ to limit a SEF CCO's certification of an ACR's 
accuracy and completeness to ``all material respects'' of the report. 
The Commission also proposes to streamline and reorganize the remaining 
ACR content requirements, including consolidating the CCO's required 
description of the SEF's policies and procedures under existing Sec.  
37.1501(e)(1) \1012\ with the CCO's required assessment of the 
effectiveness of these policies and procedures under existing Sec.  
37.1501(e)(2)(ii) and also consolidating the CCO's required narrative 
of any material changes made during the prior year with the CCO's 
required narrative of any forthcoming recommended changes and areas of 
improvement to the compliance program as required under existing Sec.  
37.1501(e)(3) and existing Sec.  37.1501(e)(2)(iii),\1013\ 
respectively.
---------------------------------------------------------------------------

    \1008\ This requirement is in proposed Sec.  37.1501(d).
    \1009\ This requirement is in proposed Sec.  37.1501(d)(3). The 
proposed eliminated provisions currently require a discussion of the 
SEF's compliance staffing and structure, a catalogue of 
investigations and disciplinary actions taken over the last year, 
and a review of disciplinary committee and panel performance.
    \1010\ This requirement is in proposed Sec.  37.1501(d)(4).
    \1011\ This requirement is in proposed Sec.  37.1501(d)(5).
    \1012\ This requirement is in proposed Sec.  37.1501(d)(1).
    \1013\ This requirement is in proposed Sec.  37.1501(d)(2).
---------------------------------------------------------------------------

    Fourth, the Commission proposes several amendments to simplify the 
ACR submission procedures. The Commission proposes to amend existing 
Sec.  37.1501(f)(2) \1014\ to provide SEFs with an additional 30 days 
to file the ACR with the Commission, but no later than 90 calendar days 
after a SEF's fiscal year end. Additionally, the Commission proposes to 
eliminate the ``substantial and undue hardship'' standard required for 
filing ACR extensions and replace it with a ``reasonable and valid'' 
standard currently set forth in existing Sec.  37.1501(f)(4).\1015\ The 
Commission also proposes to clarify existing Sec.  37.1501(f)(3) \1016\ 
to provide that, as required for initial compliance reports, the CCO 
must submit an amended ACR to the SEF's board of directors or, in the 
absence of a board of directors, to the senior officer of the SEF, for 
review prior to submitting the amended ACR to the Commission.
---------------------------------------------------------------------------

    \1014\ This requirement is in proposed Sec.  37.1501(e)(2).
    \1015\ This requirement is in proposed Sec.  37.1501(e)(4).
    \1016\ This requirement is in proposed Sec.  37.1501(e)(3).
---------------------------------------------------------------------------

    In addition to these substantive changes, the Commission proposes a 
number of conforming, clarifying, and streamlining changes that would 
not impose new costs or result in new benefits and are not discussed in 
the cost and benefit sections below. The Commission proposes to 
eliminate the CCO's obligations to the regulatory oversight committee 
(``ROC''), including existing Sec.  37.1501(c)(1)(iii), which requires 
a quarterly meeting with the ROC, and existing Sec.  37.1501(c)(1)(iv), 
which requires the CCO to provide self-regulatory program information 
to the ROC. The proposal would not impact SEFs as there is no 
requirement that a SEF have a ROC.
    Additionally, the Commission proposes to consolidate existing 
Sec. Sec.  37.1501(b)-(c) into proposed Sec.  37.1501(b). The 
Commission proposes to eliminate existing Sec.  37.1501(b)(1), which 
requires a SEF to designate a CCO, and existing Sec.  37.1501(c)(2), 
which requires the CCO to report directly to the board of directors or 
the senior officer of the SEF, as these requirements are already 
contained under Sec.  37.1500.
    The Commission proposes to eliminate the requirement under existing 
Sec.  37.1501(f)(1) that a SEF must document the submission of the ACR 
to the SEF's board of directors or senior officer in board minutes or 
some other similar written record. This requirement is already covered 
in the general recordkeeping requirements in proposed Sec.  37.1501(f), 
which is existing Sec.  37.1501(g).
    The Commission proposes a non-substantive amendment to Sec.  
37.1501(a)(2) to define a ``senior officer'' as ``the chief executive 
officer or other equivalent officer of the swap execution facility.'' 
\1017\ In addition, proposed Sec.  37.1501(f), currently set forth 
under Sec.  37.1501(g), would require a SEF to keep records in a manner 
consistent with the recordkeeping requirements under Sec. Sec.  
37.1000-1001.
---------------------------------------------------------------------------

    \1017\ In the SEF Core Principles Final Rule, the Commission 
noted that it would not adopt a definition of ``senior officer,'' 
but noted that the statutory term would only include the most senior 
executive officer of the legal entity registered as a SEF. See SEF 
Core Principles Final Rule at 33544.
---------------------------------------------------------------------------

    Finally, the Commission proposes a new acceptable practice to Core 
Principle 15 in Appendix B that would provide a non-exclusive list of 
factors that a SEF may consider when evaluating an individual's 
qualifications to be a CCO.\1018\ The proposal would provide a safe 
harbor and not impose new obligations.
---------------------------------------------------------------------------

    \1018\ 17 CFR part 37 app. B.
---------------------------------------------------------------------------

(5) Recordkeeping, Reporting, and Information-Sharing
(i) Equity Interest Transfer
    The Commission is proposing to amend the existing notification 
requirements related to transfers of equity interest in a SEF. Proposed 
Sec.  37.5(c)(1) would require a SEF to file a notice with the 
Commission regarding any transaction that results in the transfer of 
direct or indirect ownership of fifty percent or more of the equity 
interest of a SEF as opposed to only direct ownership transfers as 
currently required. Transfer of ownership in an ``indirect'' manner may 
occur through a transaction that involves the transfer of ownership of 
a SEF's direct parent or an indirect parent, and therefore, implicates 
effective change in ownership of the SEF's equity interest.
(ii) Confirmation and Trade Evidence Record
    The Commission is proposing several amendments to the existing 
confirmation requirement under

[[Page 62067]]

Sec.  37.6(b).\1019\ First, the Commission proposes Sec.  
37.6(b)(1)(ii)(B) to allow a SEF to issue a ``trade evidence record'' 
for uncleared swap transactions that are executed on its facility. As 
defined under proposed Sec.  37.6(b)(1)(ii)(B), a trade evidence record 
means a legally binding written documentation that memorializes the 
terms of a swap transaction agreed upon by the counterparties and 
legally supersedes any conflicting term in any previous agreement that 
relates to the swap transaction between the counterparties. The trade 
evidence record, at a minimum, would be required to include the 
necessary terms to serve as a legally binding record of the transaction 
that supersedes any conflicting term in any previous agreements, but is 
not required to contain all of the terms, in particular relationship 
terms contained in underlying documentation between the counterparties.
---------------------------------------------------------------------------

    \1019\ The Commission notes that the confirmation requirements 
in proposed Sec.  37.6(b)(1)(i)(A) are not changing.
---------------------------------------------------------------------------

    Second, the Commission proposes Sec.  37.6(b)(2)(i) to require a 
SEF to provide counterparties with a confirmation document or trade 
evidence record ``as soon as technologically practicable'' after the 
execution of the transaction on the SEF.
    Third, the Commission proposes Sec.  37.6(b)(2)(iii) to allow a SEF 
to issue a confirmation document or trade evidence record to the 
intermediary trading on behalf of a counterparty, provided that the SEF 
establish and enforce rules to require transmission of the document or 
record to the counterparty as soon as technologically practicable.
(iii) Information-Sharing
    The Commission proposes to amend Sec.  37.504 to generally allow a 
SEF to share information with third-parties as necessary to fulfill its 
self-regulatory and reporting responsibilities by eliminating the 
specifically enumerated list of entities with whom a SEF must share 
information.
(6) System Safeguards
    The Commission proposes to move the requirement in existing Sec.  
37.205(b)(4) that a SEF must protect audit trail data from unauthorized 
alteration and accidental erasure or other loss to proposed Sec.  
37.1401(c). The Commission proposes a new Sec.  37.1401(g) to require 
SEFs to annually prepare and submit an up-to-date Exhibit Q (existing 
Exhibit V) \1020\ to Form SEF (``Technology Questionnaire'') for 
Commission staff.
---------------------------------------------------------------------------

    \1020\ The Commission proposes to renumber existing Exhibit V to 
Form SEF as proposed Exhibit Q to Form SEF. 17 CFR part 37 app. A.
---------------------------------------------------------------------------

b. Benefits
(1) SEF Trading Specialists
    The Commission expects that SEF trading specialists would exercise 
a level of discretion and judgment in facilitating trading that is 
informed by their knowledge and understanding of the market and the 
products traded on it, and their communications with market 
participants. The role of SEF trading specialists and their use of 
discretion will likely increase under the Commission's proposed 
approach to allow SEFs to offer flexible execution methods and to 
expand the trade execution requirement. The dual and integral role that 
SEF trading specialists play in exercising that discretion--interacting 
with market participants, while facilitating fair, orderly, and 
efficient trading and overall market integrity--calls for a regulatory 
approach that aims to maintain market integrity and provide appropriate 
protections for market participants.
    The Commission believes that establishing a new category of SEF 
personnel, ``SEF trading specialists,'' and requiring SEFs to subject 
SEF trading specialists to fitness requirements, proficiency testing, 
standards of conduct for SEF trading, and ethics training, and to 
diligently supervise them, would enhance proficiency and 
professionalism among SEF trading specialists, and would promote market 
integrity and confidence of market participants. The Commission also 
believes that these requirements would increase protection of market 
participants and the public by promoting fair dealing. Furthermore, 
diligent supervision of SEF trading specialists would increase 
compliance with legal and regulatory requirements and SEF rules.
    Proposed Sec.  37.201(c)(2)(i) would enhance protections for market 
participants by seeking to ensure that SEFs do not employ persons 
subject to a statutory disqualification as a SEF trading specialist, 
subject to the proposed exception as discussed below. Sections 8a(2) or 
8a(3) of the Act set forth numerous bases upon which the Commission may 
refuse to register a person, including, without limitation, felony 
convictions, commodities or securities law violations, and bars or 
other adverse actions taken by financial regulators. The Commission 
believes that by restricting SEFs from permitting such persons from 
intermediating and facilitating SEF trading (except in a clerical or 
ministerial capacity), market participants and the public would be 
better protected from abusive and fraudulent trading practices. 
Moreover, given the role SEF trading specialists play in facilitating 
orderly and fair trading, the Commission believes that proposed Sec.  
37.201(c)(2)(i) would enhance market integrity and fairness, and the 
confidence of SEF market participants.
    Proposed Sec.  37.201(c)(2)(ii)(A) would allow SEFs to employ as a 
SEF trading specialist a person the National Futures Association 
(``NFA'') has permitted to be listed as a principal or to register with 
the Commission based on the NFA's determination that the incident 
giving rise to the person's statutory disqualification is 
insufficiently serious, recent, or otherwise relevant to evaluating the 
person's fitness. Similarly, proposed Sec.  37.201(c)(2)(ii)(B) would 
allow a SEF to employ as a SEF trading specialist a person subject to a 
statutory disqualification who provides a written notice from an RFA 
stating that if the person were to apply for registration as an 
associated person, the RFA would not deny the application on the basis 
of the statutory disqualification.
    Proposed Sec.  37.201(c)(2)(ii) would benefit SEFs and their 
prospective SEF trading specialists by allowing SEFs to employ a person 
as a SEF trading specialist where the incident giving rise to the 
person's statutory disqualification is insufficiently serious, recent, 
or otherwise relevant to evaluating the person's fitness for 
registration with the Commission. The Commission believes that, where 
an RFA provides a notice that such circumstances are present, the 
benefits of the prohibition under Sec.  37.201(c)(2)(i)--in particular 
the protection of market participants and the public and enhancing 
market integrity--are not implicated, and thus a SEF should be 
permitted to employ such persons as a SEF trading specialist.
    Given the level of discretion SEF trading specialists exercise, the 
Commission believes that proposed Sec.  37.201(c)(3)(i) would benefit 
market participants and the public by helping to ensure that SEF 
trading specialists have the requisite proficiency and knowledge to 
fulfill their responsibilities and to comply with the Act, Commission 
regulations, and SEF rules. The proficiency examination requirement 
under Sec.  37.201(c)(3)(ii) would further ensure that all SEF trading 
specialists maintain a baseline level of proficiency. This would 
increase protection of market participants and better ensure that 
trading on SEFs is conducted in a fair, orderly, and efficient manner. 
The

[[Page 62068]]

Commission expects the proposed requirements to enhance the confidence 
of market participants and the public in the integrity and fairness of 
SEF markets.
    Proposed Sec. Sec.  37.201(c)(4)-(6) would respectively require a 
SEF to ensure that SEF trading specialists receive ethics training on a 
periodic basis, subject SEF trading specialists to standards of conduct 
in dealing with market participants and fulfilling their 
responsibilities, and diligently supervise the activities of its SEF 
trading specialists.
    Overall, these proposed rules would promote public and market 
participants' confidence in the trading of swaps on SEFs and may bring 
additional volumes of trading and liquidity to SEFs.
(2) Rule Compliance and Enforcement
(i) Definition of ``Market Participant''
    The primary benefit of the rule change is an anticipated reduction 
in recordkeeping costs for clients of asset managers and SEFs.
(ii) Audit Trail and Surveillance Program
    Many of the proposed changes to the audit trail and surveillance 
requirements described above are expected to result in savings in terms 
of compliance staff and resources for most SEFs. For example, SEFs that 
offer voice trading are currently required to conduct regular voice 
audit trail surveillance in lieu of the electronic analysis capability 
requirements of Sec.  37.205(b)(3). These SEFs dedicate compliance 
staff and resources to establishing and conducting the voice audit 
trail surveillance programs, including contracting with the NFA for the 
performance of the reviews. However, under the proposed changes to 
Sec.  37.203(d), Sec.  37.205(b)(2), and Sec.  37.205(b)(3), these SEFs 
would no longer be required to conduct regular automated surveillance 
on indications of interest, requests for quotes, and orders that are 
not entered into a SEF's electronic trading system or platform. 
Therefore, new SEFs would not incur the cost to implement this 
requirement and all SEFs would not incur the ongoing cost to maintain a 
regular voice audit trail surveillance program.
    Additionally, eliminating Sec.  37.205(c)'s requirement to enforce 
audit trail requirements through annual reviews should result in cost 
savings to all SEFs, as they would no longer need resources, either 
internal compliance staff or the NFA, to perform audit trail reviews.
    However, the Commission proposes to replace these requirements with 
a requirement to perform audit trail reconstructions, which is expected 
to reduce some of the cost savings as described above.\1021\ The 
proposed changes to the audit trail rules under Sec.  37.205(a) are 
intended to address the current challenges SEFs face with respect to 
obtaining post-trade allocation information and conducting surveillance 
on orders that are not entered into an electronic trading system or 
platform. Similarly, proposed Sec.  37.203(d) would no longer require 
SEF automated surveillance systems to have certain capabilities that 
they cannot perform.
---------------------------------------------------------------------------

    \1021\ The Commission also notes that some of the new costs 
associated with the reconstruction program requirement in proposed 
Sec.  37.205(c) are offset by to the statutory mandate in Core 
Principle 4 that already requires a SEF to have methods for 
conducting comprehensive and accurate trade reconstructions.
---------------------------------------------------------------------------

(iii) Compliance and Disciplinary Programs
    SEF compliance programs should benefit from the proposed changes 
related to conducting investigations. For example, changes proposed to 
Sec.  37.203(f) seek to simplify the procedures for SEFs to conduct 
investigations and prepare investigation reports. Specifically, 
eliminating the 12-month requirement for completing investigations 
under Sec.  37.203(f)(2), and replacing it instead with a general 
statement that permits SEFs to complete investigations ``in a timely 
manner taking into account the facts and circumstances of the 
investigation'' would provide SEFs with greater discretion to manage 
their workload, and allow them to prioritize their other compliance 
responsibilities as needed. SEFs also may benefit from the additional 
clarity and flexibility provided in language related to investigation 
reports in the guidance to Core Principle 2 in Appendix B. The language 
states that compliance staff should submit all investigation reports to 
the CCO or other compliance department staff responsible for reviewing 
such reports and determining next steps in the process, and that the 
CCO or other responsible staff should have reasonable discretion to 
decide whether to take any action, such as presenting the investigation 
report to a disciplinary panel for disciplinary action.
    SEFs may realize additional cost savings under the proposed changes 
to the disciplinary rules under Sec.  37.206. Proposed Sec.  37.206(b) 
would allow a SEF to administer its disciplinary program through not 
only one or more disciplinary panels as currently allowed, but also 
through its compliance staff. This proposed rule would provide SEFs 
with more flexibility to adopt a cost effective disciplinary structure 
that better suits their markets and market participants, while still 
effectuating the requirements and protections of Core Principle 2. The 
Commission anticipates that SEFs that choose to administer their 
disciplinary programs through their compliance staff would incur the 
greatest cost savings. These SEFs would not incur the cost associated 
with establishing or maintaining disciplinary panels.
    Additionally, to the extent that a SEF chooses to administer its 
disciplinary programs through compliance staff, the SEF may no longer 
incur certain costs associated with conducting hearings or appeals, 
such as preparing materials and presentations for hearings before the 
disciplinary panel, or the time spent by SEF employees preparing 
written disciplinary decisions. A SEF also may benefit from increased 
efficiencies that they can leverage from compliance staff's knowledge 
about the SEF and its trading practices to adjudicate matters more 
quickly than under the traditional disciplinary structure.
(iv) Regulatory Service Provider
    A SEF may realize cost savings from the proposed changes under 
Sec.  37.204. Expanding the scope of entities that may provide 
regulatory services under proposed Sec.  37.204(a) to include any non-
registered entity approved by the Commission may result in an increase 
in competition among RSPs, and reduce the overall cost of securing an 
RSP. Under the proposed changes to Sec.  37.204(b), a SEF and its RSP 
may also mutually agree on the method it will use to document 
substantive decisions, rather than documenting every instance where the 
SEF's actions differ from the RSP's recommendations, which may reduce 
the administrative costs associated with documentation created and 
maintained by a SEF and its RSP. Providing SEFs with the option under 
proposed Sec.  37.204(b) to allow their RSPs to make substantive 
decisions, should better enable an RSP to promptly intervene and take 
action, as it deems necessary. Finally, eliminating the requirement 
under Sec.  37.204(c) that a SEF document where its actions differ from 
the RSP's recommendations, deferring instead to the SEF and its RSP to 
mutually agree on the method it will use to document substantive 
decisions, may encourage better communication among SEFs and its RSP.

[[Page 62069]]

(3) Error Trade Policy
    The Commission believes that the proposed changes to the error 
trade rule would reduce the costs and risks associated with error 
trades and promote swaps market integrity and efficiency. When 
counterparties execute a trade that is an error trade, the 
counterparties bear the costs and risks from being bound to terms to 
which they did not intend to assent. The proposed rule that requires 
error trades be resolved in a fair, transparent, and consistent manner 
would increase confidence that error trades would be corrected and that 
published swap data is an accurate indication of market supply and 
demand.
    The proposed requirement that error trades be resolved in a timely 
manner would reduce the costs associated with error trades, including 
associated hedging costs. A counterparty may hedge an executed trade: 
(i) Before it learns that the trade may be erroneous, (ii) after it 
learns the trade may be erroneous, but before the SEF has determined 
whether the trade is an error trade, (iii) after an error has been 
identified but before it has been resolved, or (iv) after the SEF has 
resolved the error. The potential cost of each case likely depends on 
how quickly the SEF resolves the error because the longer a SEF takes 
to do so, then the greater the chance the market price of the trade and 
related hedge trade will move. For example, if a trader on a SEF enters 
into a hedge trade and the SEF determines that the initial trade is 
different from what the trader believed, then the trader may have to 
execute a new trade that hedges the correct trade and unwind the 
initial hedge trade. Doing so will be costly if the market has moved 
and the price of entering into the new hedge and unwinding the old 
hedge has increased. Similarly, a trader that waits to execute a hedge 
trade until after the SEF has resolved the error will likely face 
higher costs the longer the SEF takes to resolve the error. The 
proposed timeliness requirement should result in faster error 
resolution and lower the risk of costly market moves.
    The proposed requirement that SEFs notify market participants that 
a swap transaction is under review pursuant to error trade rules and 
procedures, the determination that the trade under review is or is not 
an error trade, and the resolution of any error trade review should 
make markets more efficient. An error trade misinforms market 
participants when its price is different than the price would be if the 
trade had been executed non-erroneously. The notification requirement 
should allow market participants to make better informed decisions 
regarding supply and demand.
(4) Chief Compliance Officer
    As discussed in the preamble, the Commission believes that some of 
the regulations implementing Core Principle 15 may be unnecessarily 
burdensome and inefficient. The proposed regulations are intended to 
address these issues.
    The proposal to give the senior officer the same authority as the 
board of directors to oversee the CCO would provide SEFs with greater 
opportunity to structure the management and oversight of the CCO based 
on the SEF's particular corporate structure, size, and complexity. This 
could increase efficiency and reduce costs. Additionally, the quality 
of oversight of the CCO could improve if the senior officer is better 
positioned than the board of directors to provide day-to-day oversight 
of the CCO.
    The proposal to permit the CCO to use any means to identify 
noncompliance issues is less prescriptive and should also increase 
efficiencies. The proposed amendment to Sec.  37.1501(d) to refine the 
scope of the required information in a SEF's ACR should make the ACR 
process more efficient and reduce costs. For example, the proposed 
removal of Sec.  37.1501(e)(2)(i) and certain specific content set 
forth under Sec.  37.1501(e)(4) should reduce the amount of time that a 
CCO and his or her staff must spend preparing the ACR. Proposed Sec.  
37.1501(d)(4), which would require that SEFs focus on describing 
material non-compliance matters, rather than describing all compliance 
matters, should streamline the ACR requirement and provide more useful 
information to the Commission. Additionally, the proposed clarification 
under Sec.  37.1501(e)(3) that the CCO must submit an amended ACR to 
the SEF's board of directors or, in the absence of a board of 
directors, the senior officer of the SEF, should reduce the need for 
extensive follow-up discussions.
    Finally, the proposal to allow SEFs more time to submit their ACRs 
should reduce the time and resource burden on the CCO and compliance 
department. This additional time should allow SEFs to fully complete 
their ACRs and meet their other end-of-year reporting obligations, such 
as the fourth quarter financial report. However, the Commission 
understands that those SEFs that already may rely on Commission staff 
no-action relief for an extra 30 days to complete the ACR may have 
availed themselves of the benefits associated with the extended 
reporting deadline.
(5) Recordkeeping, Reporting, and Information-Sharing
(i) Equity Interest Transfer
    The Commission notes that an indirect transfer of a SEF's equity 
interest raises similar concerns as a direct transfer, notification of 
which is currently required under the existing requirement. Therefore, 
the Commission believes that proposed Sec.  37.5(c)(1) would benefit 
market participants because the Commission would have the ability to 
more broadly identify and assess situations where an indirect equity 
interest transfer of a SEF could potentially impact its operational 
ability to comply with the SEF core principles and the Commission's 
regulations.
(ii) Confirmation and Trade Evidence Record
    The Commission believes that the proposed ``trade evidence record'' 
approach in proposed Sec.  37.6(b) should benefit both SEFs and market 
participants by decreasing the administrative costs to execute an 
uncleared swap on a SEF. Not only would a SEF not be required to expend 
time and resources to gather and maintain all of the underlying 
relationship documentation between all possible counterparties on its 
facility, but market participants would also not be required to expend 
time and resources in gathering and submitting this information to the 
SEF, including any amendments or updates to that documentation. 
Consistent with the bilateral nature of the underlying relationship 
documentation and current market practice outside of SEFs, 
counterparties to the transaction would be better able to devise their 
own confirmation documents by supplementing the information provided in 
the trade evidence record with additional terms that they have 
previously negotiated. Therefore, SEFs and counterparties should 
benefit from a documentation requirement that better reflects the 
nature of uncleared swap transactions. Moreover, the Commission 
believes this trade evidence record may encourage more uncleared swaps 
trading on SEFs where these trades can benefit from SEF oversight, and 
ultimately would increase the financial integrity of the swaps market. 
The Commission notes that to the extent that SEFs and market 
participants have relied on the existing no-action relief provided by 
Commission staff to avoid these costs by incorporating those terms by 
reference in a confirmation

[[Page 62070]]

document, they have been availing themselves of the benefits from these 
reduced costs.
    SEFs should also benefit from the proposed requirement that they 
transmit the confirmation document or the trade evidence record ``as 
soon as technologically'' practicable after execution of the 
transaction rather than at the same time as execution. In particular, 
this approach should provide an opportunity for a SEF to develop 
protocols for transmitting this documentation in a manner that is 
adaptive to the type of execution method that is utilized to execute a 
transaction. Given the flexible methods of execution that the 
Commission proposes to allow for all swaps, this practical approach to 
transmitting documentation should not impede the development of trading 
systems or platforms. For example, a SEF that offers non-automated 
execution methods would not be required to ensure that post-trade 
processing protocols simultaneously transmit the confirmation or trade 
evidence record at the time of execution.
    Further, SEFs and market participants should benefit from allowing 
an intermediary to receive a confirmation document or trade evidence 
record on behalf of the counterparties to the transaction. This 
approach should be more consistent with current market practice, such 
that intermediaries maintain the connectivity in trading on the SEF. 
Given that intermediaries are connected with and participating on the 
SEFs, but are acting on behalf of the counterparties, a SEF is able to 
transmit the documentation related to a swap transaction to the 
intermediary, who would then transmit that information to the ultimate 
counterparties.
(iii) Information-Sharing
    The Commission believes that the proposed amendment to information-
sharing requirements would benefit SEFs by providing a better 
opportunity to utilize third-party entities to fulfill their self-
regulatory and reporting responsibilities at a lower cost. The proposed 
rule should increase the number of RSPs and likely increase the 
competition between these providers, which should both lower costs and 
improve the level of services offered. The Commission anticipates that 
this benefit would be greater for smaller SEFs that otherwise would 
have difficulty operating economically due to the high fixed costs of 
some services.
(6) System Safeguards
    The Commission has identified several potential benefits from the 
proposed changes to the system safeguards requirements. First, the 
proposed annual Technology Questionnaire filing requirement (in 
proposed Exhibit Q) should help the Commission maintain a current 
profile of the SEF's automated systems and be consistent with the 
provisions of existing Sec.  37.1401(g)(4),\1022\ which allows the 
Commission to request the results from a SEF's mandatory tests of its 
automated systems and business continuity-disaster recovery 
capabilities. The Commission believes that the proposed rule would 
reduce the need for additional information and document requests 
related to that existing requirement.\1023\
---------------------------------------------------------------------------

    \1022\ Existing Sec.  37.1401(g) generally requires a SEF to 
provide all other books and records requested by Commission staff in 
connection with Commission oversight of system safeguards pursuant 
to the Act or Commission regulations, or in connection with 
Commission maintenance of a current profile of the SEF's automated 
systems. 17 CFR 37.1401(g).
    \1023\ The current profile of a SEF's automated systems is also 
supported by the provision of timely advance notice of all material 
planned changes to automated systems that may impact the 
reliability, security, or adequate scalable capacity of such 
systems, and of planned changes to the SEF's program of risk 
analysis and oversight, as required by Sec.  37.1401(f)(1)-(2). 17 
CFR 37.1401(f)(1)-(2).
---------------------------------------------------------------------------

    Second, the Commission believes an annually-updated Technology 
Questionnaire could expedite Systems Safeguards Examinations (``SSE''). 
For example, it could reduce a SEF's overall compliance-related burdens 
for SSEs by (i) reducing a SEF's effort to respond to SSE document 
requests by instead allowing a SEF to provide updated information and 
documents for sections of Exhibit Q that have changed since the last 
annual filing; and (ii) allowing SEFs to respond to an SSE document 
request by referencing Exhibit Q information and documents to the 
extent that they are still current, rather than resubmitting such 
information and documents. The Commission also notes that an annual 
update to Exhibit Q, which would be required concurrently with 
submission of the CCO annual compliance report, could provide 
information and documents potentially useful in preparing that annual 
report.
c. Costs
(1) SEF Trading Specialists
    The Commission expects that SEFs and/or SEF trading specialists 
would incur additional costs to satisfy the fitness requirement in 
proposed Sec.  37.201(c)(2). The Commission expects that SEFs would vet 
prospective SEF trading specialists to ensure that they are not subject 
to a statutory disqualification. Such vetting may include the 
completion by a prospective SEF trading specialist of a questionnaire 
regarding employment and criminal history. Additionally, SEFs may 
conduct criminal background checks through third-party service 
providers to ensure that SEF trading specialists are not subject to a 
statutory disqualification.
    The costs of ensuring compliance with proposed Sec.  
37.201(c)(2)(i) may be mitigated where a SEF trading specialist is 
separately registered with the Commission in some other capacity (e.g., 
as an associated person), in which case a SEF may reasonably rely on 
the person's registration status as evidence that the person is not 
subject to a statutory disqualification or that the person falls within 
the exception set forth in proposed Sec.  37.201(c)(2)(ii)(A). In cases 
where a SEF relies on the exception in proposed Sec.  
37.201(c)(2)(ii)(B), the SEF (or the SEF trading specialist) would bear 
an additional cost of obtaining the required notice from an RFA.
    The expected costs associated with the proficiency requirement in 
proposed Sec.  37.201(c)(3)(i) would include the cost to a SEF of 
determining if a SEF trading specialist is sufficiently proficient 
(which can be accomplished by passing the examination, once it is 
available) and, if necessary, providing training to ensure that a SEF 
trading specialist possesses the requisite proficiency. In some cases, 
the cost of determining proficiency may be minimal; for example where 
the SEF trading specialist has an employment history that reflects the 
requisite knowledge and experience.
    The expected costs associated with the proficiency examination 
requirement in proposed Sec.  37.201(c)(3)(ii) would include a fee 
imposed by the RFA. This fee would likely be designed to, at a minimum, 
offset the costs of developing and administering the examination. 
Additional costs may include study, training, or other examination 
preparation, borne by a SEF trading specialist or by a SEF on behalf of 
the SEF trading specialist. As discussed above, once an examination for 
swaps proficiency is made available, compliance by a SEF with the 
examination requirement in proposed Sec.  37.201(c)(3)(ii) would 
constitute compliance with the general proficiency requirement in 
proposed Sec.  37.201(c)(3)(i). Thus, the cost associated with 
complying with proposed Sec.  37.201(c)(3)(i) would be mitigated once 
an RFA-administered examination is made available.
    As discussed in the proposed amendments to the guidance to Core

[[Page 62071]]

Principle 2 in Appendix B, each SEF would have broad discretion in 
developing and implementing its ethics training program under proposed 
Sec.  37.201(c)(4). Given this discretion, the costs to SEFs to comply 
with the ethics training requirement may vary widely from SEF to SEF. 
Furthermore, the training needs of a SEF may vary according to the 
size, number of SEF trading specialists, and the level of their 
expertise and responsibilities within a SEF.
    While the Commission believes that the requirements in proposed 
Sec. Sec.  37.201(c)(5)-(6) would impose additional costs on SEFs, the 
Commission anticipates that the costs would vary from SEF to SEF. A SEF 
may utilize its existing compliance staff or may opt to add compliance 
staff in order to enforce its standards of conduct for SEF trading 
specialists and to meet the SEF's obligation to diligently supervise 
SEF trading specialists. Additional costs associated with these 
proposed requirements may include the costs of developing standards of 
conduct and policies and procedures designed to ensure that SEF trading 
specialists are diligently supervised.
(2) Rule Compliance and Enforcement
(i) Definition of ``Market Participant''
    By effectively moving clients of asset managers out of the category 
of market participant, the proposal potentially reduces SEFs' ability 
to monitor the positions of these clients, although SEFs would still be 
able to monitor the trading of the asset managers.\1024\ Hence, the 
cost of the proposed change may be a reduction in the ability of SEFs 
to detect abusive practices to the extent that clients of asset 
managers are able to engage in such practices. However, these swap 
users, who typically give up their trading discretion, appear to be the 
least likely to engage in manipulative practices. For example, when a 
client gives complete trading discretion to an asset manager, the 
specifics of the asset manager's trading typically occurs without 
particular knowledge of the client--that is, they do not know the 
investment, whether any swap traded is occurring on a SEF, or even the 
identity of the SEF. Importantly, the asset managers who conduct 
trading on the SEF for the client remain subject to the SEF's record 
retention and other requirements. Hence, to the extent that an asset 
manager for a client is engaging in abusive trading practices on a SEF, 
a SEF's ability to investigate and prevent those practices should not 
be diminished.
---------------------------------------------------------------------------

    \1024\ The proposed definition of ``market participant'' 
includes any person who accesses a SEF through direct access 
provided by a SEF; through access or functionality provided by a 
third-party; or through directing an intermediary, such as an asset 
manager, that accesses a swap execution facility on behalf of such 
person to trade on its behalf. A person who does not access a SEF in 
any of these ways, such as a client who does not direct the asset 
manager to trade on its behalf, would not be a market participant 
under the proposed definition. See proposed Sec.  37.2(b).
---------------------------------------------------------------------------

(ii) Audit Trail and Surveillance Program
    Without conducting automated surveillance on orders entered by 
voice or certain other electronic communications, such as instant 
messaging and email, SEFs may have a reduced ability to identify 
potential misconduct involving voice orders. However, the Commission 
recognizes that since SEFs currently do not have a cost-effective 
solution for performing such automated surveillance, the proposed rules 
do not provide lesser protections to market participants and the 
public. Regarding the requirement to capture post-trade allocation 
information, the Commission understands that SEFs currently cannot 
capture this information. As a result of capturing less audit trail 
data under the proposal, there may be possible costs in the form of 
reduced protections to market participants and the public. However, the 
Commission does not believe that the proposed rule is likely to 
meaningfully reduce protections to market participants and the public 
as compared to the current rules.
    The Commission proposes to replace the audit trail enforcement 
requirement with the requirement to perform audit trail 
reconstructions.\1025\ Since SEFs are currently required to reconstruct 
a sample of orders and trades under the voice audit trail surveillance 
program, the Commission does not anticipate that any SEFs subject to 
this program will incur any additional costs associated with performing 
audit trail reconstructions under proposed Sec.  37.205(c). For SEFs 
that electronically capture audit trail data and do not have a voice 
component, the incremental cost of reconstructing trades should not be 
material, as their automated trade surveillance systems should already 
be capable of such reconstructions under Sec.  37.203(d).
---------------------------------------------------------------------------

    \1025\ The Commission also notes that some of the new costs 
associated with the reconstruction program requirement under 
proposed Sec.  37.205(c) are offset by the statutory mandate in Core 
Principle 4 that currently requires a SEF to have methods for 
conducting comprehensive and accurate trade reconstructions.
---------------------------------------------------------------------------

(iii) Compliance and Disciplinary Programs
    The Commission is mindful that the proposed elimination of the 12-
month requirement for completing investigations under Sec.  
37.203(f)(2) could lead to delays in completing disciplinary actions. 
However, the Commission notes that SEFs remain responsible for 
completing investigations in a ``timely manner taking into account the 
facts and circumstances of the investigation.'' In addition, while many 
SEFs are likely to benefit from the proposed changes described above 
related to the disciplinary process, there may be accompanying costs. 
For example, a SEF's compliance staff may incur additional costs taking 
on the added responsibilities previously performed by a disciplinary 
panel.
    The proposed changes to Sec.  37.206 also permit SEFs to establish 
a disciplinary process that may provide respondents fewer procedural 
protections than are required under the current rules. However, the 
Commission notes that the guidance to Core Principle 2 in Appendix B 
states that a SEF's rules relating to disciplinary panel procedures 
should be fair, equitable, and publicly available. Competition and 
customer demand should ensure that SEFs maintain suitable disciplinary 
programs with sufficient protections.
(iv) Regulatory Service Provider
    New RSPs may incur start-up costs associated with developing an 
automated trade surveillance system and establishing and maintaining 
sufficient compliance staff. However, the Commission would expect these 
costs to decrease once the RSP has established its program and as it 
gains experience providing regulatory services. RSPs may realize 
further reductions in these costs as they gain economies of scale by 
offering their services to multiple SEFs.
    Eliminating the requirement that a SEF hold regular meetings and 
conduct periodic reviews of its RSP may lead to varying degrees of 
communication between a SEF and its RSP, but the Commission believes 
that most SEFs would seek to maintain regular communication with their 
RSPs, given that SEFs remain ultimately responsible for the performance 
of any regulatory services received, for compliance with their 
obligations under the Act and Commission regulations, and for the RSPs' 
performance on their behalf.
(3) Error Trade Policy
    The Commission anticipates that SEFs would incur costs to establish 
and

[[Page 62072]]

maintain rules and procedures that facilitate the resolution of error 
trades. As noted in the preamble, the proposed rule is intended to 
reflect error trade policies that generally exist among SEFs so many 
SEFs should have policies that are at least partially compliant with 
the proposed rule and would not have to incur the full costs discussed 
below. The Commission understands that SEFs implemented these policies 
as an appropriate means to address error trades or to satisfy a 
condition set forth in no-action relief provided by Commission staff.
    Proposed Sec.  37.203(e)(2) would require that some SEFs incur the 
costs associated with establishing and maintaining rules and procedures 
that facilitate resolution of purported errors in a fair, transparent, 
consistent, and timely manner. Existing Sec.  37.203(e) requires only 
that a SEF have the authority to resolve errors when necessary to 
mitigate certain market disrupting events. SEFs that do not currently 
have error trade policies, or whose policies are not compliant with 
proposed Sec.  37.203(e)(2), would incur one-time costs to develop a 
compliant policy and ongoing costs to implement such policy.
    To comply with the proposed Sec.  37.203(e)(3) requirement that 
SEFs notify market participants of (i) any swap transaction that is 
under review pursuant to the SEF's error trade rules and procedures; 
(ii) a determination that the trade under review is or is not an error 
trade; and (iii) the resolution of any error trade, including any trade 
term adjustment or cancellation, some SEFs would have to incur costs to 
establish a means of communicating such information to market 
participants. The Commission believes that many SEFs would send 
notifications electronically to their market participants. All SEFs 
have the ability to communicate electronically with market 
participants. However, some SEFs may not be able to send electronic 
notifications ``as soon as practicable'' and could have to obtain and 
implement software to do so. SEFs would also incur costs each time a 
notification is sent. The Commission believes that the ongoing cost 
would be minimal if the notification was sent electronically using a 
partially automated software system. However, some SEFs may send 
notifications to their market participants by other means.
    The Commission does not believe the proposed error trade policy is 
likely to increase the risk that counterparties act carelessly and make 
more errors. As noted above, market participants may incur significant 
costs when they enter into error trades if they need to unwind hedge 
trades and execute new hedge trades. The Commission believes that these 
costs encourage market participants to implement best practices to 
avoid errors. The Commission also does not believe that the error trade 
policy is likely to increase the risk that counterparties attempt to 
use error trades to manipulate the market by entering into off-market 
transactions and then cancelling the trades after the market has moved. 
Since Sec.  37.203(e) already requires that SEFs correct error trades, 
the proposed rule should not improve a market manipulation scheme's 
chances of success.
(4) Chief Compliance Officer
    The proposed change to Sec.  37.1501(b) to authorize the senior 
officer to oversee the CCO, could impair the independence of the CCO, 
and as a result the CCO's oversight of the SEF. However, the Commission 
believes that this risk is mitigated by the Commission's review of 
annual ACRs and examination programs.
    The proposed amendments would eliminate requirements that the CCO 
identify noncompliance matters using only certain specified detection 
methods, design procedures that detect and resolve all possible 
noncompliance issues, and eliminate all potential conflicts of 
interest. These requirements would be replaced by more flexible 
standards, which could potentially allow for some impairment of a CCO's 
oversight of the SEF in some circumstances. However, the Commission 
believes that the resulting costs (in the form of potential adverse 
consequences) would not be material because the proposed changes would 
now focus on material aspects of the compliance program, e.g., material 
breaches and material conflicts of interest. The Commission believes 
that the proposal acknowledges that the focus should be placed on 
material compliance issues rather than all compliance issues.
    The proposed change to Sec.  37.1501(e) to reduce the information 
required in an ACR could make it more difficult for the Commission to 
assess a SEF's compliance and self-regulatory programs. However, the 
Commission does not anticipate that these changes would materially 
impact the Commission's assessment as it already receives or has access 
to such information from other sources. For example, the Commission 
approves a SEF's compliance staffing and structure as part of the SEF's 
registration or rule submission, and annual updates provide minimal 
additional information, at best. In addition, SEFs report finalized 
disciplinary actions to the NFA,\1026\ and the Commission could access 
this information through its oversight of the NFA.
---------------------------------------------------------------------------

    \1026\ See Sec.  9.11 (stating that whenever an exchange 
decision pursuant to which a disciplinary action or access denial 
action is to be imposed has become final, the exchange must, within 
thirty days thereafter, provide written notice of such action to the 
person against whom the action was taken and notice to the National 
Futures Association). 17 CFR 9.11.
---------------------------------------------------------------------------

    Finally, the proposal to give SEFs more time to submit their ACRs 
could delay the Commission in recognizing and addressing a SEF 
compliance issue. However, the Commission anticipates that such risk is 
mitigated to the extent that SEFs provide ACRs on the timeline set 
forth in the proposed rules. The Commission's experience with these 
SEFs has not indicated that this delayed reporting has adversely 
impacted its ability to recognize and address compliance issues in a 
timely manner.
(5) Recordkeeping, Reporting, and Information-Sharing
(i) Equity Interest Transfer
    The proposed additional requirement to notify the Commission of an 
indirect change in ownership would increase costs to a SEF, who would 
be required to provide notice in these instances. As part of that 
notification, a SEF may incur costs that are similar to those incurred 
when providing a notice of a direct change, including providing details 
of the proposed transaction and how the transaction would not adversely 
impact its ability to comply with the SEF core principles and the 
Commission's regulation, responding to any requests for supporting 
documentation from the Commission, and updating any ongoing changes to 
the transaction.\1027\
---------------------------------------------------------------------------

    \1027\ The Commission previously identified the types of 
information that a SEF should provide as part of its notification, 
including (i) relevant agreement(s); (ii) associated changes to 
relevant corporate documents; (iii) a chart outlining any new 
ownership or corporate or organization structure, if available; and 
(iv) a brief description of the purpose and any impact of the equity 
interest transfer. SEF Core Principles Final Rule at 33490.
---------------------------------------------------------------------------

(ii) Confirmation and Trade Evidence Record
    With respect to uncleared swaps, the proposed ``trade evidence 
record'' approach in proposed Sec.  37.6(b) could reduce the financial 
integrity of transactions on SEFs compared to the current rule. There 
could be a greater risk of misunderstanding between the counterparties 
if they do not provide all the terms of a transaction at the time of 
execution. Even when parties reference agreements, confusion could 
arise from

[[Page 62073]]

issues such as multiple versions of the agreement with the same 
labeling or missing sections. However, the Commission does not expect 
that this risk will materially reduce the integrity of the swaps 
market. The Commission notes that these agreements are usually 
relationship terms between counterparties that govern all trading in 
uncleared swaps and do not concern the terms of specific transactions. 
The Commission expects that, since it should generally be less 
extensive, the change should result in no increased costs.
    The Commission also notes that to the extent that a SEF elects to 
not issue a confirmation document that includes or incorporates all of 
the terms of an uncleared swap transaction (including the trade 
evidence record), the counterparties to the swap may be subject to 
other Commission regulations that impose those burdens, and therefore, 
increased costs. For example, where one of the counterparties to an 
uncleared swap transaction is a swap dealer or major swap participant, 
Sec.  23.501 requires that the swap dealer or major swap participant 
issue a confirmation for the transaction as soon as technologically 
practicable.\1028\ The Commission, however, believes that such costs 
are likely to be mitigated by the reduced cost burdens Sec.  37.6(b) 
otherwise currently imposes upon counterparties to an uncleared swap.
---------------------------------------------------------------------------

    \1028\ 17 CFR 23.501(a).
---------------------------------------------------------------------------

(iii) Information-Sharing
    The Commission recognizes that permitting SEFs to share information 
with any third party to fulfill its self-regulatory obligations under 
proposed Sec.  37.504 may increase the risk that the SEF's market 
participant information is misappropriated. These third party entities 
are not necessarily registered with the Commission and may lack the 
document security and compliance knowledge, to adequately protect 
market participant information. However, the Commission notes that a 
SEF would remain responsible for maintaining the security of this 
information, and would oversee their service providers to ensure 
compliance, to the extent feasible. Furthermore, the Commission intends 
to continue to review SEFs' operations to ensure ongoing compliance 
(including the compliance of third-party service providers).
(6) System Safeguards
    SEFs are currently required to file a Technology Questionnaire 
under existing Exhibit V to Form SEF for registration as a SEF. SEFs 
are likely to incur additional costs associated with annually updating 
this Questionnaire in proposed Exhibit Q under proposed Sec.  
37.1401(g). The Commission believes, however, that this cost may be 
minimal, as the Technology Questionnaire pertains to the SEF's 
operations and is information that a SEF should know for purposes of 
its compliance with Core Principle 14 and the Commission regulations. 
Further, the Commission believes that maintaining an annually updated 
Exhibit Q would limit SSE document requests and the effort required to 
respond to these requests and ad-hoc Commission system safeguards-
related requests under proposed Sec.  37.1401(h).
d. Section 15(a) Factors
(1) Protection of Market Participants and the Public
    The Commission believes that the proposed amendments to the 
existing SEF requirements related to compliance and self-regulatory 
responsibilities are likely to increase professionalism in the swaps 
market, further promote an orderly trading environment and market 
integrity, and better enable the Commission to protect market 
participants and the public.
    First, several of the requirements should help the Commission to 
determine whether a SEF's operations are compliant with the Act and the 
Commission's regulations. For example, requiring a SEF to additionally 
provide notice of any transaction resulting in the transfer of indirect 
ownership of fifty percent or more of the SEF's equity interest under 
Sec.  37.5(c)(1) would broaden the Commission's ability to review 
changes in ownership that may affect the SEF's operations. Accordingly, 
the Commission should be better able to assess whether such changes 
would adversely impact the SEF's operations or its ability to comply 
with the core principles or Commission's regulations, which are 
intended in part to protect market participants.
    The Commission's proposed amendments to the ACR requirements under 
proposed Sec.  37.1501(d) should also better enable the Commission to 
assess the effectiveness of a SEF's compliance or self-regulatory 
programs. The proposed amendments, among other things, would remove 
some of the existing content requirements that are duplicative and 
unnecessary, but require the ACR to include a description and self-
assessment of the SEF's written policies. Removing information 
requirements, e.g., requirements to review all Commission regulations 
applicable to a SEF and to identify the written policies and procedures 
enacted to foster compliance, may reduce the amount of information 
available to the Commission in an ACR to assess a SEF's compliance. 
However, the Commission has considered that, based on its experience 
with the existing requirements, this information may not enhance the 
usefulness of the ACR. Therefore, the Commission does not believe that 
the proposed amendments would negatively impact its ability to assess 
the SEF, which is intended, in part, to protect market participants.
    The proposed requirement that a SEF annually update its response to 
the Questionnaire should facilitate the Commission's oversight of a 
SEF's systems safeguard program, and in turn, benefit the swaps markets 
by promoting more robust automated systems and enhanced cybersecurity. 
This should decrease the likelihood of disruptions and market-wide 
closures, systems compliance issues, and systems intrusions. The 
receipt of an annually-updated response to Exhibit Q should further the 
protection of market participants and the public by helping to ensure 
that automated systems are available, reliable and secure; adequate in 
scalable capacity; and effectively overseen.
    Second, the proposed requirements under Sec.  37.201(c) should 
protect market participants and the public by mandating that SEF 
trading specialists meet fitness and proficiency standards, undergo 
periodic ethics training, and be subject to standards of conduct and 
diligent supervision by SEFs. The Commission expects that the proposed 
requirements should reduce abusive and fraudulent conduct and increase 
the professionalism of, and fair dealing by, SEF trading specialists 
who facilitate trading between SEF market participants. Furthermore, 
the proposed requirements should promote compliance with legal and 
regulatory obligations and SEF rules that are aimed at protecting 
market participants. These improvements may be attenuated if the costs 
of meeting the new standards reduce the number of SEF trading 
specialists.
    Third, in addition to promoting the Commission's ability to assess 
a SEF's compliance with the Act and Commission regulations, some of the 
requirements should protect market participants and the public by 
improving a SEF's ability to detect potential rule violations. For 
example, the proposed amendments to Sec.  37.203(f)(2) and Sec.  
37.206(b) would permit a SEF to determine the timeframe within which to 
complete an investigation and how to administer its

[[Page 62074]]

disciplinary program, respectively. A SEF would be better able to 
prioritize its completion of investigations and disciplinary cases that 
have a greater impact on the SEF's markets, its market participants, 
and the public. These benefits may be reduced if SEFs excessively delay 
investigations or do not prioritize appropriately. Furthermore, 
proposed Sec.  37.204(b) should permit a SEF's RSP to make substantive 
decisions, which would allow an RSP to take action more promptly to 
protect the SEF's markets, market participants, and the public against 
misconduct, with a reduced risk of delay that could be incurred if the 
SEF was required to take action. There may be a risk of erroneous 
decisions or inappropriate delays by the RSP, however. By shifting 
existing Sec.  37.205(c)'s focus from audit trail enforcement to audit 
trail reconstruction, proposed Sec.  37.205(c) should enable a SEF to 
better detect inaccurate or incomplete audit trail data that could 
potentially impair the SEF's ability to conduct effective surveillance. 
As a whole, the Commission believes that the requirements as amended 
should continue to allow a SEF to better protect its markets, market 
participants, and the public by providing it with greater discretion to 
carry out these self-regulatory responsibilities.
    The proposed changes to the existing audit trail requirements may 
reduce the scope of information that would be captured in a SEF's audit 
trail, but the Commission believes that these changes are not likely to 
materially affect the protection of market participants and the public. 
For example, the Commission proposes to eliminate the requirement that 
a SEF capture post-execution allocation information. The Commission 
notes that this information has generally not been captured because 
SEFs have operated under no-action relief, which was provided by 
Commission staff due to the general inability of SEFs to access this 
information. Thus, elimination of the requirement should not have a 
material effect.
    The Commission believes that certain proposed amendments to current 
requirements reflect existing market realities, which preclude SEFs 
from complying with some of these requirements. In particular, the 
proposal would (i) move the requirement that audit trail data be 
sufficient to reconstruct indications of interest, requests for quotes, 
orders and trades, to the guidance to Core Principle 2 in Appendix B; 
and (ii) eliminate the requirement under existing Sec.  37.205(b)(2) 
that a SEF's electronic history database include all indications of 
interest, requests for quotes, orders, and trades entered into a SEF's 
trading system or platform. Further, the proposed regulations would no 
longer require a SEF that offers a voice-based trading system or 
platform to maintain regular voice audit trail surveillance programs to 
reconstruct and review voice trades for possible trading violations. 
Notwithstanding the regulatory requirements in this area, the 
Commission emphasizes that SEF Core Principle 2 and its requirements 
remain and a SEF must still capture all audit trail data related to 
each of its offered execution methods that is necessary to reconstruct 
all trading on its facility, detect and investigate customer and market 
abuses, and take disciplinary action.
    Fourth, the proposed requirements should protect market 
participants by promoting the integrity of the transactions executed on 
the SEF. For example, proposed Sec.  37.203(e)--which would require a 
SEF to adopt policies to address and resolve error trades on its 
facility--should help to ensure that SEFs promptly address error trades 
to facilitate fair and equitable treatment between market participants 
on the SEF. To the extent that market participants better understand 
how a SEF addresses error trades and its approach for resolving such 
errors, these market participants should have more confidence in 
transacting on the SEF. Furthermore, the proposal should lead to SEFs 
adopting more consistent approaches to addressing trading errors, which 
should better protect market participants from basing their trading on 
erroneous information provided in market data feeds. Additionally, the 
proposal should lead to market participants receiving more effective 
notice of potential and resolved errors, which should minimize the 
market harm from price misinformation, which can lead to price 
distortion and inefficiency in the market, and indirectly impact the 
public. The extent of these improvements may depend on the quality of 
error trade policies adopted by SEFs and the effectiveness of their 
implementation.
    Fifth, the proposed requirements should continue to promote the 
legal certainty of transactions executed on the SEF. Proposed Sec.  
37.6(b)(1)(ii), which would require a SEF to provide the counterparties 
to an uncleared swap transaction with a ``trade evidence record'' that 
memorializes the terms of the swap transaction agreed upon between the 
counterparties on the SEF, specifies that such documentation must be 
legally binding and memorialize the terms of the transaction. The 
Commission notes that this approach differs from the existing no-action 
relief provided by Commission staff, under which SEFs have incorporated 
terms by reference in a confirmation for an uncleared swap that have 
been previously established via privately-negotiated underlying 
agreements. While the proposed requirement would limit the scope of 
terms and conditions that must be included in SEF-issued documentation 
for uncleared swaps, the Commission believes that this approach is not 
likely to diminish the protection of market participants. The trade 
evidence record would continue to serve as evidence of a legally-
binding swap transaction between the counterparties, who would still 
have the ability to supplement the record with additional terms that 
they had already previously agreed upon.
    The protection of market participants and the public may be 
adversely affected to the extent that risks noted in the discussion of 
the costs of the proposed amendments occur. For example, increased 
flexibility in the implementation of compliance programs may lead to a 
reduction of their effectiveness in some circumstances.
(2) Efficiency, Competitiveness, and Financial Integrity of Markets
    The Commission believes that the proposed amendments to the SEF 
requirements listed above should further promote efficiency, 
competitiveness, and financial integrity of the swaps markets.
    Requiring a SEF to adopt error trade policies under proposed Sec.  
37.203(e) should also promote efficiency and financial integrity on a 
SEF's markets. Although many SEFs currently maintain error trade 
policies as noted, the proposed rule should help to establish a more 
consistent and transparent approach to addressing and resolving error 
trades that should benefit market participants, including those that 
may rely on trading data derived from the SEF's trading activity. 
Accordingly, requiring SEFs to provide notification of potential errors 
and a pending review should mitigate the potential for subsequent 
trading based on an erroneous transaction that could create market 
distortions interfering with efficient and competitive markets. The 
requirement should encourage efficiency by minimizing the risk that the 
SEF's pricing information does not reflect existing market conditions, 
thereby increasing market participants' confidence to participate on 
the SEF's facility. The extent of these improvements may depend on the

[[Page 62075]]

quality of error trade policies adopted by SEFs, and the effectiveness 
of their implementation.
    The proposed amendments under Core Principle 2 would generally 
allow a SEF greater discretion to tailor its compliance program to 
identify and address rule violations among its markets and market 
participants. The Commission believes that proposed Sec.  37.203(f) and 
Sec.  37.206 may improve a SEF's operational efficiency, and thereby 
the efficiency and integrity of its markets, by allowing a SEF to 
determine how to complete an investigation and take disciplinary action 
to address misconduct more efficiently. Further, proposed Sec.  
37.204(b), which would allow a SEF's RSP more leeway to make 
substantive decisions related to a SEF's compliance program, should 
also improve the efficiency and integrity of a SEF's operations by 
allowing the RSP to take action with less delay once it identifies 
misconduct among market participants. These efficiency gains may be 
reduced by inappropriate decisions made by RSPs. Additionally, the 
Commission believes that the audit trail reconstruction requirement 
under proposed Sec.  37.205(c) should improve a SEF's ability to detect 
potential rule violations, and may thereby enhance the overall 
integrity of its markets.
    The requirements in proposed Sec. Sec.  37.201(c)(2)-(3) should 
enhance efficiency, competitiveness, and financial integrity of swap 
markets by helping to ensure that SEF trading specialists, who are 
responsible for facilitating orderly, efficient, and fair trading on 
SEFs, have better fitness and proficiency to do so. The requirements 
pertaining to ethics training and SEF standards of conduct in proposed 
Sec. Sec.  37.201(c)(4)-(5) should better ensure that SEF trading 
specialists are more aware of applicable regulatory obligations and SEF 
rules aimed at maintaining efficiency, competiveness, and market 
integrity. These gains may not be as extensive if the costs of meeting 
these standards reduce the number of SEF trading specialists. The 
proposed supervision requirement under Sec.  37.201(c)(6) should 
increase compliance by SEF trading specialists with its obligations.
    The Commission believes that related amendments proposed under Core 
Principle 15 should also promote efficiency and integrity of a SEF's 
market by allowing a more streamlined compliance approach that does not 
require the board of directors to assume primary oversight 
responsibility for the CCO. This proposed approach should in many 
circumstances permit the CCO to more efficiently make changes to the 
regulatory program in response to potential trading violations, which 
should aid in protecting the financial integrity of the market. 
Furthermore, the proposal's focus of the CCO's duties on reasonably 
designed procedures to address noncompliance issues and material 
conflicts of interest should improve the CCO's efficiency by specifying 
that this is the appropriate standard. This increased efficiency should 
permit CCOs to better allocate resources to focus on detecting and 
deterring material rule violations, which otherwise may harm the 
market's efficiency, competitiveness, and integrity.
(3) Price Discovery
    The Commission believes that the proposed amendments related to 
compliance and self-regulatory responsibilities should protect the 
price discovery functions provided by a SEF's trading system or 
platform. For example, the proposed amendments under Core Principle 2, 
which the Commission believes would allow a SEF to develop the most 
efficient approach to identify and address rule violations based on its 
markets and market participants, should help to facilitate orderly 
trading and promote integrity in the market. Price discovery may be 
impaired, however, if SEFs are less successful in addressing rule 
violations or have difficulty in maintaining orderly trading under the 
framework of the proposed rules. By promoting market integrity and 
orderly trading--particularly through identifying and resolving abusive 
trading practices in an efficient manner--the Commission believes that 
a SEF's trading system or platform should be able to serve as a more 
robust mechanism for price discovery.
    To the extent that SEF trading specialists facilitate the trading 
of swaps transactions, they may be active participants in the price 
discovery process. The proposed fitness, proficiency, and ethics rules 
would help ensure that SEF trading specialists perform these tasks 
ethically and competently, which should contribute to the smooth 
functioning of the price discovery process.
    The Commission believes that requiring SEFs to adopt and maintain a 
formal error trade policy under proposed Sec.  37.203(e) should 
similarly promote the SEF's ability to facilitate price discovery. The 
error trade policy should protect the price discovery process on the 
SEF's facility, and promote confidence in the prices market 
participants use to hedge risk. This may depend on the quality of the 
policy and the effectiveness of its implementation. If a SEF does not 
promptly address an error trade, market participants may mistakenly 
rely on inaccurate pricing information.
(4) Sound Risk Management Practices
    The Commission believes that the proposed amendments related to 
compliance and self-regulatory responsibilities should promote sound 
risk management practices. The gains in this regard may depend on the 
quality and effective implementation of the policies and practices that 
SEFs would adopt under the proposed amendments.
    The Commission notes that proposed Sec.  37.203(e) is intended to 
encourage SEFs to implement and maintain error trade policies that 
reduce operational risks for market participants, and are therefore 
sound risk management policies. This proposed rule should reduce the 
harm to a market participant when it enters into an error trade, and 
reduce harm to the market generally by decreasing the risk of reliance 
on pricing information from an error trade.
(5) Other Public Interest Considerations
    The Commission has not identified any effects of the proposed rules 
identified above on other public interest considerations.
Request for Comment
    The Commission requests comment on all aspects of the consideration 
of the costs and benefits of the provisions related to Compliance and 
SRO Responsibilities.
6. Design and Monitoring of Swaps
a. Overview
(1) Swaps Not Readily Susceptible to Manipulation
    The Commission proposes to revise the guidance relating to how a 
SEF should demonstrate that a new swap contract is not readily 
susceptible to manipulation under Sec.  37.301. The Commission proposes 
to adopt rules that would create an Appendix C to part 37 (and update 
the cross reference under Sec.  37.301) and make conforming changes to 
the guidance found in Appendix B. The proposed revision to the guidance 
to Core Principle 3 in Appendix B would eliminate the explanatory 
guidance, which the Commission is proposing to address in the proposed 
guidance to Appendix C to part 37 and replace the existing Appendix B 
guidance's cross reference to sections of Appendix C to part 38 with a 
general reference to Appendix C to part 37. The guidance in Appendix C 
to part 38 partly focuses on futures

[[Page 62076]]

products, which is not applicable in part 37. The proposed guidance is 
intended to clarify a SEF's obligations pursuant to Core Principle 3, 
and specifically addresses only swap contracts.
(2) Monitoring of Trading and Trade Processing
    The proposed changes to the regulations implementing Core Principle 
4 are intended to establish more practical trade monitoring 
requirements. First, the Commission proposes to amend existing Sec.  
37.401(c) \1029\ to require that a SEF conduct real-time market 
monitoring of ``trading activity'' only on its own facility and in 
order to identify disorderly trading, any market or system anomalies, 
and instances or threats of manipulation, price distortion, and 
disruption. Second, the Commission proposes to amend existing Sec.  
37.401(a) \1030\ to specify that a SEF has discretion to determine when 
(in place of the current requirement that it do so on an ``ongoing 
basis'') to collect and evaluate market participant's trading activity 
beyond its market, i.e., as necessary to detect and prevent 
manipulation, price distortion, and, where possible, disruptions of the 
physical-delivery or cash-settlement processes. Third, the Commission 
proposes to eliminate the Sec.  37.403(a) requirement that SEFs monitor 
the ``pricing'' of the reference price used to determine cash flows or 
settlement. Fourth, with regards to the Sec.  37.404(b) requirement 
that a SEF require its market participants to keep records of their 
trading, the Commission proposes to eliminate the current information 
maintenance and collection exemption that permits SEFs to limit the 
application of the requirement for market participants to keep and 
provide records of their activity to only those market participants 
that conduct ``substantial'' trading on the SEF as set forth in the 
guidance to Core Principle 4 in Appendix B. Fifth, the Commission 
proposes to amend Sec.  37.405 to state that a SEF must have risk 
control mechanisms to prevent and reduce market disruptions as well as 
price distortions only on its own facility, rather than on and off 
facility.
---------------------------------------------------------------------------

    \1029\ This requirement is in proposed Sec.  37.401(a).
    \1030\ This requirement is in proposed Sec.  37.401(b).
---------------------------------------------------------------------------

    In addition to these substantive changes, the Commission proposes a 
number of clarifying and streamlining changes that would not result in 
any new costs or benefits and are not discussed below. The Commission 
proposes to partially incorporate existing Sec.  37.203(e), which 
requires that a SEF conduct real-time market monitoring, into Sec.  
37.401(a),\1031\ and to consolidate the trade reconstruction 
requirements under Sec.  37.401(d) and Sec.  37.406 into proposed Sec.  
37.401(d). The Commission proposes clarifying amendments to Sec.  
37.402 and Sec.  37.403, regarding SEF monitoring obligations with 
respect to physical-delivery and cash-settled swaps, which would not 
impose new obligations.
---------------------------------------------------------------------------

    \1031\ The Commission notes that existing Sec.  37.203(e) 
specifies that a SEF must conduct real-time market monitoring of all 
trading activity on its system(s) or platform(s) to identify 
``disorderly trading and any market or system anomalies.'' As 
discussed above, the Commission is proposing to eliminate this 
provision and establish these requirements under Sec.  37.401(a) to 
streamline the existing regulations.
---------------------------------------------------------------------------

b. Benefits
(1) Swaps Not Readily Susceptible to Manipulation
    The Commission believes that SEFs should benefit from the swap 
focused discussion in proposed Appendix C to part 37. Similar to 
Appendix C to part 38, the guidance outlined in proposed Appendix C to 
part 37 would set forth information that should be provided to the 
Commission for new products and rule amendments under Sec.  37.301, 
based on best practices developed over the past three decades by the 
Commission and other regulators. This guidance should provide greater 
efficiency for SEFs so that they do not have to try to apply to swaps 
products the futures-related provisions in Appendix C to part 38. The 
guidance would also likely reduce the time and costs that SEFs would 
incur in providing the appropriate information and should mitigate the 
need for extensive follow-up discussions with the Commission. In 
addition, it should reduce the amount of time it takes Commission staff 
to analyze whether a new product or rule amendment is in compliance 
with the CEA.
    Furthermore, the proposed Appendix C to part 37 should not diminish 
the current benefits from the implementing regulations for Core 
Principle 3. The proposed Appendix C to part 37 should continue to aid 
SEFs to list contracts that are not readily susceptible to manipulation 
and should contribute to integrity and stability of the marketplace by 
giving traders more confidence that the prices associated with swaps 
reflect the true supply of and demand for the underlying commodities or 
financial instruments.
(2) Monitoring of Trading and Trade Processing
    The Commission acknowledges that trading abuses may take place 
across trading platforms and markets. However, the Commission 
understands that the requirement that a SEF monitor the trading 
activity of its market participants, whether or not the activity occurs 
on the SEF's own platform, has in practice been highly costly and 
burdensome, and in some instances these costs and burdens effectively 
preclude compliance. Moreover, requiring every SEF to monitor trading 
on every other regulated trading facility is redundant and therefore 
provides little incremental benefit.
    The Commission believes that the proposed regulations should 
substantially reduce these very high monitoring costs for SEFs with 
relatively little impact on the benefits of the regulation, as 
discussed above. Under the proposed regulations, a SEF would not have 
to monitor trading activity in real-time beyond its facility or the 
pricing of reference prices for cash-settled swaps, and would not have 
to collect and evaluate its market participants trading activity on an 
ongoing basis--only as needed to detect and prevent abusive trading 
practices. Accordingly, this should save SEF resources.
    Proposed Sec.  37.401(a) and, for cash-settled swaps, the removal 
of existing Sec.  37.403(a),\1032\ would limit certain monitoring 
obligations to a SEF's facility, and should significantly reduce the 
hours that a SEF's employees and officers must spend reviewing both the 
SEF's market participants' trading activity off of its facility and 
also market data (including the pricing information as required under 
Sec.  37.403(a)) from other exchanges, index providers, and over-the-
counter (``OTC'') trading. SEFs would not have to pay third party 
exchanges and providers for this market data and trading information 
because a SEF would no longer have to monitor trading beyond its 
facility (although it would still have to collect and evaluate market 
participant's trading data as needed per Sec.  37.401(b)). As a 
practical matter, SEFs would also not have to establish and implement 
protocols to reformat third party data for import and use with the 
SEF's internal systems. While existing SEFs have already incurred cost 
to establish protocols to import third party data, there would be

[[Page 62077]]

some savings for new SEFs because they would not have to develop 
protocols.
---------------------------------------------------------------------------

    \1032\ The Commission notes that the proposed elimination of 
Sec.  37.403(a) only creates a cost savings for a SEF's monitoring 
of cash-settled swap products.
---------------------------------------------------------------------------

    Furthermore, SEFs generally would no longer have to implement or 
maintain these protocols to import third party data. Consistent with 
these changes, proposed Sec.  37.405 would require a SEF to maintain 
risk control mechanisms to prevent and reduce the potential risk of 
price distortions and market disruptions on its facility. A SEF would 
no longer have to incur costs to monitor other trading facilities and 
OTC trading for purposes of its risk controls. As noted above, since 
these other trading facilities also have risk control mechanisms, the 
benefits of requiring SEFs to monitor other trading facilities may be 
incremental.
    Additionally, under proposed Sec.  37.401(b), a SEF would only be 
required to collect and evaluate data on its market participant's 
activity that occurs away from the SEF to the extent that doing so is 
necessary to detect and prevent abusive trading practices. The cost for 
SEFs to collect market data should decrease because SEFs would no 
longer collect information on an ongoing basis. To the extent that SEFs 
were requesting that market participants provide trading data, market 
participants should also incur fewer costs. Furthermore, SEFs would no 
longer have to obtain trading data from third parties since all market 
participants would be required to provide trading data upon request 
under Sec.  37.404(b), including those market participants that a SEF 
currently may not require to provide trading activity information to 
the SEF.\1033\ These market participants that currently do not collect 
or provide trading data would incur some additional costs to provide 
such information. Overall, SEFs should be required to spend less money 
importing and analyzing its market participants' off-SEF trading, and 
market participants should incur less cost in exporting this data.
---------------------------------------------------------------------------

    \1033\ Section 37.404(b) and the associated guidance to Core 
Principle 4 in Appendix B permits a SEF to limit the application of 
the requirement for market participants to keep and provide records 
of their activity in the index or instrument used as a reference 
price, the underlying commodity, and related derivatives markets, to 
only those market participants that conduct substantial trading on 
its facility. 17 CFR part 37 app. B.
---------------------------------------------------------------------------

    Consistent with these changes, proposed Sec.  37.405 would require 
a SEF to maintain risk control mechanisms to prevent and reduce the 
potential risk of price distortions and market disruptions only on its 
facility. A SEF would no longer have to monitor or coordinate its risk 
controls with other SEFs and activity on the OTC market.
    Notwithstanding these potential savings due to proposed Sec. Sec.  
37.401(a)-(b), Sec.  37.405, and removal of existing Sec.  37.403(a), 
the Commission understands that most SEFs have (in light of the 
infeasibility of compliance as discussed above) interpreted the 
existing regulations to be less demanding than as described in the 
preamble to the part 37 SEF final rule, and, in practice, have 
implemented monitoring programs and risk controls that primarily focus 
on their respective facility. These SEFs may not realize a meaningful 
reduction in costs because they already have implemented many of these 
more limited monitoring programs and risk controls.
c. Costs
(1) Swaps Not Readily Susceptible to Manipulation
    Compliance with the guidance in proposed Appendix C to part 37 
should not impose any additional costs on SEFs or the market generally. 
SEFs submitting products for the Commission's certification under Sec.  
37.301 could incur some costs applying the guidance if the proposed 
Appendix C to part 37 prompted a SEF to increase the information that 
it provided when submitting a new swap product. However, the requested 
information set forth in proposed Appendix C to part 37 is intended to 
reflect the Commission's prior expectations. For example, the proposed 
Appendix C to part 37 includes a specific section for options on swap 
contracts that Appendix C to part 38 does not address. This newly 
created section is intended to be consistent with previous Commission 
expectations regarding contract design and transparency of option 
contract terms. The Commission currently requires that a SEF's product 
submission specify in an objective manner the following material 
option-specific terms of a swap (in addition to appropriately designing 
and sufficiently specifying the underlying swap's terms): (i) Exercise 
method; (ii) exercise procedure; (iii) strike price provisions; (iv) 
automatic exercise provisions; (v) contract size; (vi) option 
expiration and last trading day; and (vii) option type and trading 
convention. SEFs have provided these option-specific terms in their 
submissions for options on swap contracts. The Commission does not 
expect SEFs to incur any additional costs because of the guidance.
(2) Monitoring of Trading and Trade Processing
    The proposed changes to the implementing regulations under Core 
Principle 4 could increase the chance that a SEF does not promptly 
identify abusive trading practices that occur away from its facility, 
but this risk is mitigated because every transaction occurring on a 
regulated platform such as a SEF or DCM would still be subject to 
monitoring. The narrowing of a SEF's monitoring obligations under Sec.  
37.401(a) may potentially cause the SEF to not identify an abusive 
trading practice occurring on another exchange or OTC market, possibly 
in coordination with trading on the SEF's facility.
    As a mitigating factor, the Commission believes that a SEF should 
benefit from its monitoring staff focusing more on trading activity on 
its facilities and the SEF's obligation to collect and evaluate its 
market participants' trading activity off of the SEF. This refocusing 
of the monitoring staff's attention should better enable a SEF to more 
quickly identify and address abusive trading practices on its facility.
    The removal of SEFs' monitoring obligations under Sec.  37.403(a) 
may potentially cause a SEF to not identify an abusive trading practice 
occurring on a cash-settled swap's underlier, possibly in coordination 
with trading of the cash-settled swap on the SEF's facility. In 
practice, the Commission believes that the additional risk of a SEF 
failing to promptly identify abusive trading due to this proposed 
regulation is minimal because SEFs typically cannot access third 
parties' price-forming information, and SEFs would be challenged to 
analyze this third party information for abusive activities. 
Consequently, the Commission does not anticipate that removing this 
requirement will materially impact SEFs current monitoring practices or 
effectiveness.\1034\
---------------------------------------------------------------------------

    \1034\ The Commission notes that SEFs would continue to be 
obligated to monitor the continued appropriateness of the index or 
instrument and take appropriate actions where there is a threat of 
manipulation, price distortion, or market disruption pursuant to 
proposed Sec.  37.403(b).
---------------------------------------------------------------------------

    The reduction in trading information that SEFs have to analyze 
under proposed Sec.  37.401(b) could limit a SEF's ability to identify 
an abusive trading practice occurring on another SEF or a DCM or OTC, 
possibly in coordination with trading on the SEF's facility. However, 
the Commission believes that under the proposed regulation, SEFs would 
still have the means to collect market participants' trading 
information and, in unusual situations when a SEF would benefit from 
additional information to identify abusive trading practices, the SEF 
would be able to request this information. Moreover, the

[[Page 62078]]

other SEFs and DCMs would be required to monitor for abusive practices 
on their own facilities. Thus, requiring SEFs to monitor trading on 
other regulated trading facilities is redundant. The Commission 
believes that SEFs would be more efficient and effective if they were 
required only to ask for this information when needed.
    The proposed changes to the risk control mechanisms under Sec.  
37.405 could increase the chance that abusive trading practices go 
unchecked. A SEF would no longer have to monitor or coordinate its risk 
controls with other SEFs and OTC trading, and a market participant may 
be able to attempt to engage in an abusive trading practice across 
exchanges and OTC due to this lack of coordination. The Commission 
believes that this risk is largely mitigated because every SEF and DCM 
would be required to have these mechanisms on their own facilities, and 
therefore the incremental detriment from removing this requirement 
should be minimal. The Commission believes that potential costs 
resulting from removing the requirement that SEFs monitor or have risk 
controls related to the OTC market are unlikely to be significant, 
since such monitoring and risk controls are not practicable. The OTC 
market is not required by the CEA or the Commission's regulations to 
have risk controls and it is not clear that risk controls in the OTC 
market are feasible. The Commission notes that in light of the 
Commission's proposed interpretation of the trade execution 
requirement, more swaps are likely to be traded on-SEF and thus subject 
to monitoring and risk controls. Moreover, SEFs would continue to have 
the ability to investigate and address abusive trading practices that 
are implemented across multiple trading facilities, and to request 
information on a market participant's trading activity.
d. Section 15(a) Factors
(1) Protection of Market Participants and the Public
    The proposed guidance in Appendix C to part 37 and the monitoring 
requirements in proposed Sec. Sec.  37.401-403 should not materially 
diminish a SEF's ability to protect market participants and the public. 
The proposed guidance in Appendix C to part 37 and the proposed 
amendments to Sec. Sec.  37.402-403 are intended to provide additional 
clarity for SEFs to help ensure that a contract is not readily 
susceptible to manipulation, and to help ensure that SEFs are able to 
adequately collect information on market activity, including special 
considerations for physical-delivery contracts and cash-settled 
contracts. Proposed Sec. Sec.  37.402-403 would require SEFs to take 
specific actions to address threats of manipulation, price distortion, 
or market disruption, and proposed Sec.  37.405 would continue to 
require risk controls to prevent and reduce the potential risk of price 
distortions and market disruptions on the SEF.
    The Commission does not believe that narrowing a SEF's monitoring 
obligation under proposed Sec.  37.401(a) to trading activity on its 
facility, requiring a SEF to collect market participants' off facility 
trading information only when necessary to detect abusive trading 
activity per proposed Sec.  37.401(b), eliminating the SEF's monitoring 
of the price formation information for underlying indexes currently set 
forth under Sec.  37.403(a), or altering the risk control mechanisms 
under Sec.  37.405 would meaningfully increase the risk that abusive 
trading practices go undetected. While there is a risk that abusive 
trading can lead to market disruptions and create distorted prices or 
systemic risks that could harm the economy and the public, the SEF's 
requirement to monitor its facility per Sec.  37.401(a) and to collect 
additional trading information from market participants as necessary 
per Sec.  37.401(b) should mitigate this risk. As a group, these rules 
should continue to protect market participants by helping to prevent 
price manipulation and trading abuses, as the proposed rules are 
designed to protect the public by creating an environment that fosters 
prices that reflect actual market conditions.
(2) Efficiency, Competitiveness, and Financial Integrity of the Markets
    The proposed guidance in Appendix C to part 37 is intended to 
provide more tailored guidance, based on best practices for swaps, 
regarding what a SEF should consider when developing a swap or amending 
the terms and conditions of an existing swap. This tailored guidance 
should help the contracts listed by SEFs, as a whole, to be more 
reflective of the underlying cash market, thus providing for more 
efficient hedging of commercial risk.
    Furthermore, proposed Sec. Sec.  37.401-403 should require SEFs to 
continue to detect and promptly address violations and market 
anomalies, and ensure that prohibited activities do not distort the 
swap market's prices. Therefore, the proposed modifications to SEF 
monitoring requirements should not materially diminish market 
confidence or reduce the market's ability to operate efficiently. 
Additionally, proposed Sec.  37.405 should continue to deter rule 
violations by establishing conditions under which trading is paused or 
halted.
(3) Price Discovery
    The Commission does not believe that the proposed rules would 
materially diminish a SEF's ability to implement an effective 
monitoring system of its facility to detect rule violations. 
Manipulation or other market disruptions interfere with the price 
discovery process by artificially distorting prices and preventing 
those prices from properly reflecting the fundamental forces of supply 
and demand. Although there is some risk, as discussed above, that 
modifications to the SEF's monitoring obligations may cause a SEF to 
not identify price manipulation, the Commission believes this risk is 
not material. These rules would continue to require that SEFs detect, 
and where possible prevent, such market mispricing, and detect 
disconnects between swaps and their related market prices, e.g., 
between cash market prices and the prices of related futures and swaps. 
These rules should continue to promote confidence in the SEF's price 
discovery process and market participants' use of swaps to hedge risk.
(4) Sound Risk Management Practices
    By following the best practices outlined in the proposed guidance 
in Appendix C to part 37 and the requirements of proposed Sec. Sec.  
37.402-403, a SEF should be able to minimize the susceptibility of a 
swap to manipulation or price distortion at the time it is developing 
the contract's terms and conditions. Performing this work early on 
should enable a SEF to minimize risks to its clearinghouse and to 
market participants. Sound risk management practices rely upon 
execution of hedge strategies at market prices that are free of 
manipulation or other disruptions. These rules are designed to 
facilitate hedging at prices free of distortions that may be 
preventable by adequate controls.
    Furthermore, proposed Sec. Sec.  37.401-403 should continue to aid 
SEFs in deterring, detecting, and addressing operational risks posed by 
abusive trading practices or trading activities. These proposed rules 
are designed to limit the potential losses and costs to SEFs and market 
participants and promote sound risk management practices.
(5) Other Public Interest Considerations
    The Commission has not identified any effects that these rules will 
have on

[[Page 62079]]

other public interest considerations other than those enumerated above.
Request for Comment
    The Commission requests comment on all aspects of the consideration 
of the costs and benefits of the provisions related to the Design and 
Monitoring of Swaps.
7. Financial Integrity of Transactions
a. Overview
    In order to promote financial integrity of transactions, the 
Commission is proposing changes with respect to certain straight-
through processing obligations under Core Principle 7 for SEFs and its 
implementing regulations and under Sec.  39.12(b)(7) for derivatives 
clearing organizations (``DCO''). The Commission will discuss these 
changes together in this section since these provisions interact to 
form the basis of the Commission's straight-through processing 
obligations for SEFs and DCOs.\1035\
---------------------------------------------------------------------------

    \1035\ For example, the Commission promulgated Sec.  37.702(b) 
and Sec.  39.12(b)(7) along with other Commission regulations 
related to straight-through processing in the same Commission 
rulemaking. See Customer Clearing Documentation, Timing of 
Acceptance for Clearing, and Clearing Member Risk Management, 77 FR 
21278 (Apr. 9, 2012) (``Timing of Acceptance for Clearing Final 
Rule'').
---------------------------------------------------------------------------

    Proposed Sec.  37.701 would require a SEF to have an independent 
clearing agreement with each registered DCO or exempt DCO to which the 
SEF routes swaps for clearing, including in those instances where a 
SEF, pursuant to a service agreement with a third-party service 
provider, routes swaps through the SEF's third-party service provider 
to a DCO that maintains its own agreement with the third-party service 
provider, but not with the SEF.
    Proposed Sec.  37.702(b)(1) would require SEFs to coordinate with 
registered DCOs to develop rules and procedures that facilitate the 
``prompt, efficient, and accurate'' processing and routing of swap 
transactions in accordance with Sec.  39.12(b)(7)(i)(A).\1036\ The 
Commission proposes to explicitly interpret the ``prompt, efficient, 
and accurate'' standard to establish a qualitative approach for swaps 
subject to manual post-execution affirmation to be routed to and 
received by the relevant DCO via a third-party affirmation hub that 
would account for existing market practices and technology, as well as 
current market conditions at the time of execution. The Commission 
notes that this proposed interpretation is in contrast to the 
Divisions' view discussed in the 2013 Staff STP Guidance, in which the 
Divisions interpreted the ``prompt and efficient'' standard in existing 
Sec.  37.702(b)(2) to mean that swaps subject to manual post-execution 
affirmation via a third-party affirmation hub should be routed to and 
received by the relevant DCO in no more than ten minutes after 
execution.\1037\
---------------------------------------------------------------------------

    \1036\ See Section XII.B.--Sec.  37.702--General Financial 
Integrity. The proposal would renumber Sec.  37.702(b)(2) to Sec.  
37.702(b)(1), delete existing Sec.  37.702(b)(1), and amend the 
``prompt and efficient'' standard to ``prompt, efficient, and 
accurate'' (emphasis added).
    \1037\ The Commission understands that several aspects of 
straight-through processing requirements are rendered through the 
2013 Staff STP Guidance and the 2015 Staff Supplementary Letter. The 
Commission also understands that certain aspects of the guidance may 
be unclear when read in conjunction with existing regulations. 
Therefore, the Commission seeks to provide greater clarity and 
certainty under the proposed framework with respect to the straight-
through processing requirements for SEFs and DCOs through the 
proposed clarifications and amendments described herein.
---------------------------------------------------------------------------

    Proposed Sec. Sec.  37.702(b)(2)-(3), respectively, would mandate 
that SEFs (i) require their market participants to identify a clearing 
member in advance for each counterparty on an order-by-order basis and 
(ii) facilitate pre-execution screening by each clearing FCM in 
accordance with the requirements of Sec.  1.73 on an order-by-order 
basis. The Commission notes that this is consistent with the Divisions' 
view in the 2013 Staff STP Guidance that such requirements are 
corollary to a SEF's obligation to facilitate ``prompt and efficient'' 
transaction processing.\1038\ Further, the Commission notes that pre-
execution credit screening has become a fundamental component of the 
swaps clearing infrastructure as SEFs that list Required Transactions 
\1039\ for trading or offer clearing for Permitted Transactions \1040\ 
generally have already established these functionalities, at least in 
part, to comply with the Commission's regulations, to be consistent 
with the Divisions' views expressed in the 2013 Staff STP Guidance, or 
to adhere to existing industry practices.\1041\
---------------------------------------------------------------------------

    \1038\ See 2013 Staff STP Guidance at 3. The Commission further 
notes that it stated in the Timing of Acceptance for Clearing Final 
Rule, that the ``parties would need to have clearing arrangement in 
place with clearing members in advance of execution'' and that 
``[i]n cases where more than once DCO offered clearing services, the 
parties also would need to specify in advance where the trade should 
be sent for clearing.'' Timing of Acceptance for Clearing Final Rule 
at 21284.
    \1039\ 17 CFR 37.9(a)(1) (defining a Required Transaction as any 
transaction involving a swap that is subject to the trade execution 
requirement in section 2(h)(8) of the Act).
    \1040\ 17 CFR 37.9(c) (defining a Permitted Transaction as any 
transaction not involving a swap that is subject to the trade 
execution requirement in section 2(h)(8) of the Act).
    \1041\ In the 2013 Staff STP Guidance, the Divisions believed 
that pre-trade credit checks would make rejection from clearing for 
credit reasons a rare event. See 2013 Staff STP Guidance at 5. The 
Commission notes that the proposed amendments to Sec.  37.702(b) are 
generally consistent with the Divisions' views articulated in the 
2013 Staff STP Guidance.
---------------------------------------------------------------------------

    The Commission proposes to streamline the applicable straight-
through processing provisions for registered DCOs by consolidating the 
existing requirements under Sec. Sec.  39.12(b)(7)(ii)-(iii) into 
proposed Sec.  39.12(b)(7)(ii) and would delete existing Sec.  
39.12(b)(7)(iii). Specifically, proposed Sec.  39.12(b)(7)(ii) would 
establish a single AQATP standard that applies to all ``agreements, 
contracts, and transactions'' (emphasis added) regardless of whether a 
trade is (1) executed competitively or noncompetitively; (2) executed 
on, off, or pursuant to the rules of a DCM; \1042\ or (3) a swap, 
futures contract, or option on a futures contract; and (4) would apply 
after submission to the DCO (i.e., once the transaction is received by 
the DCO) rather than after execution in all circumstances.
---------------------------------------------------------------------------

    \1042\ The Commission notes that it is proposing to eliminate 
the ``pursuant to the rules'' language, given the change to the 
block trade definition. See supra Section XXII.A.--Sec.  43.2--
Definition--Block Trade; Sec.  37.203(a)--Elimination of Block Trade 
Exception to Pre-Arranged Trading.
---------------------------------------------------------------------------

    In contrast, existing Sec. Sec.  39.12(b)(7)(ii)-(iii) establish 
different standards that apply based on a transaction's 
characteristics. Existing Sec.  39.12(b)(7)(ii) applies to (i) any 
contract, including futures, options on futures, and swaps, that is 
(ii) executed competitively, (iii) on or subject to the rules of a SEF 
or DCM, and (iv) the AQATP period applies after the trade's execution 
on the SEF or DCM (emphasis added). Existing Sec.  39.12(b)(7)(iii) 
applies to any (i) swap (but not other products) that either is (ii) 
executed noncompetitively on or subject to the rules of a SEF or DCM or 
(iii) not executed on or subject to the rules of a SEF or DCM, and (iv) 
the AQATP period applies after submission to the DCO (emphasis added). 
Moreover, consistent with the views expressed by the Divisions in the 
2013 Staff STP Guidance, the Commission proposes that registered DCOs 
must continue to accept or reject trades within ten seconds after 
submission under proposed Sec.  39.12(b)(7)(ii)'s AQATP standard.
    The Commission would also make several non-substantive amendments. 
First, to conform the changes throughout the part 37 proposal, all 
references under Sec. Sec.  37.702-703 to

[[Page 62080]]

``member'' would be changed to ``market participant.''
    Second, existing Sec.  37.702(b)(2) requires SEFs to develop rules 
and procedures to facilitate the ``prompt and efficient transaction 
processing'' of swap transactions to the applicable DCO. To conform 
this requirement to existing Sec.  39.12(b)(7)(i)(A), which requires 
each registered DCO to coordinate with a SEF or DCM to facilitate the 
``prompt, efficient, and accurate'' processing of swaps for clearing, 
the Commission proposes to add the term ``accurate'' to the existing 
``prompt and efficient'' standard for SEFs under Sec.  
37.702(b)(2).\1043\ Proposed Sec.  37.702(b)(1) would also apply to the 
``routing'' of swap transactions; while the Commission believes that 
``processing'' as used in existing Sec.  37.702(b)(2) also encompasses 
the routing of swaps from a SEF to a DCO, the Commission proposes to 
explicitly include ``routing'' in the regulatory text for avoidance of 
doubt.\1044\ As a result, existing Sec.  37.702(b)(1), which required a 
SEF to have the ``capacity to route transactions'' to a DCO, would be 
deleted as unnecessary due to new proposed Sec.  37.702(b)(1). As a 
conforming change to proposed Sec.  37.702(b)(1), the Commission also 
proposes to add the term ``routing'' to Sec.  39.12(b)(7)(i)(A). The 
Commission also proposes to specify under Sec.  37.702(b)(1) that a 
SEF's obligation to coordinate with DCOs should be in accordance with 
DCOs' obligations under existing Sec.  39.12(b)(7)(i)(A).\1045\
---------------------------------------------------------------------------

    \1043\ The Commission proposes to renumber Sec.  37.702(b)(2) to 
Sec.  37.702(b)(1).
    \1044\ Existing Sec.  37.702(b)(1) requires SEFs to have the 
capacity to route transactions to the DCO in a manner acceptable to 
the DCO for purposes of clearing. Since proposed Sec.  37.702(b)(3) 
would specify that SEFs must also work with DCOs to route 
transactions, existing Sec.  37.702(b)(1) would become superfluous 
and would be deleted.
    \1045\ Existing Sec.  37.702(b)(2) requires SEFs to work with 
each DCO in accordance with the requirements of Sec.  39.12(b)(7). 
The Commission's proposal would more specifically reference Sec.  
39.12(b)(7)(i)(A) (emphasis added), which establishes a 
corresponding obligation on DCOs to work with SEFs to develop rules 
to facilitate the ``prompt, efficient, and accurate processing'' of 
transactions in order to avoid any confusion with the application of 
the AQATP standard under existing Sec. Sec.  39.12(b)(7)(ii)-(iii).
---------------------------------------------------------------------------

    Third, proposed Sec.  37.702 would clarify that a SEF's obligations 
under Sec.  37.702 apply only to registered DCOs, as opposed to exempt 
DCOs.
    Fourth, proposed Sec.  37.702(b) would specify that its 
requirements apply only to those transactions routed through a SEF to a 
registered DCO for clearing. The Commission believes that this change 
is helpful to clarify that Sec.  37.702(b)'s requirements do not apply 
to those SEFs that do not facilitate the clearing of swaps executed on 
the SEF.
    Fifth, proposed Sec.  39.12(b)(7) would apply to all ``agreements, 
contracts, and transactions,'' rather than ``transactions'' as 
currently provided, in order to conform with the statutory definition 
of ``DCO'' in section 1a(15) of the Act and general scope of product 
eligibility under Sec.  39.12(b)(1) and would make conforming changes 
in proposed Sec. Sec.  39.12(b)(7)(i)-(ii).
b. Benefits
    Proposed Sec.  37.701 is intended to interact with the other 
proposed changes in Core Principle 7 and Sec.  39.12(b)(7) to 
strengthen the straight-through processing and routing of swaps from 
SEFs to DCOs, and increase market integrity. The Commission believes 
proposed Sec.  37.701(b)'s requirement that a SEF have a direct 
clearing agreement with each DCO to which the SEF submits swaps for 
clearing would improve a SEF's ability to establish rules and 
procedures that better coordinate with a DCO's clearance and settlement 
processes to foster greater financial integrity of swaps sent to the 
DCO for clearing. Such an agreement also would instill more confidence 
in the ability of swap clearing through the SEF, as under the proposal 
the SEF should have the appropriate processes to facilitate swaps 
clearing. Further, the terms established in a direct clearing agreement 
between the SEF and DCO should help the SEF and DCO resolve any 
problems that arise at the DCO that could diminish the SEF's ability to 
submit transactions for clearing.
    The Commission believes that adopting proposed Sec. Sec.  
37.702(b)(2)-(3) would strengthen the straight-through processing and 
routing of swaps from SEFs to DCOs, and increase financial integrity of 
transactions by ensuring a consistent and timely clearing process. 
Specifically, proposed Sec. Sec.  37.702(b)(2)-(3) should benefit 
transaction processing, routing, and clearing by codifying the 
straight-through processing requirement that SEFs must ensure that 
trades are efficiently routed to DCOs, reducing the time between 
execution and clearing. However, to the extent counterparties already 
comply with proposed Sec. Sec.  37.702(b)(2)-(3) as a result of 
standard industry practices or as a result of adopting the Divisions' 
view discussed in the 2013 Staff STP Guidance, these benefits may 
already have been realized.\1046\
---------------------------------------------------------------------------

    \1046\ As discussed above, in the 2013 Staff STP Guidance, the 
Divisions previously discussed their view that the straight-through 
processing requirements under Sec.  37.702(b) require SEFs to have 
pre-execution credit screening in certain instances. Id. at 3.
---------------------------------------------------------------------------

    The Commission believes that its proposed qualitative 
interpretation of the ``prompt, efficient, and accurate'' standard in 
proposed Sec.  37.702(b)(1), rather than a static bright-line standard 
such as the ten-minute standard discussed by the Divisions in the 2015 
Supplementary Staff Letter, would benefit the marketplace by 
establishing a standard that is conducive to the broader array of swaps 
that would be subject to the expanded trade execution requirement, as 
well as the additional executed methods that would be permitted under 
the Commission's proposal.
    The Commission's proposed qualitative interpretation of the 
``prompt, efficient, and accurate'' standard should also help ensure 
that SEFs have time to use third-party affirmation hubs for all swap 
trades instead of merely those trades that can be routed through the 
affirmation hub for submission to the DCO within the prescribed time 
limit. The Commission believes that permitting the use of affirmation 
hubs benefits the marketplace in certain situations by providing an 
opportunity for counterparties to identify and correct potential error 
trades prior to routing these trades to a DCO for clearing, thereby 
reducing the number of error trades.
    The Commission believes that streamlining and creating a single 
AQATP standard would benefit DCOs, SEFs, and clearing FCMs. The current 
bifurcation of the AQATP standard requires a DCO to ascertain the 
characteristics of a trade to determine whether the DCO's obligation to 
accept or reject a trade subject to AQATP begins after (1) the trade's 
execution for a trade that is executed competitively on a SEF or DCM 
(and therefore subject to Sec.  39.12(b)(7)(ii)), or (2) the trade's 
submission to the DCO for a trade that was either executed non-
competitively or on or subject to the rules of a SEF or DCM or executed 
bilaterally (and therefore subject to Sec.  39.12(b)(7)(iii)). The 
Commission's proposal to streamline the AQATP standard should simplify 
the AQATP standard for DCOs, which in turn may lead to even more 
efficient trade processing, routing, and clearing since these extra 
steps are being removed from the straight-through processing 
requirements.
c. Costs
    Proposed Sec.  37.701 would require those SEFs that do not 
currently have a direct clearing agreement with a DCO to

[[Page 62081]]

clear swaps executed on the SEF to enter into such an agreement with an 
applicable DCO. This requirement could add a marginal cost related to 
reviewing and entering into such an agreement with the SEF's DCO.
    With respect to the Commission's proposed qualitative 
interpretation of the ``prompt, efficient, and accurate'' standard in 
proposed Sec.  37.702(b)(1), the Commission believes that the proposed 
qualitative standard for swaps routed via third-party affirmation hubs 
could reduce the financial integrity of the trades facilitated by the 
SEF as compared to the alternative of establishing a bright-line static 
deadline, such as the ten-minute timeframe discussed by the Divisions 
in the 2015 Supplementary Staff Letter. As a result, a SEF could argue 
that it complies with the Commission's qualitative interpretation of 
the ``prompt, efficient, and accurate'' standard even though the swap 
could have been processed and routed more quickly if the Commission 
would have established a bright-line standard, e.g., the ten-minute 
timeframe articulated in the 2015 Supplementary Staff Letter.
    However, the Commission believes this potential cost would be 
mitigated if, as the Commission expects will occur, market and 
technological developments enable processing and routing through third-
party affirmation hubs to occur at increasingly shorter time intervals. 
The Commission also believes that there is an inherent incentive to 
confirm all trades in a timely manner, as a counterparty to the trade 
that has entered a trade in its front office system and is trading on 
that information needs to ensure that trade is accurate, otherwise, it 
may be managing its portfolio with inaccurate information. Further, the 
Commission has set forth its expectation that under its proposed 
qualitative standard, transactions that can be reasonably affirmed on a 
fully automatic basis after execution should be affirmed in that 
manner.\1047\ In such cases, the Commission believes that ``prompt, 
efficient, and accurate'' processing and routing would occur in a much 
shorter time frame, e.g., less than the ten-minute time frame discussed 
in the 2015 Supplementary Staff Letter. Accordingly, the Commission 
would continue to monitor the post-trade affirmation timeframe and 
industry developments with respect to swap processing and routing to 
require that SEFs and DCOs comply with their applicable straight-
through processing requirements.
---------------------------------------------------------------------------

    \1047\ The Commission notes that this statement is consistent 
with the views of the Divisions in the 2015 Supplementary Staff 
Letter. Id. at 3.
---------------------------------------------------------------------------

    Proposed Sec.  37.702(b)(2) would require each market participant 
to identify a clearing FCM in advance of each trade for each 
counterparty. The Commission notes that market participants must 
already identify a clearing FCM, and so does not believe that the 
proposed requirement will impose a material cost since it would specify 
only that a market participant must identify its clearing FCM before 
the trade rather than after. Similarly, proposed Sec.  37.702(b)(3) 
would require SEFs to provide pre-execution credit screening, which 
could impose a cost on some SEFs to establish a means of communicating 
with an FCM. While proposed Sec. Sec.  37.702(b)(2)-(3) could impose 
costs by requiring SEFs to update their systems to facilitate these 
requirements, the Commission believes that SEFs generally already have 
established these functionalities as established market practices. 
Moreover, existing Sec.  1.73 requires a clearing FCM to implement pre-
execution risk controls. Consequently, the Commission believes that 
most SEFs already comply with proposed Sec.  37.702(b)(3) since 
clearing FCMs otherwise would unlikely be able to comply with their 
Sec.  1.73 obligations. Accordingly, costs imposed by proposed 
Sec. Sec.  37.702(b)(2)-(3) likely have already been realized.\1048\
---------------------------------------------------------------------------

    \1048\ The Divisions' view in the 2013 Staff STP Guidance 
already stipulated that SEFs should adopt the practices that the 
Commission has proposed under Sec. Sec.  37.702(b)(2)-(3). As a 
result, to the extent that SEFs have followed the Divisions' 
interpretation in the 2013 Staff STP Guidance, such costs already 
have been realized.
---------------------------------------------------------------------------

    The Commission believes that the proposed consolidation of the 
AQATP standard would not impose any new cost on DCOs since the 
Commission is merely clarifying an AQATP standard in existing Sec.  
39.12(b)(7)(ii) to more accurately reflect when a DCO's AQATP 
obligation begins. The proposed ten-second AQATP standard could impose 
new costs by requiring DCOs to establish the ability to accept or 
reject trades for clearing within ten seconds. However, the Commission 
does not believe that the proposed interpretation of the AQATP standard 
would impose any material costs because it conforms to the industry 
standard and 99 percent of all trades are accepted or rejected from 
clearing within ten seconds or less.\1049\ The proposed ten-second 
interpretation of the AQATP standard could dis-incentivize the 
development of an even quicker industry AQATP standard, resulting in 
the opportunity cost of the development of more efficient and faster 
straight-through processing. On the other hand, the ten-second standard 
could be too prescriptive, compared to the qualitative approach the 
Commission is taking with respect to the ``prompt, efficient, and 
accurate'' standard in the context of manual affirmation hubs, and 
certain execution methods such as voice execution, that may have a 
relatively higher error rate compared to other execution methods such 
as electronic trading, could reasonably require more than ten seconds 
under the AQATP standard. This issue could be exacerbated by new or 
innovative execution methods along with potentially new and complex 
swaps that the Commission anticipates may become more common on SEFs 
and DCMs under its proposed framework and that otherwise could benefit 
from more than ten seconds under the AQATP standard.
---------------------------------------------------------------------------

    \1049\ See 2015 Supplementary Staff Letter at 5.
---------------------------------------------------------------------------

d. Section 15(a) Factors
(1) Protection of Market Participants and the Public
    The Commission's proposal on the financial integrity of 
transactions and straight-through processing obligations should benefit 
market participants and the public by helping to ensure greater 
transparency and consistency of straight-through processing, which the 
Commission expects would result in market participants and the public 
having a better understanding of the relevant market structure. In 
turn, this could enable market participants and the public to make more 
informed choices and more readily identify and understand possible 
risks. The proposal would adopt and codify certain straight-through 
processing standards--rather than relying on industry practice or staff 
guidance--related to the processing and routing of swaps by SEFs, i.e., 
the ``prompt, efficient, and accurate'' standard and the continued use 
of manual affirmation hubs and the clearing or rejection of trades by 
registered DCOs, i.e., the ten-second AQATP standard. These 
requirements should help market participants and the public obtain 
greater transparency of market structure and potential risks related to 
timely trade processing and clearing. Similarly, although the 
Commission believes that its proposal is consistent with existing 
industry practices, by adopting and codifying these straight-through 
processing standards, the proposal should better protect market 
participants and the public by helping to ensure that FCMs, SEFs, DCMs, 
and DCOs adhere to the applicable straight-through processing

[[Page 62082]]

standards. As a result, the proposal would help ensure that market 
participants and the public continue to receive the related straight-
through processing benefits.
(2) Efficiency, Competitiveness, and Financial Integrity of Markets
    The AQATP standard reflects the Commission's belief that acceptance 
or rejection for clearing in close to real time is crucial for the 
efficient operation of trading venues, and the Commission's proposal is 
intended to reinforce SEFs' and DCOs' mutual obligation to work with 
one another to ensure the prompt, efficient, and accurate processing 
and routing of swaps from SEFs to DCOs. In turn, this should promote 
market efficiency and the financial integrity of transactions by 
requiring these market participants to work together to process, route, 
and ultimately clear swap transactions as appropriate.
    In recognizing that some trading venues may not be fully automated 
or may offer execution methods that either are not fully automated or 
that have a relatively higher error rate, such as voice execution, the 
Commission's proposal would explicitly permit the use of third-party 
affirmation hubs pursuant to proposed Sec.  37.702(b) to assist 
counterparties in identifying and fixing any errors before routing to a 
DCO. Identifying errors before trades are cleared should enhance the 
financial integrity of markets by helping to ensure that cleared 
transactions reflect counterparties' expectations and thereby avoid 
costs associated with fixing any cleared error trades. However, the 
absence of a prescribed timeframe to confirm transactions may result in 
delayed resolution of trade errors.
    Clarifying that a DCO must accept or reject a trade after 
submission to the DCO, i.e., when the DCO receives the transaction, 
subject to the ten-second AQATP standard should facilitate a regulatory 
framework in which DCOs have access to reasonably available technology 
to provide their clearing customers with competitive and efficient 
timeframes to accurately accept or reject trades for clearing. The 
Commission's AQATP standard for DCOs' compliance will allow--and 
require--the timeframe for straight-through processing to continue to 
adapt with technological advancements and other cleared product 
developments.
    Proposed Sec.  37.702(b) and the Commission's related 
interpretation should promote efficiency by incorporating the use of 
third-party affirmation platforms, which provide an opportunity to 
identify error trades prior to clearing, pursuant to the ``prompt, 
efficient, and accurate'' standards. Similarly, proposed Sec.  
37.702(b) should promote financial integrity by reducing instances in 
which a DCO inadvertently clears an error trade, which may also 
possibly be reported to an SDR that would publish such trades to the 
public pursuant to the real-time reporting requirements under part 43 
of the Commission's regulations. However, the Commission also 
recognizes that to the extent that market participants have adopted 
these practices, such as pre-execution screening by FCMs, these 
benefits may already have been realized.
(3) Price Discovery
    The Commission does not believe the proposed changes will have a 
significant effect on price discovery. To the extent that the 
Commission's proposal is conducive to permitting new execution methods 
(i.e., by establishing a qualitative standard for third-party manual 
affirmation hubs), the Commission believes that these changes could 
improve price discovery. On the other hand, the absence of a prescribed 
timeframe to process and route transactions to a DCO may result in 
trades taking longer to clear than they otherwise would have with a 
prescribed timeframe, which may affect price discovery. However, as 
noted above, the Commission believes that the proposed standard is 
consistent with industry practice.
(4) Sound Risk Management Practices
    The AQATP standard reflects the Commission's belief that acceptance 
or rejection for clearing in close to real time is crucial for 
effective risk management. The Commission believes that prudent risk 
management dictates that once a trade has been submitted to a clearing 
FCM or a DCO, the clearing FCM or DCO must accept or reject it as 
quickly as possible. The Commission's proposal would promote sound risk 
management practices by ensuring that all intended-to-be-cleared swaps 
are subject to straight-through processing on a SEF and that all trades 
submitted to a DCO are subject to a consistent AQATP standard.
(5) Other Public Interest Considerations
    The Commission has not identified any other public interest 
considerations relevant to the proposal on financial integrity and 
straight-through processing obligations.
Request for Comment
    The Commission requests comment on all aspects of the consideration 
of the costs and benefits of the proposal related to the financial 
integrity of transactions and straight-through processing obligations.
8. Financial Resources
a. Overview
    The proposal would generally adopt Commission staff ``Financial 
Resources Guidance,'' \1050\ with certain changes, as part of the 
proposed acceptable practices to Core Principle 13 in Appendix B to 
part 37 to provide additional guidance for SEFs when determining their 
financial obligations under proposed Sec.  37.1301 and Sec.  37.1303, 
including what costs a SEF may or may not include in its projected 
operating cost calculations.
---------------------------------------------------------------------------

    \1050\ CFTC Letter No. 17-25 Division of Market Oversight 
Guidance on Calculating Projected Operating Costs by Designated 
Contract Markets and Swap Execution Facilities (Apr. 28, 2017).
---------------------------------------------------------------------------

    Proposed Sec.  37.1301(a) would require a SEF to maintain financial 
resources in an amount adequate to cover only those projected operating 
costs necessary to enable the SEF to comply with its core principle 
obligations under section 5h of the Act and any applicable Commission 
regulation for a one-year period, calculated on an ongoing basis. In 
contrast, existing Sec.  37.1301(a) requires a SEF to maintain 
sufficient financial resources to cover all of its operations for a 
one-year period, calculated on an ongoing basis, regardless of whether 
such operating costs are necessary for the SEF to comply with its core 
principle or other applicable Commission regulations. The Commission 
would consolidate Sec.  37.1301(c) with Sec.  37.1301(a) and 
accordingly delete Sec.  37.1301(c). Proposed Sec.  37.1301(b) would 
permit a SEF to file a consolidated financial report if the SEF also 
operates as a DCO.
    Pursuant to existing Sec.  37.1303, a SEF currently has reasonable 
discretion to determine its financial obligations under Sec.  
37.1301.\1051\ The Commission would adopt Acceptable Practices to 
further clarify the costs that a SEF may or may not exclude in its 
reasonable discretion when determining its projected operating costs 
under Sec.  37.1301(a). The proposed Acceptable Practices would 
generally be based

[[Page 62083]]

upon the Financial Resources Guidance in which staff discussed the 
scope of a SEF's reasonable discretion for determining its obligations 
under Sec.  37.1301 and Sec.  37.1303. Specifically, the Financial 
Resources Guidance provides that a SEF may reasonably exclude from its 
projected operating costs certain expenses, including (1) costs 
attributable solely to sales, marketing, business development, or 
recruitment; \1052\ (2) compensation and related taxes and benefits for 
SEF employees whose functions are not necessary to meet the SEF's 
regulatory responsibilities; \1053\ (3) costs for acquiring and 
defending patents and trademarks for SEF products and related 
intellectual property; (4) magazine, newspaper, and online periodical 
subscription fees; (5) tax preparation and audit fees; (6) to the 
extent not covered by item (2) above, the variable commissions that a 
voice-based SEF may pay to its employee-brokers, calculated as a 
percentage of transaction revenue generated by the voice-based SEF; and 
(7) any non-cash costs, including depreciation and amortization. The 
Commission similarly would incorporate this list with certain 
conforming changes into the proposed Acceptable Practices as costs that 
the Commission believes may be reasonable for a SEF to exclude from its 
projected operating cost calculations.\1054\ In addition to these 
enumerated items, the proposed Acceptable Practices additionally would 
provide that as long as a SEF offers more than one bona fide execution 
method, it may be a reasonable use of a SEF's discretion under proposed 
Sec.  37.1304 to include the costs of only one of its bona fide 
execution methods in its projected operating costs calculations, while 
excluding the costs associated with its other execution methods.\1055\
---------------------------------------------------------------------------

    \1051\ Section 37.1303 provides that a SEF has reasonable 
discretion in determining the methodology used to compute its 
projected operating costs in order to determine the amount needed to 
meet its requirements under Sec.  37.1301. Because the liquidity 
requirement in existing Sec.  37.1305 is based upon a SEF's 
financial requirement under Sec.  37.1301, the SEF's application of 
its reasonable discretion also implicitly determines its liquidity 
obligation under Sec.  37.1305. The Commission proposes to renumber 
Sec.  37.1303 to Sec.  37.1304. Other than renumbering the provision 
and other conforming changes, such as including a reference to wind-
down costs, the Commission is not proposing substantive changes to 
the provision.
    \1052\ The costs listed in this item (1) also include costs for 
travel, entertainment, events and conferences to the extent that 
such costs are not necessary.
    \1053\ For example, if a SEF requires a certain number of voice 
brokers to run its voice/hybrid platform but hires additional voice 
brokers to provide superior customer service, the SEF would only 
need to include the minimum number of voice brokers to run its 
voice-based or voice-assisted platform based on its current business 
volume, and taking into account any projected increase or decrease 
in business volume, in its projected operating cost calculations.
    \1054\ In order to conform to the Commission's proposed change 
to Sec.  37.1301(a), the Commission proposes to slightly alter the 
wording of item (2) to provide that a SEF may exclude the costs of a 
SEF's employees are not necessary to comply with the core principles 
set forth in Sec.  5h of the Act and any applicable Commission 
regulations. (emphasis added). Similarly, the Financial Resources 
Guidance provides that a reasonable calculation of projected 
operating expenses must include all expenses necessary for a SEF to 
discharge its responsibilities as a SEF in compliance with the CEA, 
the Commission's regulations, and the SEF's rulebooks, which is 
consistent with existing Sec.  37.1301(a). However, in order to 
conform with proposed Sec.  37.1301(a), the proposed acceptable 
practices would instead provide that a SEF must include all expenses 
necessary for the SEF ``to comply'' with the core principles and any 
applicable Commission regulations.
    \1055\ For example, if a SEF offers both an Order Book and RFQ 
System, the SEF would be permitted to include the costs related to 
only one of the execution methods it offers (e.g., if a SEF includes 
in its projected operating costs the costs associated with its Order 
Book, it may exclude the costs related to its RFQ System, or vice-
versa). A bona fide method would refer to a method actually used by 
SEF participants and not established by a SEF on a pro forma basis 
for the purpose of complying with--or evading--the financial 
resources requirement. In contrast, under the current Financial 
Resources Guidance and Commission regulations, a SEF's projected 
operating costs generally must include all offered execution 
methods.
---------------------------------------------------------------------------

    Further, based on the Financial Resources Guidance, the proposed 
Acceptable Practices would clarify that in order to determine its 
obligations under proposed Sec.  37.1301(a), a SEF may pro-rate, but 
not exclude, certain expenses in calculating projected operating 
costs.\1056\ In pro-rating any of these expenses, however, a SEF would 
need to document, identify, and justify is decision to pro-rate such 
expenses.
---------------------------------------------------------------------------

    \1056\ For example, a SEF would be permitted to pro-rate 
expenses that are shared with affiliates, e.g., the costs of 
administrative staff or seconded employees that a SEF shares with 
affiliates. Further, a SEF would also be permitted to pro-rate 
expenses that are attributable in part to activities that are not 
required to comply with the SEF core principles, e.g., costs of a 
SEF's office space to the extent it also houses personnel whose 
costs may be excludable under items (1) or (2).
---------------------------------------------------------------------------

    Proposed Sec.  37.1303 would require a SEF to maintain liquid 
assets in an amount equal to the greater of (i) three-months' projected 
operating costs necessary to enable the SEF to comply with its core 
principle and applicable Commission regulations and (ii) the SEF's 
projected wind-down costs. In contrast, a SEF currently must maintain 
sufficient liquid assets to cover six-months' projected operating 
costs.\1057\ As discussed above, the Commission proposes to adopt the 
Acceptable Practices to further clarify the costs that a SEF, based on 
its reasonable discretion, may or may not exclude from its projected 
operating costs when determining its financial obligations under 
proposed Sec.  37.1303.
---------------------------------------------------------------------------

    \1057\ The proposal would renumber Sec.  37.1305 to Sec.  
37.1303.
---------------------------------------------------------------------------

    Since SEFs currently are not required to provide GAAP-compliant 
financial submissions, proposed Sec.  37.1306(a) would require a SEF's 
quarterly financial submissions to conform to GAAP, or in the case of a 
non-U.S. domiciled SEF that is not otherwise required to prepare GAAP-
compliant statements, to prepare its statements in accordance with 
either the International Financial Reporting Standards issued by the 
International Accounting Standards Board, or a comparable international 
standard that the Commission may accept in its discretion. Proposed 
Sec.  37.1306(c) would provide that a SEF's quarterly financial 
statements must explicitly (i) identify all the SEF's expenses without 
any exclusions, (ii) identify all expenses and corresponding amounts 
that the SEF excluded or pro-rated when it determined its projected 
operating costs, (iii) explain why the SEF excluded or pro-rated any 
expenses, and (iv) identify and explain all costs necessary to wind 
down the SEF's operations. Section 37.1306(c)(1) currently requires 
SEFs to provide ``[s]ufficient documentation'' explaining how the SEF 
determined its financial resources obligations, and the Commission 
believes that the items specified in proposed Sec.  37.1306(c) 
constitute such sufficient documentation and are already being provided 
by compliant SEFs. Proposed Sec.  37.1306(d) would extend the deadline 
for a SEF's fourth quarter financial statement from sixty to ninety 
days after the end of such fiscal quarter to conform to the extended 
deadline for a SEF's annual compliance report. Proposed Sec.  
37.1306(e) would require a SEF to provide notice no later than forty-
eight hours after it knows or reasonably should know it no longer meets 
its financial resources obligations.
b. Benefits
    Proposed Sec.  37.1301(a) is expected to reduce the total financial 
assets that most SEFs must maintain since a SEF would be required to 
maintain sufficient resources to cover only its operations necessary to 
comply with its core principle obligations and applicable Commission 
regulations rather than all of its operating costs as currently 
provided in existing Sec.  37.1301(a). With respect to proposed Sec.  
37.1301(a), the proposed Acceptable Practices would provide further 
guidance regarding the scope of a SEF's reasonable discretion when 
determining the SEF's financial requirements under Sec.  37.1301(a) to 
exclude certain expenses from its projected operating cost 
calculations, thereby reducing the amount of total financial assets 
that a SEF must maintain under proposed Sec.  37.1301(a). To the extent 
that the proposed Acceptable Practices generally adopt the staff's 
existing Financial Resources Guidance, SEFs may also already have 
realized the benefits associated with reduced financial resources

[[Page 62084]]

requirements. However, in addition to the expenses enumerated in the 
Financial Resources Guidance, the proposed Acceptable Practices also 
would clarify that when determining its financial obligations under 
Sec.  37.1301(a), as long as a SEF includes the costs of one bona fide 
execution method, a SEF could reasonably exclude from its projected 
operating costs the expenses associated with its other execution 
methods.\1058\ As a result, the Commission anticipates that a SEF's 
projected operating costs related to a SEF's execution platforms would 
generally not be significantly more than the least costly bona fide 
execution method offered by the SEF, which the Commission notes could 
be in the millions of dollars for certain SEFs.\1059\
---------------------------------------------------------------------------

    \1058\ For example, if a SEF offers both an Order Book and RFQ 
System, the SEF would be permitted to include the costs related to 
only one of the execution methods it offers (e.g., if a SEF includes 
in its projected operating costs the costs associated with its Order 
Book, it may exclude the costs related to its RFQ System, or vice-
versa). A bona fide method would refer to a method actually used by 
SEF participants and not established by a SEF on a pro forma basis 
for the purpose of complying with--or evading--the financial 
resources requirement.
    \1059\ The Commission anticipates that SEFs that offer execution 
methods that are more costly for a SEF to maintain, such as voice-
based or voice-assisted execution methods, are likely to see the 
greatest relative reduction in projected operating costs.
---------------------------------------------------------------------------

    Proposed Sec.  37.1301(b) could result in a marginal cost reduction 
since an entity would no longer be required to submit a separate 
financial submission for its affiliated SEF and DCO. However, the 
Commission believes that this would be a de minimis reduction.
    Proposed Sec.  37.1303's liquidity requirement would significantly 
reduce the amount of liquid financial assets that must be maintained by 
most SEFs. Currently, a SEF must maintain liquid financial assets equal 
to six-months' projected operating costs, while proposed Sec.  37.1303 
would require most SEFs to hold three-months' projected operating 
costs. As a result, proposed Sec.  37.1303 generally would reduce the 
liquidity requirement for most SEFs by 50 percent.\1060\ Similar to the 
discussion above under proposed Sec.  37.1301(a), the proposed 
Acceptable Practices would broaden the reasonable discretion that a SEF 
has under proposed Sec.  37.1304 for computing its projected operating 
costs to exclude certain expenses from its projected three-months' 
operating cost calculations, thereby reducing the amount of total 
financial assets that a SEF must maintain under proposed Sec.  
37.1303.\1061\ In addition, a SEF currently must maintain liquid assets 
equal to six-months' operating costs even if the SEF's actual wind-down 
costs are greater. For certain SEFs with wind-down costs that exceed 
six-months' operating costs, proposed Sec.  37.1303 would augment 
market integrity for such SEFs by requiring them to maintain additional 
liquid assets to cover their wind-down costs, even if the SEF's wind-
down would exceed six-months, but in no event would a SEF be permitted 
to maintain less than three-months' operating costs.
---------------------------------------------------------------------------

    \1060\ The Commission notes that the current liquidity 
requirement in existing Sec.  37.1305 as well as proposed Sec.  
37.1303 permits a SEF to acquire a ``committed line of credit'' to 
satisfy the liquidity requirement. However, the Commission notes 
that most SEFs satisfy this requirement through maintaining liquid 
assets rather than obtaining a line of credit. Accordingly, as a 
practical matter, the Commission expects proposed Sec.  37.1303 to 
reduce the amount of liquid assets that a SEF must maintain. 
Moreover, the Commission notes that there would be additional 
associated costs if a SEF were to obtain a committed line of credit.
    \1061\ This assumes that a SEF's projected wind-down costs are 
less than the SEF's three-months' projected operating costs; 
otherwise, proposed Sec.  37.1303 would require the SEF to maintain 
liquid financial resources in an amount equal to its wind-down 
costs.
---------------------------------------------------------------------------

    The Commission believes that the proposal provides a SEF with 
greater flexibility in terms of establishing its financial resources. 
This, in turn, may lead to greater efficiencies in terms of financing 
and capital allocation and investment. However, the Commission 
acknowledges, as discussed below, this flexibility may increase the 
level of financial risk at the SEF.
    Proposed Sec. Sec.  37.1306(a) and (c) would benefit transparency 
and augment the Commission's oversight by requiring SEFs to provide 
standardized, GAAP-compliant financial submissions that explicitly 
identify any cost a SEF has excluded or pro-rated in determining its 
projected operating costs. In its experience conducting ongoing SEF 
oversight, Commission staff has devoted additional effort to obtain 
appropriate clarity and sufficient documentation from SEFs. Therefore, 
the Commission believes that clarifying the minimum documentation that 
a SEF must provide would mitigate the time and resources required both 
by staff in conducting its oversight and by SEFs in responding to 
staff's requests for additional information. Proposed Sec.  37.1306(e) 
would benefit market integrity by ensuring that the Commission is aware 
of any non-compliance forty-eight hours after the SEF knows or 
reasonably should know that it fails to satisfy its financial resources 
obligations rather than when the SEF submits its quarterly financial 
statement under Sec.  37.1306(a), increasing the Commission's ability 
to promptly respond.
c. Costs
    Proposed Sec.  37.1301(a) would reduce the amount of financial 
resources that a SEF must maintain to an amount that would enable the 
SEF to comply with its core principle obligations and applicable 
Commission regulations for a one-year period, calculated on an ongoing 
basis, rather than in an amount necessary to cover all of the SEF's 
operations as required under existing Sec.  37.1301(a). The proposed 
Acceptable Practices further would clarify the costs that a SEF may 
exclude when determining its obligations under proposed Sec.  
37.1301(a). As a result, proposed Sec.  37.1301(a) as contemplated in 
the proposed Acceptable Practices likely would induce SEFs to reduce 
the current level of total financial resources that they maintain under 
Sec.  37.1301. In turn, this could decrease market participants' 
confidence and could harm a SEF's stability during adverse market 
conditions because the SEF may not have adequate financial resources to 
cover its costs. However, the Commission believes that the potential 
harm to a SEF's financial stability and to the market is minimal since 
proposed Sec.  37.1301(a) addresses only the amount of a SEF's total 
financial assets, which includes illiquid assets, rather than focusing 
only on a SEF's liquid assets. The Commission notes that illiquid 
assets are less important compared to the amount of liquid financial 
assets that a SEF must maintain under proposed Sec.  37.1303 since it 
is more difficult for a SEF to timely liquidate its illiquid assets to 
cover its operating costs, especially during periods of market 
instability. Accordingly, the Commission believes a SEF's liquid 
financial assets, which the Commission addresses in proposed Sec.  
37.1303 below, is more important for sustaining a SEF's financial 
health and continuing operations.
    Proposed Sec.  37.1303 could require some SEFs to maintain 
additional liquid financial assets, compared to the current liquidity 
requirement, where a SEF's wind-down costs exceed six-months' operating 
costs. However, as explained above under the discussion of benefits, 
the Commission believes that most SEFs would not have wind-down costs 
that exceed six-months' operating costs. Accordingly, proposed Sec.  
37.1303 should not increase the liquidity requirement for most SEFs.
    Proposed Sec.  37.1304 would require a SEF to incur an additional 
marginal cost to calculate its wind-down costs, in addition to its 
projected operating costs as currently required, in order to determine 
its financial resources

[[Page 62085]]

obligations under Sec.  37.1301 and Sec.  37.1303. The Commission 
estimates that this proposed change would impose an initial, minimal, 
one-time cost for each SEF related to determining the length of time 
and associated costs associated with an orderly wind down.
    Proposed Sec.  37.1306 would impose greater costs on a SEF. 
Specifically, proposed Sec.  37.1306(a) would require a SEF to submit 
GAAP-compliant quarterly reports. Because GAAP-compliant financial 
statements generally require additional effort compared to non-GAAP 
compliance financial statements, the Commission estimates that the 
proposed change would increase annual costs for each SEF to create 
GAAP-compliance financial report. However, the Commission does not 
believe that proposed Sec.  37.1306(c) would increase costs. Under 
existing Sec.  37.1306(c), a SEF must provide sufficient documentation 
explaining the methodology it used to compute its financial resources 
requirements; accordingly, proposed Sec.  37.1306(c) is merely 
clarifying the type of information that is already required.\1062\ 
Similarly, the Commission does not believe that proposed Sec.  
37.1306(e) would increase costs since a SEF currently is required to 
maintain continuous compliance with its financial resources 
obligations. By requiring a SEF to notify the Commission within 48 
hours of non-compliance, rather than informing the Commission through a 
SEF's quarterly financial submission, proposed Sec.  37.1306(e) could 
impose a de minimis cost to prepare a notice from a non-compliant SEF.
---------------------------------------------------------------------------

    \1062\ See Sec.  37.1306(c).
---------------------------------------------------------------------------

d. Section 15(a) Factors
(1) Protection of Market Participants and the Public
    The Commission previously noted that the financial resources 
requirements protect market participants and the public by establishing 
uniform standards and a system of Commission oversight that ensures 
that trading occurs on a financially stable facility, which in turn, 
mitigates the risk of market disruptions, financial losses, and system 
problems that could arise from a SEF's failure to maintain adequate 
financial resources.\1063\ In the event that a SEF must wind down its 
operations, proposed Sec.  37.1303 would explicitly require a SEF to 
maintain sufficient liquid financial resources to conduct an orderly 
wind-down of its operations, or three-months' operating costs if 
greater than the SEF's wind-down costs.\1064\ The Commission believes 
that the proposed SEF financial requirements are better calibrated to 
the inherent risks of a SEF, which should not diminish the financial 
integrity of the SEF, but should result in greater efficiencies.
---------------------------------------------------------------------------

    \1063\ See Core Principles Final Rule at 33580.
    \1064\ As the Commission previously noted, a SEF that has 
sufficient amounts of liquid financial resources would be better 
positioned to close out trading in a manner not disruptive to market 
participants or to members of the public who rely on SEF prices. See 
Core Principles Final Rule at 33580.
---------------------------------------------------------------------------

    Moreover, a SEF would be required to provide notice under proposed 
Sec.  37.1306(e) no later than forty-eight hours after it knows or 
reasonably should have known that it no longer satisfies its financial 
resources obligations, ensuring that the Commission can take prompt 
action to protect market participants and the public. In contrast, the 
Commission currently is notified of non-compliance in a SEF's quarterly 
financial statements. Lastly, a SEF would be required to submit GAAP-
compliant quarterly financial submissions under proposed Sec.  
37.1306(c) that explicitly identify the costs a SEF has excluded or 
pro-rated in determining its projected operating costs. As a result, 
the Commission would more easily be able to compare SEFs' financial 
health and take pro-active steps to protect market participants and the 
public if the Commission identifies a SEF with weak financial health or 
the development of negative financial trends among SEFs that could 
endanger the market participants or the public.
(2) Efficiency, Competitiveness, and Financial Integrity of the Markets
    Proposed Sec.  37.1301(a) and Sec.  37.1303, as further clarified 
through the proposed Acceptable Practices, together should benefit 
market efficiency by reducing capital costs since SEFs would no longer 
be required to maintain an excessive amount of financial resources. 
Accordingly, a SEF should be able to more efficiently allocate its 
financial resources, which in turn should encourage market growth and 
innovation. For example, as noted above, in the case of proposed Sec.  
37.1303, the Commission expects that most SEFs would need to hold 
approximately 50 percent less liquid financial assets as reserve 
capital to cover operating costs. The current financial resources 
requirements dis-incentivize a SEF by imposing higher capital 
requirements if the SEF wishes to offer new or experimental technology, 
execution methods, or related products and services--especially if such 
business lines, products, or services are not expected to be 
immediately profitable or would have low margins.
    The existing regulations may discourage a SEF from offering more 
capital intensive activities, such as execution methods that involve 
human brokers compared to fully electronic trading that are less 
capital intensive. Accordingly, the Commission believes that the 
proposed capital resources requirements would be more neutral with 
respect to a SEF's chosen technology and business model, and therefore 
should encourage a greater variety of execution methods and related 
services and products in the market place.
    Reducing capital costs would promote the entry of new entrants into 
the market by reducing start-up costs and initial capital requirements, 
thereby further encouraging competition and innovation. The increase in 
competition and innovation could depend on the extent to which 
potential new entrants respond to this encouragement.
    Proposed Sec.  37.1306(e) should improve the financial integrity of 
markets by requiring a SEF to notify the Commission within 48 hours 
after it knows or reasonably should have known that it no longer 
satisfies its financial resources obligations, ensuring that the 
Commission can take prompt action to protect market integrity. Lastly, 
proposed Sec.  37.1306(c) would improve SEF financial submissions by 
requiring GAAP-compliant statements as well as clarifying that a SEF 
must explicitly identify any costs that it has exclude or pro-rated in 
determining its projected operating costs. These changes should improve 
the Commission's ability to conduct its oversight responsibilities to 
protect market integrity.
(3) Price Discovery
    The Commission has not identified any effects of the proposed rules 
identified above on price discovery.
(4) Sound Risk Management Practices
    By establishing specific standards with respect to how SEFs should 
assess and monitor the adequacy of their financial resources, the 
financial resources rules should promote sound risk management 
practices by SEFs. As noted above, proposed Sec.  37.1303 would require 
a SEF to identify its wind-down costs and associated timing and ensure 
that it has sufficient liquid assets to maintain an orderly wind down. 
Similarly, proposed Sec.  37.1306(c) would require a SEF to explain the 
basis of its determination for its estimate of its

[[Page 62086]]

wind-down costs and timing. Proposed Sec.  37.1307(e) would require a 
SEF to notify the Commission no later than 48 hours after it knows or 
reasonably should have known that it no longer satisfies its financial 
resources obligations. As a result, a SEF would be required to ensure 
that it maintains the necessary procedures to identify, and to notify 
the Commission of, any non-compliance.
(5) Other Public Interest Considerations
    The Commission has not identified any effects that these rules will 
have on other public interest considerations other than those 
enumerated above.
Request for Comment
    The Commission requests comment on all aspects of the consideration 
of the costs and benefits of the provisions related to SEF financial 
resources.

D. Antitrust Considerations

    CEA section 15(b) requires the Commission to ``take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of this Act, in issuing any order or adopting any Commission 
rule or regulation (including any exemption under section 4(c) or 
4c(b)), or in requiring or approving any bylaw, rule, or regulation of 
a contract market or registered futures association established 
pursuant to section 17 of this Act.'' \1065\
---------------------------------------------------------------------------

    \1065\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission believes that the public interest to be protected by 
the antitrust laws is generally to protect competition. The Commission 
requests comment on whether the proposal implicates any other specific 
public interest to be protected by the antitrust laws.
    The Commission has considered the proposal to determine whether it 
is anticompetitive and does not anticipate that the proposal, viewed in 
its entirety, will have material anticompetitive effects or result in 
anticompetitive behavior. As described in detail in the preamble above, 
the proposal is expected to generally provide greater flexibility and 
competition in connection with swap trading on SEFs largely as a result 
of the proposed approach that would permit SEFs to offer a variety of 
innovative execution methods rather than being limited to specific, 
mandated execution methods. The Commission believes that such 
innovation is expected to promote greater competition between SEFs in 
order to attract additional trading and market participation.
    The Commission also believes that achieving the SEF statutory goals 
of promoting trading on SEFs and pre-trade price transparency requires 
both (i) increasing the number of swaps that are subject to the trade 
execution requirement; and (ii) concurrently providing flexibility of 
execution methods. The Commission believes that requiring market 
participants to conduct a larger portion of their swaps trading on SEFs 
would, among other things, foster additional competition among a more 
concentrated number of market participants resulting in increased 
market efficiency and decreased transaction costs.
    The Commission also notes that the proposal would enhance the 
available third party regulatory service providers that a SEF could 
hire to perform a variety of regulatory functions required of SEFs 
under the Act and Commission regulations. Specifically, as noted in the 
preamble, the Commission has proposed to expand the scope of entities 
that may provide regulatory services under Sec.  37.204(a) to include 
any non-registered entity approved by the Commission. This proposed 
change is expected to potentially increase competition among existing 
and potential regulatory service providers and, thereby, reduce 
operating costs for SEFs, and mitigate barriers to entry for new SEFs.
    Although the Commission does not anticipate that the proposal, 
viewed in its entirety, will have material anticompetitive effects or 
result in anticompetitive behavior, the Commission encourages comments 
on any aspect of the proposal that may be inconsistent with the 
antitrust laws or anticompetitive in nature. For example, the impartial 
access requirements proposed under Sec.  37.202(a) would not require an 
all-to-all market as envisioned by the current SEF rules, and therefore 
may inhibit the ability of certain market participants to access 
certain trading markets and liquidity pools. The Commission notes, 
however, that the current SEF market structure and participation 
patterns already have generally developed along these traditional 
lines, absent the proposed access criteria. The Commission underscores 
that its proposed changes to the impartial access requirements would 
require a SEF to allow access to prospective participants who are able 
to meet the SEF's participation criteria. As discussed in this 
proposal, although the Commission believes that this approach should 
prevent potential anticompetitive harms, it may still provide potential 
barriers to access.\1066\ The Commission requests comment on whether 
and in what circumstances adopting the proposed rule could be 
anticompetitive.
---------------------------------------------------------------------------

    \1066\ The Commission previously applied the impartial access 
requirement to ISVs on the basis that such types of vendors would 
provide various benefits to the market and market participants. SEF 
Core Principles Final Rule at 33,508 n.423. However, based on the 
Commission's experience and notwithstanding the existing impartial 
access requirement, ISVs have not established a significant level of 
participation on SEFs, nor have they achieved a broad level of 
adoption among market participants, absent the proposed access 
criteria. See supra VII.A.1.a.--Sec.  37.202(a)(1)--Impartial Access 
Criteria.
---------------------------------------------------------------------------

    Further, the Commission has preliminarily determined that the 
proposal serves the regulatory goals set forth in CEA section 5h(e) to 
promote trading on SEFs and pre-trade transparency in the swaps market. 
In addition, the Commission also preliminary believes that the proposal 
serves the general regulatory purpose in CEA section 3(b) to ``promote 
responsible innovation and fair competition among boards of trade, 
other markets and market participants.'' \1067\
    Although the Commission has not identified any less anticompetitive 
means to effectuate the purposes of CEA sections 5h(e) and 3(b) in 
connection with the SEF regulatory framework, nonetheless, the 
Commission requests comment on whether there are other less 
anticompetitive means of achieving the relevant purposes of the Act. 
The Commission notes that it is not required to follow the least 
anticompetitive course of action.

List of Subjects

17 CFR Part 9

    Administrative practice and procedure, Commodity exchanges, 
Commodity futures, Reporting and recordkeeping requirements.

17 CFR Part 36

    Designated contract markets, Registered entities, Swap execution 
facilities, Swaps, Trade execution requirement.

17 CFR Part 37

    Commodity futures, Registered entities, Registration application, 
Reporting and recordkeeping requirements, Swap execution facilities, 
Swaps.

17 CFR Part 38

    Commodity futures, Designated contract markets, Registered 
entities, Reporting and recordkeeping

[[Page 62087]]

requirements, Swaps, Trade execution requirement.

17 CFR Part 39

    Consumer protection, Derivatives clearing organizations, Reporting 
and recordkeeping requirements, Risk management, Straight-through 
processing, Swaps.

17 CFR Part 43

    Block trades, Consumer protection, Reporting and recordkeeping 
requirements, Swaps.

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR chapter I as follows:

PART 9--RULES RELATING TO REVIEW OF EXCHANGE DISCIPLINARY, ACCESS 
DENIAL OR OTHER ADVERSE ACTIONS

0
1. The authority citation for part 9 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 6b-1, 6c, 7, 7a-2, 7b-3, 8, 9, 9a, 
12, 12a, 12c, 13b, 16a, 18, 19, and 21.

0
2. Amend Sec.  9.1 by:
0
a. Redesignating paragraph (c) as paragraph (d);
0
b. Redesignating paragraph (b)(4) as paragraph (c);
0
c. Revising paragraphs (b)(2), (b)(3), and newly redesignated paragraph 
(c).
    The revisions read as follows:


Sec.  9.1   Scope of rules.

* * * * *
    (b) * * *
    (2) Except as provided in Sec. Sec.  9.11(a), (b)(3)(i) through 
(v), (c), 9.12(a), and 9.13 (concerning the notice, effective date and 
publication of a disciplinary or access denial action), any summary 
action permitted under the rules of the swap execution facility 
imposing a minor penalty for the violation of rules relating to 
recordkeeping or reporting, or permitted under Core Principle 13, 
paragraph (a)(6) in appendix B to part 38 of this chapter imposing a 
minor penalty for the violation of exchange rules relating to decorum 
or attire, or relating to the timely submission of accurate records 
required for clearing or verifying each day's transactions or other 
similar activities; and
    (3) Any exchange action arising from a claim, grievance, or dispute 
involving cash market transactions which are not a part of, or directly 
connected with, any transaction for the purchase, sale, delivery or 
exercise of a commodity for future delivery, a commodity option, or a 
swap.
    (c) The Commission will, upon its own motion or upon motion filed 
pursuant to Sec.  9.21(b), promptly notify the appellant and the 
exchange that it will not accept the notice of appeal or petition for 
stay of matters specified in paragraph (b) of this section. The 
determination to decline to accept a notice of appeal will be without 
prejudice to the appellant's right to seek alternate forms of relief 
that may be available in any other forum.
0
3. In Sec.  9.2, revise paragraph (k) to read as follows:


Sec.  9.2   Definitions.

* * * * *
    (k) Summary action means a disciplinary action resulting in the 
imposition of a penalty on a person for violation of rules of the 
exchange permitted under the rules of the swap execution facility for 
impeding the progress of a hearing; Core Principle 13, paragraph (a)(4) 
in appendix B to part 38 of this chapter (penalty for impeding progress 
of hearing); Core Principle 2, paragraph (a)(8) in appendix B to part 
37 of this chapter (emergency disciplinary actions); Core Principle 13, 
paragraph (a)(7) in appendix B to part 38 of this chapter (emergency 
disciplinary actions); the rules of the swap execution facility for 
summary fines for violations of rules regarding recordkeeping or 
reporting; or Core Principle 13, paragraph (a)(6) in appendix B to part 
38 of this chapter (summary fines for violations of rules regarding 
timely submission of records, decorum, or other similar activities).
0
4. In Sec.  9.11, revise paragraph (b)(2) to read as follows:


Sec.  9.11   Form, contents and delivery of notice of disciplinary or 
access denial action.

* * * * *
    (b) * * *
    (2) The written notice of a disciplinary action or access denial 
action provided to the person against whom the action was taken by a 
swap execution facility must be a copy of a written decision which 
includes the items listed in paragraphs (b)(3)(i) through (vi) of this 
section.
* * * * *
0
5. In Sec.  9.12, revise paragraphs (a)(1) through (3) to read as 
follows:


Sec.  9.12   Effective date of disciplinary or access denial action.

    (a) * * *
    (1) As permitted by Core Principle 2, paragraph (a)(8) in appendix 
B to part 37 of this chapter (emergency disciplinary actions) or Core 
Principle 13, paragraph (a)(7) in appendix B to part 38 of this chapter 
(emergency disciplinary actions), the exchange reasonably believes, and 
so states in its written decision, that immediate action is necessary 
to protect the best interests of the marketplace;
    (2) As permitted by the rules of the swap execution facility or 
Core Principle 13, paragraph (a)(4) in appendix B to part 38 of this 
chapter (hearings), the exchange determines, and so states in its 
written decision, that the actions of a person who is within the 
exchange's jurisdiction has impeded the progress of a disciplinary 
hearing;
    (3) As permitted by the rules of the swap execution facility for 
recordkeeping or reporting violations or Core Principle 13, paragraph 
(a)(6) in appendix B to part 38 of this chapter (summary fines for 
violations of rules regarding timely submission of records, decorum, or 
other similar activities), the exchange determines that a person has 
violated exchange rules relating to decorum or attire, or timely 
submission of accurate records required for clearing or verifying each 
day's transactions or other similar activities; or
* * * * *
0
6. In Sec.  9.24, revise paragraph (a)(2) to read as follows:


Sec.  9.24   Petition for stay pending review.

    (a) * * *
    (2) Within ten days after a notice of summary action has been 
delivered in accordance with Sec.  9.12(b) to a person who is the 
subject of a summary action permitted by Core Principle 2, paragraph 
(a)(8) in appendix B to part 37 of this chapter (emergency disciplinary 
actions) or Core Principle 13, paragraph (a)(7) in appendix B to part 
38 of this chapter (emergency disciplinary actions), that person may 
petition the Commission to stay the effectiveness of the summary action 
pending completion of the exchange proceeding.
* * * * *
0
7. Add part 36 to read as follows:

PART 36--TRADE EXECUTION REQUIREMENT

Sec.
36.1 Trade execution requirement.
36.2 Registry of registered entities listing swaps subject to the 
trade execution requirement.
36.3 Trade execution requirement compliance schedule.
Appendix A to Part 36--Form TER

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a-2, 7b-3, 2a2, and 21, 
as amended by Titles VII and VIII of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 
1376 (2010).

[[Page 62088]]

Sec.  36.1   Trade execution requirement.

    (a) Except as provided in this section, counterparties shall 
execute a transaction involving a swap subject to the clearing 
requirement of section 2(h)(1) of the Act on a designated contract 
market, a swap execution facility, or a swap execution facility that is 
exempt from registration under section 5h(g) of the Act, that lists the 
swap for trading.
    (b) Paragraph (a) of this section does not apply to a swap 
transaction that is listed only by a swap execution facility that is 
exempt from registration under section 5h(g) of the Act.
    (c) Paragraph (a) of this section does not apply to a swap 
transaction for which the clearing exception under section 2(h)(7) of 
the Act or the exceptions or exemptions under part 50 of this chapter 
have been elected, and the associated requirements met.
    (d) Paragraph (a) of this section does not apply to a swap 
transaction that is executed as a component of a package transaction 
that includes a component transaction that is the issuance of a bond in 
a primary market.
    (1) For purposes of this paragraph (d), a package transaction 
consists of two or more component transactions executed between two or 
more counterparties where:
    (i) Execution of each component transaction is contingent upon the 
execution of all other components transactions; and
    (ii) The component transactions are priced or quoted together as 
one economic transaction with simultaneous or near simultaneous 
execution of all components.
    (2) [Reserved]
    (e) Paragraph (a) of this section does not apply to a swap 
transaction that is executed between counterparties that have eligible 
affiliate counterparty status pursuant to Sec.  50.52(a) of this 
chapter even if the eligible affiliate counterparties clear the swap 
transaction.


Sec.  36.2   Registry of registered entities listing swaps subject to 
the trade execution requirement.

    (a) Registry. The Commission shall publish and maintain on its 
website a list that specifies the swaps that are subject to the trade 
execution requirement under section 2(h)(8) of the Act as set forth in 
Sec.  36.1 and the designated contract markets and swap execution 
facilities where such swaps are listed for trading.
    (b) Required filing. A designated contract market or swap execution 
facility shall file electronically to the Commission a complete Form 
TER set forth in appendix A to this part for each swap, or any group, 
category, type or class of swaps that it lists for trading and is 
subject to or becomes subject to the clearing requirement of section 
2(h)(1) of the Act, as follows:
    (1) For any swap, or any group, category, type or class of swaps 
subject to the clearing requirement of section 2(h)(1) of the Act, to 
be listed for trading, a designated contract market or a swap execution 
facility shall submit a complete Form TER or amend its Form TER 
concurrently with the submission of a product listing pursuant to Sec.  
40.2 or Sec.  40.3 of this chapter;
    (2) For any swap, or any group, category, type or class of swaps 
currently listed for trading and subject to the clearing requirement of 
section 2(h)(1) of the Act, a designated contract market or a swap 
execution facility shall submit a complete Form TER ten business days 
prior to the effective date of this rule in the Federal Register; or
    (3) For any swap, or any group, category, type or class of swaps 
that a designated contract market or a swap execution facility lists 
for trading that subsequent to listing is determined to become subject 
to the clearing requirement of section 2(h)(1) of the Act, the 
designated contract market or the swap execution facility shall submit 
a complete Form TER or amend its Form TER ten business days prior to 
the effective date of the same swap, or same group, category, type or 
class of swaps becoming subject to the clearing requirement.
    (c) Required posting. A designated contract market and a swap 
execution facility shall publicly post the most recent version of its 
Form TER on its website pursuant to the timeline in paragraph (b) of 
this section. If any information reported on Form TER, or in any 
amendment thereto, is or becomes inaccurate for any reason, the 
designated contract market or the swap execution facility shall 
promptly file an amendment on Form TER updating such information.


Sec.  36.3   Trade execution requirement compliance schedule.

    (a) Definitions. For the purposes of this section:
    Category 1 entity means a swap dealer; a security-based swap 
dealer; a major swap participant; or a major security-based swap 
participant.
    Category 2 entity means a commodity pool; a private fund as defined 
in section 202(a) of the Investment Advisers Act of 1940; or a person 
predominantly engaged in activities that are in the business of 
banking, or in activities that are financial in nature as defined in 
section 4(k) of the Bank Holding Company Act of 1956.
    (b) For swaps subject to the requirements of section 2(h)(8) of the 
Act prior to the effective date of this rule, counterparties must 
continue to comply with the requirements of section 2(h)(8) of the Act.
    (c) Schedule for compliance. Upon the effective date of this rule, 
the following schedule for compliance with the trade execution 
requirement under section 2(h)(8) of the Act as set forth in Sec.  36.1 
shall apply with respect to swaps that on the effective date of this 
rule in the Federal Register become subject to the requirements of 
section 2(h)(8) of the Act:
    (1) Category 1 entities. A Category 1 entity must comply with the 
requirements of section 2(h)(8) of the Act as set forth in Sec.  36.1 
no later than ninety (90) days from the effective date of this rule in 
the Federal Register when it executes a swap transaction with another 
Category 1 entity or a non-Category 1 entity that voluntarily seeks to 
execute the swap on a swap execution facility, designated contract 
market, or swap execution facility that is exempt from registration 
under section 5h(g) of the Act.
    (2) Category 2 entities. A Category 2 entity must comply with the 
requirements of section 2(h)(8) of the Act as set forth in Sec.  36.1 
no later than one hundred and eighty (180) days from the effective date 
of this rule in the Federal Register when it executes a swap 
transaction with another Category 2 entity, a Category 1 entity, or 
other counterparties that voluntarily seek to execute the swap on a 
swap execution facility, designated contract market, or swap execution 
facility that is exempt from registration under section 5h(g) of the 
Act.
    (3) Other counterparties. All other counterparties must comply with 
the requirements of section 2(h)(8) of the Act as set forth in Sec.  
36.1 no later than two hundred and seventy (270) days from the 
effective date of this rule in the Federal Register.
    (d) Nothing in this rule shall be construed to prohibit any person 
from voluntarily complying with the requirements of section 2(h)(8) of 
the Act as set forth in Sec.  36.1 sooner than required under the 
implementation schedule provided under paragraph (c) of this section.
    (e) Future compliance schedules. After the effective date of this 
rule and upon the issuance of additional clearing requirement 
determinations under section 2(h)(2) of the Act that a swap, or any 
group, category, type or class of swaps is required to be cleared, the

[[Page 62089]]

Commission shall determine the appropriate schedule for compliance with 
the trade execution requirement under section 2(h)(8) of the Act as set 
forth in Sec.  36.1 for that swap, group, category, type or class of 
swap.

Appendix A to Part 36--Form TER

BILLING CODE 6351-01-P

[[Page 62090]]

[GRAPHIC] [TIFF OMITTED] TP30NO18.024


[[Page 62091]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.025


[[Page 62092]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.026


[[Page 62093]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.027

BILLING CODE 6351-01-C

[[Page 62094]]

0
8. Revise part 37 to read as follows:

PART 37--SWAP EXECUTION FACILITIES

Subpart A--General Provisions
Sec.
37.1 Scope.
37.2 Applicable provisions and definitions.
37.3 Requirements and procedures for registration.
37.4 Procedures for implementing rules.
37.5 Provision of information relating to a swap execution facility.
37.6 Enforceability.
37.7 Boards of trade operating both a designated contract market and 
a swap execution facility.
Subpart B--Compliance With Core Principles
37.100 Core Principle 1--Compliance with core principles.
37.101 [Reserved]
Subpart C--Compliance With Rules
37.200 Core Principle 2--Compliance with rules.
37.201 Requirements for swap execution facility execution methods.
37.202 Access requirements.
37.203 Rule enforcement program.
37.204 Regulatory services provided by a third party.
37.205 Audit trail.
37.206 Disciplinary procedures and sanctions.
Subpart D--Swaps Not Readily Susceptible to Manipulation
37.300 Core Principle 3--Swaps not readily susceptible to 
manipulation.
37.301 General requirements.
Subpart E--Monitoring of Trading and Trade Processing
37.400 Core Principle 4--Monitoring of trading and trade processing.
37.401 General requirements.
37.402 Additional requirements for physical-delivery swaps.
37.403 Additional requirements for cash-settled swaps.
37.404 Ability to obtain information.
37.405 Risk controls for trading.
37.406 Regulatory service provider.
37.407 Additional sources for compliance.
Subpart F--Ability To Obtain Information
37.500 Core Principle 5--Ability to obtain information.
37.501 Establish and enforce rules.
37.502 Provide information to the Commission.
37.503 Information-sharing.
37.504 Prohibited use of data collected for regulatory purposes.
Subpart G--Position Limits or Accountability
37.600 Core Principle 6--Position limits or accountability.
37.601 [Reserved].
Subpart H--Financial Integrity of Transactions
37.700 Core Principle 7--Financial integrity of transactions.
37.701 Required clearing.
37.702 General financial integrity.
37.703 Monitoring for financial soundness.
Subpart I--Emergency Authority
37.800 Core Principle 8--Emergency authority.
37.801 Additional sources for compliance.
Subpart J--Timely Publication of Trading Information
37.900 Core Principle 9--Timely publication of trading information.
37.901 General requirements.
Subpart K--Recordkeeping and Reporting
37.1000 Core Principle 10--Recordkeeping and reporting.
37.1001 Recordkeeping.
Subpart L--Antitrust Considerations
37.1100 Core Principle 11--Antitrust considerations.
37.1101 Additional sources for compliance.
Subpart M--Conflicts of Interest
37.1200 Core Principle 12--Conflicts of interest.
37.1201 [Reserved].
Subpart N--Financial Resources
37.1300 Core Principle 13--Financial resources.
37.1301 General requirements.
37.1302 Types of financial resources.
37.1303 Liquidity of financial resources.
37.1304 Computation of costs to meet financial resources 
requirement.
37.1305 Valuation of financial resources.
37.1306 Reporting to the Commission.
37.1307 Delegation of authority.
Subpart O--System Safeguards
37.1400 Core Principle 14--System safeguards.
37.1401 Requirements.
Subpart P--Designation of Chief Compliance Officer
37.1500 Core Principle 15--Designation of chief compliance officer.
37.1501 Chief compliance officer.
Appendix A to Part 37--Form SEF
Appendix B to Part 37--Guidance on, and Acceptable Practices in, 
Compliance With Core Principles
Appendix C to Part 37--Demonstration of Compliance That a Swap 
Contract Is Not Readily Susceptible to Manipulation

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a-2, 7b-3 and 12a, as 
amended by Titles VII and VIII of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 
(2010).

Subpart A--General Provisions


Sec.  37.1   Scope.

    The provisions of this part shall apply to every swap execution 
facility that is registered or is applying to become registered as a 
swap execution facility under section 5h of the Commodity Exchange Act 
(``the Act'').


Sec.  37.2   Applicable provisions and definitions.

    (a) Applicable provisions. A swap execution facility shall comply 
with the requirements of this part and all other applicable Commission 
regulations, including Sec.  1.60 of this chapter and any related 
definitions and cross-referenced sections.
    (b) Definitions. For the purposes of this part, market participant 
means any person who accesses a swap execution facility in the 
following manner:
    (1) Through direct access provided by a swap execution facility;
    (2) Through access or functionality provided by a third-party; or
    (3) Through directing an intermediary that accesses a swap 
execution facility on behalf of such person to trade on its behalf.


Sec.  37.3   Requirements and procedures for registration.

    (a) Requirements for registration. Any person operating a facility 
that offers a trading system or platform in which more than one market 
participant has the ability to execute or trade any swap, regardless of 
whether such swap is subject to the trade execution requirement under 
section 2(h)(8) of the Act as set forth in Sec.  36.1 of this chapter, 
with more than one other market participant on the system or platform 
shall register the facility as a swap execution facility under this 
part or as a designated contract market under part 38 of this chapter.
    (b) Procedures for registration--(1) Application for registration. 
An applicant requesting registration as a swap execution facility 
shall:
    (i) File electronically a complete Form SEF as set forth in 
appendix A to this part, or any successor forms, and all information 
and documentation described in such forms with the Secretary of the 
Commission in the form and manner specified by the Commission;
    (ii) Provide to the Commission, upon the Commission's request, any 
additional information and documentation necessary to review an 
application; and
    (iii) Obtain a legal entity identifier code for the purpose of 
identifying the swap execution facility pursuant to part 45 of this 
chapter.
    (2) Request for confidential treatment. (i) An applicant requesting 
registration as a swap execution facility shall identify with 
particularity any information in the application that will be subject 
to a request for confidential

[[Page 62095]]

treatment pursuant to Sec.  145.9 of this chapter.
    (ii) Section 40.8 of this chapter sets forth those sections of the 
application that will be made publicly available, notwithstanding a 
request for confidential treatment pursuant to Sec.  145.9 of this 
chapter.
    (3) Amendment of application for registration. An applicant 
amending a pending application for registration as a swap execution 
facility shall file an amended Form SEF electronically with the 
Secretary of the Commission in the manner specified by the Commission.
    (4) Effect of incomplete application. If an application is 
incomplete pursuant to paragraph (b)(1) of this section, the Commission 
shall notify the applicant that its application will not be deemed to 
have been submitted for purposes of the Commission's review.
    (5) Commission review period. The Commission shall review an 
application for registration as a swap execution facility pursuant to 
the 180-day timeframe and procedures specified in section 6(a) of the 
Act.
    (6) Commission determination. (i) The Commission shall issue an 
order granting registration upon a Commission determination, in its own 
discretion, that the applicant has demonstrated compliance with the Act 
and the Commission's regulations applicable to swap execution 
facilities. If deemed appropriate, the Commission may issue an order 
granting registration subject to conditions.
    (ii) The Commission may issue an order denying registration upon a 
Commission determination, in its own discretion, that the applicant has 
not demonstrated compliance with the Act and the Commission's 
regulations applicable to swap execution facilities.
    (c) Amendment of an order of registration. (1) A swap execution 
facility requesting an amendment to an order of registration shall 
electronically file such request with the Secretary of the Commission 
in the form and manner specified by the Commission.
    (2) A swap execution facility shall provide to the Commission, upon 
the Commission's request, any additional information and documentation 
necessary to review a request to amend an order of registration.
    (3) The Commission shall issue an amended order of registration 
upon a Commission determination, in its own discretion, that the swap 
execution facility would maintain compliance with the Act and the 
Commission's regulations upon amendment to the order. If deemed 
appropriate, the Commission may issue an amended order of registration 
subject to conditions.
    (4) The Commission may decline to issue an amended order based upon 
a Commission determination, in its own discretion, that the SEF would 
not continue to maintain compliance with the Act and the Commission's 
regulations upon amendment to the order.
    (d) Reinstatement of dormant registration. A dormant swap execution 
facility as defined in Sec.  40.1 of this chapter may reinstate its 
registration under the procedures of paragraph (b) of this section. The 
applicant may rely upon previously submitted materials if such 
materials accurately describe the dormant swap execution facility's 
conditions at the time that it applies for reinstatement of its 
registration.
    (e) Request for transfer of registration. (1) A swap execution 
facility seeking to transfer its registration from its current legal 
entity to a new legal entity as a result of a corporate change shall 
file a request for approval to transfer such registration with the 
Secretary of the Commission in the form and manner specified by the 
Commission.
    (2) Timeline for filing a request for transfer of registration. A 
swap execution facility shall file a request for transfer of 
registration as soon as practicable prior to the anticipated corporate 
change.
    (3) Required information. The request for transfer of registration 
shall include the following:
    (i) The underlying documentation that governs the corporate change;
    (ii) A description of the corporate change, including the reason 
for the change and its impact on the swap execution facility, including 
its governance and operations, and its impact on the rights and 
obligations of market participants;
    (iii) A discussion of the transferee's ability to comply with the 
Act, including the core principles applicable to swap execution 
facilities, and the Commission's regulations thereunder;
    (iv) The governing documents adopted by the transferee, including a 
copy of any constitution, articles or certificate of incorporation, 
organization, formation, or association with all amendments thereto, 
partnership or limited liability agreements, and any existing bylaws, 
operating agreement, or rules or instruments corresponding thereto;
    (v) The transferee's rules marked to show changes from the current 
rules of the swap execution facility;
    (vi) A representation by the transferee that it:
    (A) Will be the surviving entity and successor-in-interest to the 
transferor swap execution facility and will retain and assume the 
assets and liabilities of the transferor, except if otherwise indicated 
in the request;
    (B) Will assume responsibility for complying with all applicable 
provisions of the Act and the Commission's regulations promulgated 
thereunder, including all self-regulatory responsibilities except if 
otherwise indicated in the request; and
    (C) Will notify market participants of all changes to the 
transferor's rulebook prior to the transfer, including those changes 
that may affect the rights and obligations of market participants, and 
will further notify market participants of the concurrent transfer of 
the registration to the transferee upon Commission approval and 
issuance of an order permitting this transfer.
    (4) Commission determination. Upon review of a request for transfer 
of registration, the Commission, as soon as practicable, shall issue an 
order either approving or denying the request.
    (f) Request for withdrawal of application for registration. An 
applicant for registration as a swap execution facility may withdraw 
its application submitted pursuant to paragraph (b) of this section by 
filing a withdrawal request electronically with the Secretary of the 
Commission. Withdrawal of an application for registration shall not 
affect any action taken or to be taken by the Commission based upon 
actions, activities, or events occurring during the time that the 
application was pending with the Commission.
    (g) Request for vacation of registration. A swap execution facility 
may request that its registration be vacated under section 7 of the Act 
by filing a vacation request electronically with the Secretary of the 
Commission. Vacation of registration shall not affect any action taken 
or to be taken by the Commission based upon actions, activities, or 
events occurring during the time that the swap execution facility was 
registered by the Commission.
    (h) Delegation of authority. The Commission hereby delegates, until 
it orders otherwise, to the Director of the Division of Market 
Oversight or such other employee or employees as the Director may 
designate from time to time, upon consultation with the General Counsel 
or the General Counsel's delegate, authority to notify an applicant 
seeking registration that its application is incomplete and that it 
will not be deemed to have been submitted for purposes of the 
Commission's review, and to notify an

[[Page 62096]]

applicant seeking registration under section 6(a) of the Act that its 
application is materially incomplete and the running of the 180-day 
period is stayed. The Director may submit to the Commission for its 
consideration any matter that has been delegated in this paragraph. 
Nothing in this paragraph prohibits the Commission, at its election, 
from exercising the authority delegated in this paragraph.


Sec.  37.4   Procedures for implementing rules.

    (a) Any rule, except for swap product terms and conditions, 
submitted as part of a swap execution facility's application for 
registration shall be considered for approval by the Commission at the 
time the Commission issues the swap execution facility's order of 
registration.
    (b) Any rule, except for swap product terms and conditions, 
submitted as part of an application to reinstate the registration of a 
dormant swap execution facility, as defined in Sec.  40.1 of this 
chapter, shall be considered for approval by the Commission at the time 
the Commission approves the dormant swap execution facility's 
reinstatement of registration.


Sec.  37.5   Provision of information relating to a swap execution 
facility.

    (a) Request for information. Upon the Commission's request, a swap 
execution facility shall file with the Commission information related 
to its business as a swap execution facility in the form and manner and 
within the time period as the Commission specifies in its request.
    (b) Demonstration of compliance. Upon the Commission's request, a 
swap execution facility shall file with the Commission a written 
demonstration, containing supporting data, information, and documents 
that it is in compliance with its obligations under the Act and the 
Commission's regulations as the Commission specifies in its request. 
The swap execution facility shall file such written demonstration in 
the form and manner and within the time period as the Commission 
specifies in its request.
    (c) Equity interest transfer--(1) Equity interest transfer 
notification. A swap execution facility shall file with the Commission 
a notification of each transaction involving the direct or indirect 
transfer of fifty percent or more of the equity interest in the swap 
execution facility. The Commission may, upon receiving such 
notification, request that the swap execution facility provide 
supporting documentation of the transaction.
    (2) Timing of notification. The equity interest transfer notice 
described in paragraph (c)(1) of this section shall be filed 
electronically with the Secretary of the Commission at its Washington, 
DC headquarters at [email protected] and the Division of Market 
Oversight at [email protected], at the earliest possible time but 
in no event later than the open of business ten business days following 
the date upon which a firm obligation is made to transfer, directly or 
indirectly, fifty percent or more of the equity interest in the swap 
execution facility.
    (3) Certification. Upon a transfer, whether directly or indirectly, 
of an equity interest of fifty percent or more in a swap execution 
facility, the swap execution facility shall file electronically with 
the Secretary of the Commission at its Washington, DC headquarters at 
[email protected] and the Division of Market Oversight at 
[email protected], a certification that the swap execution 
facility meets all of the requirements of section 5h of the Act and the 
Commission regulations adopted thereunder, no later than two business 
days following the date on which the equity interest of fifty percent 
or more was acquired.
    (d) Delegation of authority. The Commission hereby delegates, until 
it orders otherwise, the authority set forth in this section to the 
Director of the Division of Market Oversight or such other employee or 
employees as the Director may designate from time to time. The Director 
may submit to the Commission for its consideration any matter that has 
been delegated in this paragraph. Nothing in this paragraph prohibits 
the Commission, at its election, from exercising the authority 
delegated in this paragraph.


Sec.  37.6   Enforceability.

    (a) Enforceability of transactions. A swap transaction executed on 
a swap execution facility shall not be void, voidable, subject to 
rescission, otherwise invalidated, or rendered unenforceable as a 
result of:
    (1) A violation by the swap execution facility of the provisions of 
section 5h of the Act or this part;
    (2) Any Commission proceeding to alter or supplement a rule, term, 
or condition under section 8a(7) of the Act or to declare an emergency 
under section 8a(9) of the Act; or
    (3) Any other proceeding the effect of which is to:
    (i) Alter or supplement a specific term or condition or trading 
rule or procedure; or
    (ii) Require a swap execution facility to adopt a specific term or 
condition, trading rule or procedure, or to take or refrain from taking 
a specific action.
    (b) Swap documentation--(1) Legally binding documentation--(i) 
Cleared swaps. (A) A swap execution facility shall provide a 
confirmation document to each counterparty to a cleared swap 
transaction that is executed on the swap execution facility.
    (B) Confirmation document means a legally binding written 
documentation (electronic or otherwise) that memorializes the agreement 
to all terms of a swap transaction and legally supersedes any previous 
agreement (electronic or otherwise) that relates to the swap 
transaction between the counterparties.
    (ii) Uncleared swaps. (A) A swap execution facility shall provide a 
trade evidence record to each counterparty to an uncleared swap 
transaction that is executed on the swap execution facility.
    (B) Trade evidence record means a legally binding written 
documentation (electronic or otherwise) that memorializes the terms of 
a swap transaction agreed upon by the counterparties and legally 
supersedes any conflicting term in any previous agreement (electronic 
or otherwise) that relates to the swap transaction between the 
counterparties.
    (2) Requirements for swap documentation. (i) A swap execution 
facility shall issue the confirmation document or trade evidence record 
to the counterparties as soon as technologically practicable after the 
execution of the swap transaction on the swap execution facility.
    (ii) Specific customer identifiers for accounts included in bunched 
orders involving swap transactions need not be included in a 
confirmation document or a trade evidence record provided by a swap 
execution facility if the applicable requirements of Sec.  1.35(b)(5) 
of this chapter are met.
    (iii) The swap execution facility may issue the confirmation 
document or trade evidence record to the person acting as an 
intermediary on behalf of the counterparty to the swap transaction. The 
swap execution facility shall establish and enforce rules that require 
such intermediary to send the confirmation document or trade evidence 
record to the respective counterparty as soon as technologically 
practicable upon receipt of the confirmation document or trade evidence 
record from the swap execution facility.


Sec.  37.7   Boards of trade operating both a designated contract 
market and a swap execution facility.

    (a) An entity that intends to operate both a designated contract 
market and a swap execution facility shall separately

[[Page 62097]]

register the two entities pursuant to the designated contract market 
designation procedures set forth in part 38 of this chapter and the 
swap execution facility registration procedures set forth in this part.
    (b) A board of trade, as defined in section 1a(6) of the Act, that 
operates both a designated contract market and a swap execution 
facility and that uses the same electronic trade execution system for 
executing and trading swaps on the designated contract market and on 
the swap execution facility shall clearly identify to market 
participants for each swap whether the execution or trading of such 
swaps is taking place on the designated contract market or on the swap 
execution facility.

Subpart B--Compliance With Core Principles


Sec.  37.100   Core Principle 1--Compliance with core principles.

    (a) In general. To be registered, and maintain registration, as a 
swap execution facility, the swap execution facility shall comply 
with--
    (1) The core principles described in section 5h of the Act; and
    (2) Any requirement that the Commission may impose by rule or 
regulation pursuant to section 8a(5) of the Act.
    (b) Reasonable discretion of a swap execution facility. Unless 
otherwise determined by the Commission by rule or regulation, a swap 
execution facility described in paragraph (a) of this section shall 
have reasonable discretion in establishing the manner in which the swap 
execution facility complies with the core principles described in 
section 5h of the Act.


Sec.  37.101  [Reserved]

Subpart C--Compliance With Rules


Sec.  37.200   Core Principle 2--Compliance with rules.

    A swap execution facility shall:
    (a) Establish and enforce compliance with any rule of the swap 
execution facility, including the terms and conditions of the swaps 
traded or processed on or through the swap execution facility and any 
limitation on access to the swap execution facility;
    (b) Establish and enforce trading, trade processing, and 
participation rules that will deter abuses and have the capacity to 
detect, investigate, and enforce those rules, including means to 
provide market participants with impartial access to the market and to 
capture information that may be used in establishing whether rule 
violations have occurred;
    (c) Establish rules governing the operation of the facility, 
including rules specifying trading procedures to be used in entering 
and executing orders traded or posted on the facility, including block 
trades; and
    (d) Provide by its rules that when a swap dealer or major swap 
participant enters into or facilitates a swap that is subject to the 
mandatory clearing requirement of section 2(h) of the Act, the swap 
dealer or major swap participant shall be responsible for compliance 
with the mandatory trading requirement under section 2(h)(8) of the 
Act.


Sec.  37.201   Requirements for swap execution facility execution 
methods.

    (a) Required swap execution facility rules. A swap execution 
facility shall establish rules governing the operation of the swap 
execution facility that specify:
    (1) The protocols and procedures for trading and execution, 
including entering, amending, cancelling, or executing orders for each 
execution method;
    (2) The manner or circumstances in which the swap execution 
facility may exercise discretion in facilitating trading and execution 
for each execution method; and
    (3) The sources and methodology for generating any market pricing 
information provided to facilitate trading and execution for each 
execution method.
    (b) Pre-execution communications. A swap execution facility shall 
establish rules governing the operation of the swap execution facility 
that specify a prohibition on engaging in any communications away from 
the swap execution facility regarding any swap subject to the trade 
execution requirement of section 2(h)(8) of the Act as set forth in 
Sec.  36.1 of this chapter.
    (1) Counterparties to a swap that is subject to the trade execution 
requirement of section 2(h)(8) of the Act as set forth in Sec.  36.1 of 
this chapter may engage in communications away from the swap execution 
facility if the swap is executed as a component of a package 
transaction that includes a component transaction that is not subject 
to section 2(h)(8) of the Act as set forth in Sec.  36.1 of this 
chapter. For purposes of this paragraph (b)(1), a package transaction 
consists of two or more component transactions executed between two or 
more counterparties where:
    (i) Execution of each component transaction is contingent upon the 
execution of all other components transactions; and
    (ii) The component transactions are each priced or quoted together 
as part of one economic transaction with simultaneous or near 
simultaneous execution of all components.
    (2) [Reserved]
    (c) SEF trading specialist--(1) Definition. For purposes of this 
part, the term SEF trading specialist means any natural person who, 
acting as an employee (or in a similar capacity) of a swap execution 
facility, facilitates the trading or execution of swaps transactions 
(other than in a ministerial or clerical capacity), or who is 
responsible for direct supervision of such persons.
    (2) Fitness. (i) No swap execution facility shall permit a person 
who is subject to a statutory disqualification under sections 8a(2) or 
8a(3) of the Act to serve as a SEF trading specialist if the swap 
execution facility knows, or in the exercise of reasonable care should 
know, of the statutory disqualification.
    (ii) The prohibition set forth in paragraph (c)(2)(i) of this 
section shall not apply to:
    (A) Any person listed as a principal or registered with the 
Commission as an associated person of a futures commission merchant, 
retail foreign exchange dealer, introducing broker, commodity pool 
operator, commodity trading advisor, or leverage transaction merchant, 
or any person registered as a floor broker or floor trader, 
notwithstanding that such person is subject to a disqualification from 
registration under sections 8a(2) or 8a(3) of the Act; or
    (B) Any person otherwise subject to a disqualification from 
registration under sections 8a(2) or 8a(3) of the Act for whom a 
registered futures association provides a notice stating that, if the 
person applied for registration with the Commission as an associated 
person, the registered futures association would not deny the 
application on the basis of the statutory disqualification.
    (3) Proficiency requirements. (i) A swap execution facility shall 
establish and enforce standards and procedures to ensure that its SEF 
trading specialists have the proficiency and knowledge necessary to:
    (A) Fulfill their responsibilities to the swap execution facility 
as SEF trading specialists; and
    (B) Comply with applicable provisions of the Act, the Commission's 
regulations, and the rules of the swap execution facility.
    (ii) Qualification testing. A swap execution facility shall require 
any person serving as a SEF trading specialist to demonstrate that:

[[Page 62098]]

    (A) Such person has taken and passed any examination for swaps 
proficiency developed and administered by a registered futures 
association; and
    (B) There is no continuous two-year period subsequent to such 
person passing a swaps proficiency examination during which the person 
has not served as a SEF trading specialist.
    (iii) Compliance with the qualification testing requirements under 
paragraph (c)(3)(ii) of this section shall constitute compliance with 
the proficiency requirements under paragraph (c)(3)(i) of this section.
    (4) Ethics training. A swap execution facility shall establish and 
enforce policies and procedures to ensure that its SEF trading 
specialists receive ethics training on a periodic basis.
    (5) Standards of conduct. A swap execution facility shall establish 
and enforce policies and procedures that require its SEF trading 
specialists in dealing with market participants and fulfilling their 
responsibilities to the swap execution facility to satisfy standards of 
conduct as established by the swap execution facility.
    (6) Duty to supervise. A swap execution facility shall diligently 
supervise the activities of its SEF trading specialists in the 
facilitation of trading and execution on the swap execution facility.
    (7) Additional sources for compliance. A swap execution facility 
may refer to the guidance and/or acceptable practices in appendix B of 
this part to demonstrate to the Commission compliance with the 
requirements of Sec.  37.201.


Sec.  37.202   Access requirements.

    (a) Impartial access to markets, market services, and execution 
methods. (1) A swap execution facility shall establish rules specifying 
impartial access criteria for its markets, market services, and 
execution methods, including any indicative quote screens or any 
similar pricing data displays. Such impartial access criteria shall be 
transparent, fair, and non-discriminatory and applied to all or 
similarly situated market participants.
    (2) A swap execution facility shall establish fee structures and 
fee practices that are fair and non-discriminatory to market 
participants.
    (b) Limitations on access. A swap execution facility shall 
establish and impartially enforce rules governing any decision to deny, 
suspend, permanently bar, or otherwise limit market participants' 
access to the swap execution facility, including when such decisions 
are made as part of a disciplinary or emergency action taken by the 
swap execution facility. The swap execution facility shall maintain 
documentation of any decision to deny, suspend, permanently bar, or 
otherwise limit access of a market participant to the swap execution 
facility.
    (c) Eligibility. A swap execution facility shall require its market 
participants to provide the swap execution facility with written 
confirmation (electronic or otherwise) of their status as eligible 
contract participants, as defined by the Act and Commission 
regulations, prior to obtaining access.
    (d) Jurisdiction. Prior to granting any market participant access 
to its facilities, a swap execution facility shall require that the 
market participant consent to its jurisdiction.


Sec.  37.203   Rule enforcement program.

    (a) Abusive trading practices prohibited. A swap execution facility 
shall prohibit abusive trading practices on its markets by market 
participants. Swap execution facilities that permit intermediation 
shall prohibit customer-related abuses including, but not limited to, 
trading ahead of customer orders, trading against customer orders, 
accommodation trading, and improper cross trading. Specific trading 
practices that shall be prohibited include front-running, wash trading, 
pre-arranged trading, fraudulent trading, money passes, and any other 
trading practices that a swap execution facility deems to be abusive. A 
swap execution facility shall also prohibit any other manipulative or 
disruptive trading practices prohibited by the Act or by the Commission 
pursuant to Commission regulation.
    (b) Authority to collect information. A swap execution facility 
shall have the authority to collect information required to be kept by 
persons subject to the swap execution facility's recordkeeping rules.
    (c) Compliance staff and resources. A swap execution facility shall 
establish and maintain sufficient compliance staff and resources to 
ensure that it can fulfill its self-regulatory obligations under the 
Act and Commission regulations.
    (d) Automated trade surveillance system. A swap execution facility 
shall maintain an automated trade surveillance system capable of 
detecting and reconstructing potential trade practice violations. Any 
trade executed by voice or by entry into a swap execution facility's 
electronic trading system or platform and any order entered into an 
electronic trading system or platform shall be loaded and processed 
into the automated trade surveillance system no later than 24 hours 
after the completion of the trading day on which such trade was 
executed or such order was entered.
    (e) Error trade policy--(1) Definition. As used in this paragraph 
(e), the term error trade means any swap transaction executed on a swap 
execution facility that contains an error in any term of the swap 
transaction, including price, size, or direction.
    (2) A swap execution facility shall establish and maintain rules 
and procedures that facilitate the resolution of error trades in a 
fair, transparent, consistent, and timely manner. Such rules and 
procedures shall:
    (i) Provide the swap execution facility with the authority to 
adjust trade terms or cancel trades; and
    (ii) Specify the rules and procedures for market participants to 
notify the swap execution facility of an error trade, including any 
time limits for notification.
    (3) A swap execution facility shall, as soon as practicable, 
provide notice to all market participants of:
    (i) Any swap transaction that is under review by the swap execution 
facility pursuant to error trade rules and procedures;
    (ii) Any determination by the swap execution facility that a swap 
transaction under review is or is not an error trade; and
    (iii) The resolution of any error trade, including any trade term 
adjustment or trade cancellation.
    (4) The requirements of paragraph (e) of this section shall not 
preclude the swap execution facility from establishing non-reviewable 
ranges.
    (f) Investigations--(1) Procedures. A swap execution facility shall 
establish and maintain procedures that require its compliance staff to 
conduct investigations, including the commencement of an investigation 
upon the receipt of a request from Commission staff or upon the 
discovery or receipt of information by the swap execution facility that 
indicates a reasonable basis for finding that a violation may have 
occurred or will occur.
    (2) Timeliness. Each investigation shall be completed in a timely 
manner, taking into account the facts and circumstances of the 
investigation.
    (3) Investigation reports. Compliance staff shall prepare a written 
investigation report to document the conclusion of each investigation. 
The investigation report shall include the reason the investigation was 
initiated; a summary of the complaint, if any; the relevant facts; 
compliance staff's analysis and conclusions; and a

[[Page 62099]]

recommendation as to whether disciplinary action should be pursued.
    (g) Additional sources for compliance. A swap execution facility 
may refer to the guidance and/or acceptable practices in appendix B of 
this part to demonstrate to the Commission compliance with the 
requirements of Sec.  37.203.


Sec.  37.204   Regulatory services provided by a third party.

    (a) Use of regulatory service provider permitted. A swap execution 
facility may choose to contract with a registered futures association 
or another registered entity, as such terms are defined under the Act, 
or any non-registered entity (collectively, ``regulatory service 
providers''), for the provision of services to assist in complying with 
the Act and Commission regulations thereunder, as approved by the 
Commission. Any swap execution facility that chooses to contract with a 
regulatory service provider shall ensure that such provider has the 
capabilities and resources necessary to provide timely and effective 
regulatory services, including adequate staff and automated 
surveillance systems. A swap execution facility shall at all times 
remain responsible for the performance of any regulatory services 
received, for compliance with the swap execution facility's obligations 
under the Act and Commission regulations, and for the regulatory 
service provider's performance on its behalf.
    (b) Duty to supervise regulatory service provider. A swap execution 
facility that elects to use the service of a regulatory service 
provider shall retain sufficient compliance staff and resources to 
supervise the quality and effectiveness of the regulatory services 
provided on its behalf. A swap execution facility shall determine the 
necessary processes for a swap execution facility to supervise such 
provider. Such processes shall include, at a minimum, the swap 
execution facility's involvement in all substantive decisions, such as 
decisions involving:
    (1) The adjustment or cancellation of trades;
    (2) Whether or not to issue disciplinary charges; and
    (3) Denials of access to the swap execution facility for 
disciplinary reasons. Such decisions shall be documented as agreed upon 
by the swap execution facility and its regulatory service provider.
    (c) Delegation of authority. The Commission hereby delegates, until 
it orders otherwise, to the Director of the Division of Market 
Oversight or such other employee or employees as the Director may 
designate from time to time, the authority to approve any regulatory 
service provider chosen by a swap execution facility for the provision 
of regulatory services. The Director may submit to the Commission for 
its consideration any matter that has been delegated in this paragraph. 
Nothing in this paragraph prohibits the Commission, at its election, 
from exercising the authority delegated in this paragraph.


Sec.  37.205   Audit trail.

    (a) Audit trail required. A swap execution facility shall capture 
and retain all audit trail data necessary to reconstruct all trading on 
its facility, detect and investigate customer and market abuses, and 
take appropriate disciplinary action. An acceptable audit trail shall 
also permit the swap execution facility to track a customer order from 
the time of receipt through execution on the swap execution facility.
    (b) Elements of an acceptable audit trail program--(1) Original 
source documents. A swap execution facility's audit trail shall include 
original source documents. Original source documents include 
unalterable, sequentially-identified records on which trade execution 
information is originally recorded, whether recorded manually or 
electronically.
    (2) Transaction history database. A swap execution facility's audit 
trail program shall include an electronic transaction history database. 
An adequate transaction history database includes a history of any 
trade executed by voice or by entry into a swap execution facility's 
electronic trading system or platform and any order entered into its 
electronic trading system or platform, including any order modification 
and cancellation.
    (3) Electronic analysis capability. A swap execution facility's 
audit trail program shall include electronic analysis capability with 
respect to all audit trail data in the transaction history database. 
Such electronic analysis capability shall ensure that the swap 
execution facility has the ability to reconstruct any trade executed by 
voice or by entry into a swap execution facility's electronic trading 
system or platform and any order entered into its electronic trading 
system or platform, and identify possible trading violations with 
respect to both customer and market abuse.
    (c) Audit trail reconstruction. A swap execution facility shall 
establish a program to verify its ability to comprehensively and 
accurately reconstruct all trading on its facility in a timely manner.


Sec.  37.206   Disciplinary procedures and sanctions.

    (a) Enforcement staff. A swap execution facility shall establish 
and maintain sufficient enforcement staff and resources to effectively 
and promptly enforce possible rule violations within the disciplinary 
jurisdiction of the swap execution facility.
    (b) Disciplinary program. A swap execution facility shall establish 
a disciplinary program to enforce its rules. A swap execution facility 
shall administer its disciplinary program through one or more 
disciplinary panels or its compliance staff. Notwithstanding the 
requirements of Sec.  37.2, if a swap execution facility elects to 
administer its disciplinary program through its compliance staff, the 
requirements of Sec.  1.64(c)(4) of this chapter shall not apply to 
such compliance staff. Any disciplinary panel or appellate panel 
established by a swap execution facility shall meet the composition 
requirements of applicable Commission regulations, and shall not 
include any member of the swap execution facility's compliance staff or 
any person involved in adjudicating any other stage of the same 
proceeding.
    (c) Warning letters and sanctions. (1) All warning letters and 
sanctions imposed by a swap execution facility or its disciplinary 
panels shall be commensurate with the violations committed and shall be 
clearly sufficient to deter recidivism or similar violations by other 
market participants. All such warning letters and sanctions (including 
summary fines and sanctions imposed pursuant to an accepted settlement 
offer) shall take into account the respondent's disciplinary history. 
In the event of demonstrated customer harm, any sanction shall also 
include full customer restitution, except where the amount of 
restitution or to whom it should be provided cannot be reasonably 
determined.
    (2) A swap execution facility's compliance staff or disciplinary 
panel may not issue more than one warning letter to the same individual 
found to have committed the same rule violation within a rolling 
twelve-month period, except for rule violations related to minor 
recordkeeping or reporting infractions.
    (d) Additional sources for compliance. A swap execution facility 
may refer to the guidance and/or acceptable practices in appendix B of 
this part to demonstrate to the

[[Page 62100]]

Commission compliance with the requirements of Sec.  37.206.

Subpart D--Swaps Not Readily Susceptible to Manipulation


Sec.  37.300   Core Principle 3--Swaps not readily susceptible to 
manipulation.

    The swap execution facility shall permit trading only in swaps that 
are not readily susceptible to manipulation.


Sec.  37.301   General requirements.

    To demonstrate to the Commission compliance with the requirements 
of Sec.  37.300, a swap execution facility shall, at the time it 
submits a new swap contract in advance to the Commission pursuant to 
part 40 of this chapter, provide the applicable information as set 
forth in appendix C to this part, Demonstration of Compliance that a 
Swap Contract is Not Readily Susceptible to Manipulation.

Subpart E--Monitoring of Trading and Trade Processing


Sec.  37.400   Core Principle 4--Monitoring of trading and trade 
processing.

    The swap execution facility shall:
    (a) Establish and enforce rules or terms and conditions defining, 
or specifications detailing:
    (1) Trading procedures to be used in entering and executing orders 
traded on or through the facilities of the swap execution facility; and
    (2) Procedures for trade processing of swaps on or through the 
facilities of the swap execution facility; and
    (b) Monitor trading in swaps to prevent manipulation, price 
distortion, and disruptions of the delivery or cash settlement process 
through surveillance, compliance, and disciplinary practices and 
procedures, including methods for conducting real-time monitoring of 
trading and comprehensive and accurate trade reconstructions.


Sec.  37.401   General requirements.

    A swap execution facility shall:
    (a) Conduct real-time market monitoring of all trading activity on 
the swap execution facility to identify disorderly trading, any market 
or system anomalies, and instances or threats of manipulation, price 
distortion, and disruption;
    (b) Collect and evaluate data on its market participants' trading 
activity away from its facility, including trading in the index or 
instrument used as a reference price, the underlying commodity for its 
listed swaps, or in related derivatives markets, as necessary to detect 
and prevent manipulation, price distortion, and, where possible, 
disruptions of the physical-delivery or cash-settlement processes;
    (c) Monitor and evaluate general market data as necessary to detect 
and prevent manipulative activity that would result in the failure of 
the market price to reflect the normal forces of supply and demand; and
    (d) Have the ability to comprehensively and accurately reconstruct 
all trading activity on its facility for the purpose of detecting 
instances or threats of manipulation, price distortion, and 
disruptions.


Sec.  37.402   Additional requirements for physical-delivery swaps.

    For a physical-delivery swap listed on the swap execution facility, 
the swap execution facility shall:
    (a) Monitor the swap's terms and conditions as it relates to the 
underlying commodity market by reviewing the convergence between the 
swap's price and the price of the underlying commodity and make a good-
faith effort to resolve conditions that are interfering with 
convergence or notify the Commission of such conditions; and
    (b) Monitor the availability of the supply of the commodity 
specified by the delivery requirements of the swap and make a good-
faith effort to resolve conditions that threaten the adequacy of 
supplies or the delivery process or notify the Commission of such 
conditions.


Sec.  37.403   Additional requirements for cash-settled swaps.

    (a) For cash-settled swaps listed on the swap execution facility 
where the reference price is formulated and computed by the swap 
execution facility, the swap execution facility shall monitor the 
continued appropriateness of its methodology for deriving that price 
and take appropriate action, including amending the methodology, where 
there is a threat of manipulation, price distortion, or market 
disruption.
    (b) For cash-settled swaps listed on the swap execution facility 
where the reference price relies on a third-party index or instrument, 
the swap execution facility shall monitor the continued appropriateness 
of the index or instrument and take appropriate action, including 
selecting an alternate index or instrument for deriving the reference 
price, where there is a threat of manipulation, price distortion, or 
market disruption.


Sec.  37.404   Ability to obtain information.

    (a) A swap execution facility shall maintain access to sufficient 
information to assess whether trading in swaps that it lists, in the 
index or instrument used as a reference price, or in the underlying 
commodity for its listed swaps is being used to affect prices on its 
market.
    (b) A swap execution facility shall have rules that require its 
market participants to keep records of their trading, including records 
of their activity in the index or instrument used as a reference price, 
the underlying commodity, and related derivatives markets, and make 
such records available, upon request, to the swap execution facility 
or, if applicable, to its regulatory service provider, and the 
Commission.


Sec.  37.405   Risk controls for trading.

    The swap execution facility shall establish and maintain risk 
control mechanisms to prevent and reduce the potential risk of price 
distortions and market disruptions on its facility, including, but not 
limited to, market restrictions that pause or halt trading under market 
conditions prescribed by the swap execution facility.


Sec.  37.406   Regulatory service provider.

    A swap execution facility shall comply with the regulations in this 
subpart through a dedicated regulatory department or by contracting 
with a regulatory service provider pursuant to Sec.  37.204.


Sec.  37.407   Additional sources for compliance.

    A swap execution facility may refer to the guidance and/or 
acceptable practices in appendix B of this part to demonstrate to the 
Commission compliance with the requirements of Sec.  37.400.

Subpart F--Ability To Obtain Information


Sec.  37.500   Core Principle 5--Ability to obtain information.

    The swap execution facility shall:
    (a) Establish and enforce rules that will allow the facility to 
obtain any necessary information to perform any of the functions 
described in section 5h of the Act;
    (b) Provide the information to the Commission on request; and
    (c) Have the capacity to carry out such international information-
sharing agreements as the Commission may require.


Sec.  37.501   Establish and enforce rules.

    A swap execution facility shall establish and enforce rules that 
will allow the swap execution facility to have the ability and 
authority to obtain sufficient information to allow it to fully perform 
its operational, risk management, governance, and

[[Page 62101]]

regulatory functions and any requirements under this part.


Sec.  37.502   Provide information to the Commission.

    A swap execution facility shall provide information in its 
possession to the Commission upon request, in a form and manner that 
the Commission approves.


Sec.  37.503   Information-sharing.

    A swap execution facility shall share information as required by 
the Commission or as appropriate to fulfill its self-regulatory and 
reporting responsibilities. Appropriate information-sharing agreements 
can be established or the Commission can act in conjunction with the 
swap execution facility to carry out such information sharing.


Sec.  37.504   Prohibited use of data collected for regulatory 
purposes.

    A swap execution facility shall not use for business or marketing 
purposes, nor permit such use of, any proprietary data or personal 
information it collects or receives, from or on behalf of any person, 
for the purpose of fulfilling its regulatory obligations; provided, 
however, that a swap execution facility may use or permit the use of 
such data or information for business or marketing purposes if the 
person from whom it collects or receives such data or information 
clearly consents to the use of such data or information in such manner. 
A swap execution facility shall not condition access to its markets or 
market services on a person's consent to the swap execution facility's 
use of proprietary data or personal information for business or 
marketing purposes.

Subpart G--Position Limits or Accountability


Sec.  37.600   Core Principle 6--Position limits or accountability.

    (a) In general. To reduce the potential threat of market 
manipulation or congestion, especially during trading in the delivery 
month, a swap execution facility that is a trading facility shall adopt 
for each of the contracts of the facility, as is necessary and 
appropriate, position limitations or position accountability for 
speculators.
    (b) Position limits. For any contract that is subject to a position 
limitation established by the Commission pursuant to section 4a(a) of 
the Act, the swap execution facility shall:
    (1) Set its position limitation at a level no higher than the 
Commission limitation; and
    (2) Monitor positions established on or through the swap execution 
facility for compliance with the limit set by the Commission and the 
limit, if any, set by the swap execution facility.


Sec.  37.601  [Reserved]

Subpart H--Financial Integrity of Transactions


Sec.  37.700   Core Principle 7--Financial integrity of transactions.

    The swap execution facility shall establish and enforce rules and 
procedures for ensuring the financial integrity of swaps entered on or 
through the facilities of the swap execution facility, including the 
clearance and settlement of the swaps pursuant to section 2(h)(1) of 
the Act.


Sec.  37.701   Required clearing.

    (a) Transactions executed on the swap execution facility that are 
required to be cleared under section 2(h)(1)(A) of the Act or are 
voluntarily cleared by the counterparties shall be cleared through a 
Commission-registered derivatives clearing organization, or a 
derivatives clearing organization that the Commission has determined is 
exempt from registration.
    (b) A swap execution facility shall have an independent clearing 
agreement with each Commission-registered derivatives clearing 
organization, or derivatives clearing organization that the Commission 
has determined is exempt from registration, to which the swap execution 
facility submits a swap for clearing.


Sec.  37.702   General financial integrity.

    A swap execution facility shall provide for the financial integrity 
of its transactions:
    (a) By establishing minimum financial standards for its market 
participants, which shall, at a minimum, require that each market 
participant qualifies as an eligible contract participant as defined in 
section 1a(18) of the Act;
    (b) For transactions routed through a swap execution facility to a 
registered derivatives clearing organization for clearing:
    (1) By coordinating with each registered derivatives clearing 
organization to which the swap execution facility submits transactions 
for clearing, in the development of rules and procedures to facilitate 
prompt, efficient, and accurate processing and routing of transactions 
to registered derivatives clearing organizations in accordance with the 
requirements of Sec.  39.12(b)(7)(i)(A) of this chapter;
    (2) By requiring that each market participant identify a clearing 
member in advance for each counterparty on an order-by-order basis; and
    (3) By facilitating pre-execution screening by each clearing 
futures commission merchant in accordance with the requirements of 
Sec.  1.73 of this chapter on an order-by-order basis.


Sec.  37.703   Monitoring for financial soundness.

    A swap execution facility shall monitor its market participants to 
ensure that they continue to qualify as eligible contract participants 
as defined in section 1a(18) of the Act.

Subpart I--Emergency Authority


Sec.  37.800   Core Principle 8--Emergency authority.

    The swap execution facility shall adopt rules to provide for the 
exercise of emergency authority, in consultation or cooperation with 
the Commission, as is necessary and appropriate, including the 
authority to liquidate or transfer open positions in any swap or to 
suspend or curtail trading in a swap.


Sec.  37.801   Additional sources for compliance.

    A swap execution facility may refer to the guidance and/or 
acceptable practices in appendix B of this part to demonstrate to the 
Commission compliance with the requirements of Sec.  37.800.

Subpart J--Timely Publication of Trading Information


Sec.  37.900   Core Principle 9--Timely publication of trading 
information.

    (a) In general. The swap execution facility shall make public 
timely information on price, trading volume, and other trading data on 
swaps to the extent prescribed by the Commission.
    (b) Capacity of swap execution facility. The swap execution 
facility shall be required to have the capacity to electronically 
capture and transmit trade information with respect to transactions 
executed on the facility.


Sec.  37.901   General requirements.

    With respect to swaps traded on or through a swap execution 
facility, each swap execution facility shall:
    (a) Report specified swap data as provided under parts 43 and 45 of 
this chapter; and
    (b) Meet the requirements of part 16 of this chapter.

Subpart K--Recordkeeping and Reporting


Sec.  37.1000   Core Principle 10--Recordkeeping and reporting.

    (a) In general. A swap execution facility shall:

[[Page 62102]]

    (1) Maintain records of all activities relating to the business of 
the facility, including a complete audit trail, in a form and manner 
acceptable to the Commission for a period of five years;
    (2) Report to the Commission, in a form and manner acceptable to 
the Commission, such information as the Commission determines to be 
necessary or appropriate for the Commission to perform the duties of 
the Commission under the Act; and
    (3) Keep any such records relating to swaps defined in section 
1a(47)(A)(v) of the Act open to inspection and examination by the 
Securities and Exchange Commission.
    (b) Requirements. The Commission shall adopt data collection and 
reporting requirements for swap execution facilities that are 
comparable to corresponding requirements for derivatives clearing 
organizations and swap data repositories.


Sec.  37.1001   Recordkeeping.

    A swap execution facility shall maintain records of all activities 
relating to the business of the facility, in a form and manner 
acceptable to the Commission, for a period of at least five years. A 
swap execution facility shall maintain such records, including a 
complete audit trail for all swaps executed on the swap execution 
facility, investigatory files, and disciplinary files, in accordance 
with the requirements of Sec.  1.31 and part 45 of this chapter.

Subpart L--Antitrust Considerations


Sec.  37.1100   Core Principle 11--Antitrust considerations.

    Unless necessary or appropriate to achieve the purposes of the Act, 
the swap execution facility shall not:
    (a) Adopt any rules or take any actions that result in any 
unreasonable restraint of trade; or
    (b) Impose any material anticompetitive burden on trading or 
clearing.


Sec.  37.1101   Additional sources for compliance.

    A swap execution facility may refer to the guidance and/or 
acceptable practices in appendix B of this part to demonstrate to the 
Commission compliance with the requirements of Sec.  37.1100.

Subpart M--Conflicts of Interest


Sec.  37.1200   Core Principle 12--Conflicts of interest.

    The swap execution facility shall:
    (a) Establish and enforce rules to minimize conflicts of interest 
in its decision-making process; and
    (b) Establish a process for resolving the conflicts of interest.


Sec.  37.1201  [Reserved]

Subpart N--Financial Resources


Sec.  37.1300   Core Principle 13--Financial resources.

    (a) In general. The swap execution facility shall have adequate 
financial, operational, and managerial resources to discharge each 
responsibility of the swap execution facility.
    (b) Determination of resource adequacy. The financial resources of 
a swap execution facility shall be considered to be adequate if the 
value of the financial resources exceeds the total amount that would 
enable the swap execution facility to cover the operating costs of the 
swap execution facility for a one-year period, as calculated on a 
rolling basis.


Sec.  37.1301   General requirements.

    (a) A swap execution facility shall maintain financial resources on 
an ongoing basis that are adequate to enable it to comply with the core 
principles set forth in section 5h of the Act and any applicable 
Commission regulations. Financial resources shall be considered 
adequate if their value exceeds the total amount that would enable the 
swap execution facility to cover its projected operating costs 
necessary for the swap execution facility to comply with section 5h of 
the Act and applicable Commission regulations for a one-year period, as 
calculated on a rolling basis pursuant to Sec.  37.1304.
    (b) An entity that operates as both a swap execution facility and a 
derivatives clearing organization shall also comply with the financial 
resource requirements of Sec.  39.11 of this chapter. In lieu of filing 
separate reports under Sec.  37.1306(a) and Sec.  39.11(f) of this 
chapter, such an entity may file a single report in accordance with 
Sec.  39.11 of this chapter.


Sec.  37.1302   Types of financial resources.

    Financial resources available to satisfy the requirements of Sec.  
37.1301 may include:
    (a) The swap execution facility's own capital, meaning its assets 
minus its liabilities calculated in accordance with generally accepted 
accounting principles in the United States; and
    (b) Any other financial resource deemed acceptable by the 
Commission.


Sec.  37.1303   Liquidity of financial resources.

    The financial resources allocated by the swap execution facility to 
meet the ongoing requirements of Sec.  37.1301 shall include 
unencumbered, liquid financial assets (i.e., cash and/or highly liquid 
securities) equal to at least the greater of three months of projected 
operating costs, as calculated on a rolling basis, or the projected 
costs needed to wind down the swap execution facility's operations, in 
each case as determined under Sec.  37.1304. If a swap execution 
facility lacks sufficient unencumbered, liquid financial assets to 
satisfy its obligations under this section, the swap execution facility 
may satisfy this requirement by obtaining a committed line of credit or 
similar facility in an amount at least equal to such deficiency.


Sec.  37.1304   Computation of costs to meet financial resources 
requirement.

    A swap execution facility shall each fiscal quarter, make a 
reasonable calculation of its projected operating costs and wind-down 
costs in order to determine its applicable obligations under Sec.  
37.1301 and Sec.  37.1303. The swap execution facility shall have 
reasonable discretion in determining the methodologies used to compute 
such amounts. The Commission may review the methodologies and require 
changes as appropriate.


Sec.  37.1305   Valuation of financial resources.

    No less than each fiscal quarter, a swap execution facility shall 
compute the current market value of each financial resource used to 
meet its obligations under Sec.  37.1301 and Sec.  37.1303. Reductions 
in value to reflect market and credit risk (``haircuts'') shall be 
applied as appropriate.


Sec.  37.1306   Reporting to the Commission.

    (a) Each fiscal quarter, or at any time upon Commission request, a 
swap execution facility shall provide a report to the Commission that 
includes:
    (1) The amount of financial resources necessary to meet the 
requirements of Sec.  37.1301 and Sec.  37.1303, computed in accordance 
with the requirements of Sec.  37.1304, and the market value of each 
available financial resource, computed in accordance with the 
requirements of Sec.  37.1305; and
    (2) Financial statements, including the balance sheet, income 
statement, and statement of cash flows of the swap execution facility.
    (i) The financial statements shall be prepared in accordance with 
generally accepted accounting principles in the United States, prepared 
in English, and denominated in U.S. dollars.
    (ii) The financial statements of a swap execution facility that is 
not domiciled in the United States, and is not otherwise required to 
prepare financial statements in accordance with generally

[[Page 62103]]

accepted accounting principles in the United States, may satisfy the 
requirement in paragraph (a)(2)(i) of this section if such financial 
statements are prepared in accordance with either International 
Financial Reporting Standards issued by the International Accounting 
Standards Board, or a comparable international standard as the 
Commission may otherwise accept in its discretion.
    (b) The calculations required by paragraph (a) of this section 
shall be made as of the last business day of the swap execution 
facility's applicable fiscal quarter.
    (c) With each report required under paragraph (a) of this section, 
the swap execution facility shall also provide the Commission with 
sufficient documentation explaining the methodology used to compute its 
financial requirements under Sec.  37.1301 and Sec.  37.1303. Such 
documentation shall:
    (1) Allow the Commission to reliably determine, without additional 
requests for information, that the swap execution facility has made 
reasonable calculations pursuant to Sec.  37.1304; and
    (2) Include, at a minimum:
    (i) A total list of all expenses, without any exclusion;
    (ii) All expenses and the corresponding amounts, if any, that the 
swap execution facility excluded or pro-rated when determining its 
operating costs, calculated on a rolling basis, required under Sec.  
37.1301 and Sec.  37.1303, and the basis for any determination to 
exclude or pro-rate any such expenses;
    (iii) Documentation demonstrating the existence of any committed 
line of credit or similar facility relied upon for the purpose of 
meeting the requirements of Sec.  37.1303 (e.g., copies of agreements 
establishing or amending a credit facility or similar facility); and
    (iv) All costs that a swap execution facility would incur to wind 
down the swap execution facility's operations, the projected amount of 
time for any such wind-down period, and the basis of its determination 
for the estimation of its costs and timing.
    (d) The reports and supporting documentation required by this 
section shall be filed not later than 40 calendar days after the end of 
the swap execution facility's first three fiscal quarters, and not 
later than 90 calendar days after the end of the swap execution 
facility's fourth fiscal quarter, or at such later time as the 
Commission may permit, in its discretion, upon request by the swap 
execution facility.
    (e) A swap execution facility shall provide notice to the 
Commission no later than 48 hours after it knows or reasonably should 
have known that it no longer meets its obligations under Sec.  37.1301 
or Sec.  37.1303.


Sec.  37.1307   Delegation of authority.

    (a) The Commission hereby delegates, until it orders otherwise, to 
the Director of the Division of Market Oversight or such other employee 
or employees as the Director may designate from time to time, authority 
to:
    (1) Determine whether a particular financial resource under Sec.  
37.1302 may be used to satisfy the requirements of Sec.  37.1301;
    (2) Review and make changes to the methodology used to compute 
projected operating costs and wind-down costs under Sec.  37.1304 and 
the valuation of financial resources under Sec.  37.1305;
    (3) Request reports, in addition to those required in Sec.  
37.1306, or additional documentation or information under Sec.  
37.1306(a), (c), and (e); and
    (4) Grant an extension of time to file fiscal quarter reports under 
Sec.  37.1306(d).
    (b) The Director may submit to the Commission for its consideration 
any matter that has been delegated in this section. Nothing in this 
section prohibits the Commission, at its election, from exercising the 
authority delegated in this section.

Subpart O--System Safeguards


Sec.  37.1400   Core Principle 14--System safeguards.

    The swap execution facility shall:
    (a) Establish and maintain a program of risk analysis and oversight 
to identify and minimize sources of operational risk, through the 
development of appropriate controls and procedures, and automated 
systems, that:
    (1) Are reliable and secure; and
    (2) Have adequate scalable capacity;
    (b) Establish and maintain emergency procedures, backup facilities, 
and a plan for disaster recovery that allow for:
    (1) The timely recovery and resumption of operations; and
    (2) The fulfillment of the responsibilities and obligations of the 
swap execution facility; and
    (c) Periodically conduct tests to verify that the backup resources 
of the swap execution facility are sufficient to ensure continued:
    (1) Order processing and trade matching;
    (2) Price reporting;
    (3) Market surveillance; and
    (4) Maintenance of a comprehensive and accurate audit trail.


Sec.  37.1401   Requirements.

    (a) A swap execution facility's program of risk analysis and 
oversight with respect to its operations and automated systems shall 
address each of the following categories of risk analysis and 
oversight:
    (1) Enterprise risk management and governance. This category 
includes, but is not limited to: Assessment, mitigation, and monitoring 
of security and technology risk; security and technology capital 
planning and investment; board of directors and management oversight of 
technology and security; information technology audit and controls 
assessments; remediation of deficiencies; and any other elements of 
enterprise risk management and governance included in generally 
accepted best practices;
    (2) Information security. This category includes, but is not 
limited to, controls relating to: Access to systems and data (including 
least privilege, separation of duties, account monitoring and control); 
user and device identification and authentication; security awareness 
training; audit log maintenance, monitoring, and analysis; media 
protection; personnel security and screening; automated system and 
communications protection (including network port control, boundary 
defenses, encryption); system and information integrity (including 
malware defenses, software integrity monitoring); vulnerability 
management; penetration testing; security incident response and 
management; and any other elements of information security included in 
generally accepted best practices;
    (3) Business continuity-disaster recovery planning and resources. 
This category includes, but is not limited to: Regular, periodic 
testing and review of business continuity-disaster recovery 
capabilities, the controls and capabilities described in paragraphs 
(c), (d), and (k) of this section; and any other elements of business 
continuity-disaster recovery planning and resources included in 
generally accepted best practices;
    (4) Capacity and performance planning. This category includes, but 
is not limited to: Controls for monitoring the swap execution 
facility's systems to ensure adequate scalable capacity (including 
testing, monitoring, and analysis of current and projected future 
capacity and performance, and of possible capacity degradation due to 
planned automated system changes); and any other elements of capacity 
and performance planning included in generally accepted best practices;
    (5) Systems operations. This category includes, but is not limited 
to: System maintenance; configuration management (including baseline

[[Page 62104]]

configuration, configuration change and patch management, least 
functionality, inventory of authorized and unauthorized devices and 
software); event and problem response and management; and any other 
elements of system operations included in generally accepted best 
practices;
    (6) Systems development and quality assurance. This category 
includes, but is not limited to: Requirements development; pre-
production and regression testing; change management procedures and 
approvals; outsourcing and vendor management; training in secure coding 
practices; and any other elements of systems development and quality 
assurance included in generally accepted best practices; and
    (7) Physical security and environmental controls. This category 
includes, but is not limited to: Physical access and monitoring; power, 
telecommunication, and environmental controls; fire protection; and any 
other elements of physical security and environmental controls included 
in generally accepted best practices.
    (b) In addressing the categories of risk analysis and oversight 
required under paragraph (a) of this section, a swap execution facility 
shall follow generally accepted standards and best practices with 
respect to the development, operation, reliability, security, and 
capacity of automated systems.
    (c) A swap execution facility shall maintain a business continuity-
disaster recovery plan and business continuity-disaster recovery 
resources, emergency procedures, and backup facilities sufficient to 
enable timely recovery and resumption of its operations and resumption 
of its ongoing fulfillment of its responsibilities and obligations as a 
swap execution facility following any disruption of its operations. 
Such responsibilities and obligations include, without limitation: 
Order processing and trade matching; transmission of matched orders to 
a derivatives clearing organization for clearing, where appropriate; 
price reporting; market surveillance; and maintenance of a 
comprehensive audit trail protected from alteration, accidental 
erasure, or other loss. A swap execution facility's business 
continuity-disaster recovery plan and resources generally should enable 
resumption of trading and clearing of swaps executed on the swap 
execution facility during the next business day following the 
disruption. A swap execution facility shall update its business 
continuity-disaster recovery plan and emergency procedures at a 
frequency determined by an appropriate risk analysis, but at a minimum 
no less frequently than annually.
    (d) A swap execution facility satisfies the requirement to be able 
to resume its operations and resume its ongoing fulfillment of its 
responsibilities and obligations during the next business day following 
any disruption of its operations by maintaining either:
    (1) Infrastructure and personnel resources of its own that are 
sufficient to ensure timely recovery and resumption of its operations 
and resumption of its ongoing fulfillment of its responsibilities and 
obligations as a swap execution facility following any disruption of 
its operations; or
    (2) Contractual arrangements with other swap execution facilities 
or disaster recovery service providers, as appropriate, that are 
sufficient to ensure continued trading and clearing of swaps executed 
on the swap execution facility, and ongoing fulfillment of all of the 
swap execution facility's responsibilities and obligations with respect 
to such swaps, in the event that a disruption renders the swap 
execution facility temporarily or permanently unable to satisfy this 
requirement on its own behalf.
    (e) A swap execution facility shall notify Commission staff 
promptly of all:
    (1) Electronic trading halts and material system malfunctions;
    (2) Cyber security incidents or targeted threats that actually or 
potentially jeopardize automated system operation, reliability, 
security, or capacity; and
    (3) Activations of the swap execution facility's business 
continuity-disaster recovery plan.
    (f) A swap execution facility shall provide Commission staff timely 
advance notice of all material:
    (1) Planned changes to automated systems that may impact the 
reliability, security, or adequate scalable capacity of such systems; 
and
    (2) Planned changes to the swap execution facility's program of 
risk analysis and oversight.
    (g) A swap execution facility shall annually prepare and submit to 
the Commission an up-to-date Exhibit Q to Form SEF--Program of Risk 
Analysis and Oversight Technology Questionnaire--in appendix A to this 
part. The annual filing shall be submitted electronically to the 
Commission not later than 90 calendar days after the end of the swap 
execution facility's fiscal year. The swap execution facility shall 
file Exhibit Q with the annual financial report and the annual 
compliance report pursuant to Sec.  37.1306(d) and Sec.  37.1501(e)(2), 
respectively.
    (h) As part of a swap execution facility's obligation to produce 
books and records in accordance with Sec.  1.31 of this chapter, Core 
Principle 10 (Recordkeeping and Reporting), and Sec.  37.1000 and Sec.  
37.1001, a swap execution facility shall provide to the Commission the 
following system safeguards-related books and records, promptly upon 
the request of any Commission representative:
    (1) Current copies of its business continuity-disaster recovery 
plans and other emergency procedures;
    (2) All assessments of its operational risks or system safeguards-
related controls;
    (3) All reports concerning system safeguards testing and assessment 
required by this chapter, whether performed by independent contractors 
or by employees of the swap execution facility; and
    (4) All other books and records requested by Commission staff in 
connection with Commission oversight of system safeguards pursuant to 
the Act or Commission regulations, or in connection with Commission 
maintenance of a current profile of the swap execution facility's 
automated systems.
    (5) Nothing in this paragraph (h) shall be interpreted as reducing 
or limiting in any way a swap execution facility's obligation to comply 
with Sec.  1.31 of this chapter, Core Principle 10 (Recordkeeping and 
Reporting), or Sec.  37.1000 or Sec.  37.1001.
    (i) A swap execution facility shall conduct regular, periodic, 
objective testing and review of its automated systems to ensure that 
they are reliable, secure, and have adequate scalable capacity. It 
shall also conduct regular, periodic testing and review of its business 
continuity-disaster recovery capabilities. Such testing and review 
shall include, without limitation, all of the types of testing set 
forth in this paragraph (i).
    (1) Definitions. As used in paragraph (i):
    Controls means the safeguards or countermeasures employed by the 
swap execution facility in order to protect the reliability, security, 
or capacity of its automated systems or the confidentiality, integrity, 
and availability of its data and information, and in order to enable 
the swap execution facility to fulfill its statutory and regulatory 
responsibilities.
    Controls testing means assessment of the swap execution facility's 
controls to determine whether such controls are implemented correctly, 
are operating as intended, and are enabling the swap execution facility 
to meet the requirements established by this section.

[[Page 62105]]

    Enterprise technology risk assessment means a written assessment 
that includes, but is not limited to, an analysis of threats and 
vulnerabilities in the context of mitigating controls. An enterprise 
technology risk assessment identifies, estimates, and prioritizes risks 
to swap execution facility operations or assets, or to market 
participants, individuals, or other entities, resulting from impairment 
of the confidentiality, integrity, and availability of data and 
information or the reliability, security, or capacity of automated 
systems.
    External penetration testing means attempts to penetrate the swap 
execution facility's automated systems from outside the systems' 
boundaries to identify and exploit vulnerabilities. Methods of 
conducting external penetration testing include, but are not limited 
to, methods for circumventing the security features of an automated 
system.
    Internal penetration testing means attempts to penetrate the swap 
execution facility's automated systems from inside the systems' 
boundaries, to identify and exploit vulnerabilities. Methods of 
conducting internal penetration testing include, but are not limited 
to, methods for circumventing the security features of an automated 
system.
    Key controls means those controls that an appropriate risk analysis 
determines are either critically important for effective system 
safeguards or intended to address risks that evolve or change more 
frequently and therefore require more frequent review to ensure their 
continuing effectiveness in addressing such risks.
    Security incident means a cyber security or physical security event 
that actually jeopardizes or has a significant likelihood of 
jeopardizing automated system operation, reliability, security, or 
capacity, or the availability, confidentiality or integrity of data.
    Security incident response plan means a written plan documenting 
the swap execution facility's policies, controls, procedures, and 
resources for identifying, responding to, mitigating, and recovering 
from security incidents, and the roles and responsibilities of its 
management, staff and independent contractors in responding to security 
incidents. A security incident response plan may be a separate document 
or a business continuity-disaster recovery plan section or appendix 
dedicated to security incident response.
    Security incident response plan testing means testing of a swap 
execution facility's security incident response plan to determine the 
plan's effectiveness, identify its potential weaknesses or 
deficiencies, enable regular plan updating and improvement, and 
maintain organizational preparedness and resiliency with respect to 
security incidents. Methods of conducting security incident response 
plan testing may include, but are not limited to, checklist completion, 
walk-through or table-top exercises, simulations, and comprehensive 
exercises.
    Vulnerability testing means testing of a swap execution facility's 
automated systems to determine what information may be discoverable 
through a reconnaissance analysis of those systems and what 
vulnerabilities may be present on those systems.
    (2) Vulnerability testing. A swap execution facility shall conduct 
vulnerability testing of a scope sufficient to satisfy the requirements 
set forth in paragraph (k) of this section.
    (i) A swap execution facility shall conduct such vulnerability 
testing at a frequency determined by an appropriate risk analysis.
    (ii) Such vulnerability testing shall include automated 
vulnerability scanning, which shall follow generally accepted best 
practices.
    (iii) A swap execution facility shall conduct vulnerability testing 
by engaging independent contractors or by using employees of the swap 
execution facility who are not responsible for development or operation 
of the systems or capabilities being tested.
    (3) External penetration testing. A swap execution facility shall 
conduct external penetration testing of a scope sufficient to satisfy 
the requirements set forth in paragraph (k) of this section.
    (i) A swap execution facility shall conduct such external 
penetration testing at a frequency determined by an appropriate risk 
analysis.
    (ii) A swap execution facility shall conduct external penetration 
testing by engaging independent contractors or by using employees of 
the swap execution facility who are not responsible for development or 
operation of the systems or capabilities being tested.
    (4) Internal penetration testing. A swap execution facility shall 
conduct internal penetration testing of a scope sufficient to satisfy 
the requirements set forth in paragraph (k) of this section.
    (i) A swap execution facility shall conduct such internal 
penetration testing at a frequency determined by an appropriate risk 
analysis.
    (ii) A swap execution facility shall conduct internal penetration 
testing by engaging independent contractors or by using employees of 
the swap execution facility who are not responsible for development or 
operation of the systems or capabilities being tested.
    (5) Controls testing. A swap execution facility shall conduct 
controls testing of a scope sufficient to satisfy the requirements set 
forth in paragraph (k) of this section.
    (i) A swap execution facility shall conduct controls testing, which 
includes testing of each control included in its program of risk 
analysis and oversight, at a frequency determined by an appropriate 
risk analysis. Such testing may be conducted on a rolling basis.
    (ii) A swap execution facility shall conduct controls testing by 
engaging independent contractors or by using employees of the swap 
execution facility who are not responsible for development or operation 
of the systems or capabilities being tested.
    (6) Security incident response plan testing. A swap execution 
facility shall conduct security incident response plan testing 
sufficient to satisfy the requirements set forth in paragraph (k) of 
this section.
    (i) A swap execution facility shall conduct such security incident 
response plan testing at a frequency determined by an appropriate risk 
analysis.
    (ii) A swap execution facility's security incident response plan 
shall include, without limitation, the swap execution facility's 
definition and classification of security incidents, its policies and 
procedures for reporting security incidents and for internal and 
external communication and information sharing regarding security 
incidents, and the hand-off and escalation points in its security 
incident response process.
    (iii) A swap execution facility may coordinate its security 
incident response plan testing with other testing required by this 
section or with testing of its other business continuity-disaster 
recovery and crisis management plans.
    (iv) A swap execution facility may conduct security incident 
response plan testing by engaging independent contractors or by using 
employees of the swap execution facility.
    (7) Enterprise technology risk assessment. A swap execution 
facility shall conduct enterprise technology risk assessment of a scope 
sufficient to satisfy the requirements set forth in paragraph (k) of 
this section.
    (i) A swap execution facility shall conduct enterprise technology 
risk assessment at a frequency determined by an appropriate risk 
analysis. A swap execution facility that has conducted an enterprise 
technology risk assessment that complies with this section may

[[Page 62106]]

conduct subsequent assessments by updating the previous assessment.
    (ii) A swap execution facility may conduct enterprise technology 
risk assessments by using independent contractors or employees of the 
swap execution facility who are not responsible for development or 
operation of the systems or capabilities being assessed.
    (j) To the extent practicable, a swap execution facility shall:
    (1) Coordinate its business continuity-disaster recovery plan with 
those of the market participants it depends upon to provide liquidity, 
in a manner adequate to enable effective resumption of activity in its 
markets following a disruption causing activation of the swap execution 
facility's business continuity-disaster recovery plan;
    (2) Initiate and coordinate periodic, synchronized testing of its 
business continuity-disaster recovery plan with those of the market 
participants it depends upon to provide liquidity; and
    (3) Ensure that its business continuity-disaster recovery plan 
takes into account the business continuity-disaster recovery plans of 
its telecommunications, power, water, and other essential service 
providers.
    (k) Scope of testing and assessment. The scope for all system 
safeguards testing and assessment required by this part shall be broad 
enough to include the testing of automated systems and controls that 
the swap execution facility's required program of risk analysis and 
oversight and its current cybersecurity threat analysis indicate is 
necessary to identify risks and vulnerabilities that could enable an 
intruder or unauthorized user or insider to:
    (1) Interfere with the swap execution facility's operations or with 
fulfillment of its statutory and regulatory responsibilities;
    (2) Impair or degrade the reliability, security, or adequate 
scalable capacity of the swap execution facility's automated systems;
    (3) Add to, delete, modify, exfiltrate, or compromise the integrity 
of any data related to the swap execution facility's regulated 
activities; or
    (4) Undertake any other unauthorized action affecting the swap 
execution facility's regulated activities or the hardware or software 
used in connection with those activities.
    (l) Internal reporting and review. Both the senior management and 
the Board of Directors of a swap execution facility shall receive and 
review reports setting forth the results of the testing and assessment 
required by this section. A swap execution facility shall establish and 
follow appropriate procedures for the remediation of issues identified 
through such review, as provided in paragraph (m) of this section, and 
for evaluation of the effectiveness of testing and assessment 
protocols.
    (m) Remediation. A swap execution facility shall identify and 
document the vulnerabilities and deficiencies in its systems revealed 
by the testing and assessment required by this section. The swap 
execution facility shall conduct and document an appropriate analysis 
of the risks presented by such vulnerabilities and deficiencies, to 
determine and document whether to remediate or accept the associated 
risk. When the swap execution facility determines to remediate a 
vulnerability or deficiency, it must remediate in a timely manner given 
the nature and magnitude of the associated risk.

Subpart P--Designation of Chief Compliance Officer


Sec.  37.1500   Core Principle 15--Designation of chief compliance 
officer.

    (a) In general. Each swap execution facility shall designate an 
individual to serve as a chief compliance officer.
    (b) Duties. The chief compliance officer shall:
    (1) Report directly to the board or to the senior officer of the 
facility;
    (2) Review compliance with the core principles in this subsection;
    (3) In consultation with the board of the facility, a body 
performing a function similar to that of a board, or the senior officer 
of the facility, resolve any conflicts of interest that may arise;
    (4) Be responsible for establishing and administering the policies 
and procedures required to be established pursuant to this section;
    (5) Ensure compliance with the Act and the rules and regulations 
issued under the Act, including rules prescribed by the Commission 
pursuant to section 5h of the Act; and
    (6) Establish procedures for the remediation of noncompliance 
issues found during compliance office reviews, look backs, internal or 
external audit findings, self-reported errors, or through validated 
complaints.
    (c) Requirements for procedures. In establishing procedures under 
paragraph (b)(6) of this section, the chief compliance officer shall 
design the procedures to establish the handling, management response, 
remediation, retesting, and closing of noncompliance issues.
    (d) Annual reports--(1) In general. In accordance with rules 
prescribed by the Commission, the chief compliance officer shall 
annually prepare and sign a report that contains a description of:
    (i) The compliance of the swap execution facility with the Act; and
    (ii) The policies and procedures, including the code of ethics and 
conflict of interest policies, of the swap execution facility.
    (2) Requirements. The chief compliance officer shall:
    (i) Submit each report described in paragraph (d)(1) of this 
section with the appropriate financial report of the swap execution 
facility that is required to be submitted to the Commission pursuant to 
section 5h of the Act; and
    (ii) Include in the report a certification that, under penalty of 
law, the report is accurate and complete.


Sec.  37.1501   Chief compliance officer.

    (a) Definitions. For purposes of this part, the term--
    Board of directors means the board of directors of a swap execution 
facility, or for those swap execution facilities whose organizational 
structure does not include a board of directors, a body performing a 
function similar to a board of directors.
    Senior officer means the chief executive officer or other 
equivalent officer of the swap execution facility.
    (b) Chief compliance officer--(1) Authority of chief compliance 
officer. (i) The position of chief compliance officer shall carry with 
it the authority and resources to develop, in consultation with the 
board of directors or senior officer, the policies and procedures of 
the swap execution facility and enforce such policies and procedures to 
fulfill the duties set forth for chief compliance officers in the Act 
and Commission regulations.
    (ii) The chief compliance officer shall have supervisory authority 
over all staff acting at the direction of the chief compliance officer.
    (2) Qualifications of chief compliance officer. (i) The individual 
designated to serve as chief compliance officer shall have the 
background and skills appropriate for fulfilling the responsibilities 
of the position.
    (ii) No individual disqualified from registration pursuant to 
sections 8a(2) or 8a(3) of the Act may serve as a chief compliance 
officer.
    (3) Appointment and removal of chief compliance officer. (i) Only 
the board of directors or the senior officer may appoint or remove the 
chief compliance officer.
    (ii) The swap execution facility shall notify the Commission within 
two business days of the appointment or removal, whether interim or 
permanent, of a chief compliance officer.
    (4) Compensation of the chief compliance officer. The board of

[[Page 62107]]

directors or the senior officer shall approve the compensation of the 
chief compliance officer.
    (5) Annual meeting with the chief compliance officer. The chief 
compliance officer shall meet with the board of directors or senior 
officer of the swap execution facility at least annually.
    (6) Information requested of the chief compliance officer. The 
chief compliance officer shall provide any information regarding the 
self-regulatory program of the swap execution facility as requested by 
the board of directors or the senior officer.
    (c) Duties of chief compliance officer. The duties of the chief 
compliance officer shall include, but are not limited to, the 
following:
    (1) Overseeing and reviewing compliance of the swap execution 
facility with section 5h of the Act and any related rules adopted by 
the Commission;
    (2) Taking reasonable steps, in consultation with the board of 
directors or the senior officer of the swap execution facility, to 
resolve any material conflicts of interest that may arise;
    (3) Establishing and administering written policies and procedures 
reasonably designed to prevent violations of the Act and the rules of 
the Commission;
    (4) Taking reasonable steps to ensure compliance with the Act and 
the rules of the Commission;
    (5) Establishing procedures reasonably designed to handle, respond, 
remediate, retest, and resolve noncompliance issues identified by the 
chief compliance officer through any means, including any compliance 
office review, look-back, internal or external audit finding, self-
reported error, or validated complaint;
    (6) Establishing and administering a compliance manual designed to 
promote compliance with the applicable laws, rules, and regulations and 
a written code of ethics for the swap execution facility designed to 
prevent ethical violations and to promote honesty and ethical conduct 
by personnel of the swap execution facility;
    (7) Supervising the self-regulatory program of the swap execution 
facility with respect to trade practice surveillance; market 
surveillance; real-time market monitoring; compliance with audit trail 
requirements; enforcement and disciplinary proceedings; audits, 
examinations, and other regulatory responsibilities (including taking 
reasonable steps to ensure compliance with, if applicable, financial 
integrity, financial reporting, sales practice, recordkeeping, and 
other requirements); and
    (8) Supervising the effectiveness and sufficiency of any regulatory 
services provided to the swap execution facility by a regulatory 
service provider in accordance with Sec.  37.204.
    (d) Preparation of annual compliance report. The chief compliance 
officer shall, not less than annually, prepare and sign an annual 
compliance report that covers the prior fiscal year. The report shall, 
at a minimum, contain:
    (1) A description and self-assessment of the effectiveness of the 
written policies and procedures of the swap execution facility, 
including the code of ethics and conflict of interest policies to 
reasonably ensure compliance with the Act and applicable Commission 
regulations;
    (2) Any material changes made to compliance policies and procedures 
during the coverage period for the report and any areas of improvement 
or recommended changes to the compliance program;
    (3) A description of the financial, managerial, and operational 
resources set aside for compliance with the Act and applicable 
Commission regulations;
    (4) Any material non-compliance matters identified and an 
explanation of the corresponding action taken to resolve such non-
compliance matters; and
    (5) A certification by the chief compliance officer that, to the 
best of his or her knowledge and reasonable belief, and under penalty 
of law, the annual compliance report is accurate and complete in all 
material respects.
    (e) Submission of annual compliance report and related matters--(1) 
Furnishing the annual compliance report prior to submission to the 
Commission. Prior to submission to the Commission, the chief compliance 
officer shall provide the annual compliance report for review to the 
board of directors of the swap execution facility or, in the absence of 
a board of directors, to the senior officer of the swap execution 
facility. Members of the board of directors and the senior officer 
shall not require the chief compliance officer to make any changes to 
the report.
    (2) Submission of annual compliance report to the Commission. The 
annual compliance report shall be submitted electronically to the 
Commission not later than 90 calendar days after the end of the swap 
execution facility's fiscal year. The swap execution facility shall 
concurrently file the annual compliance report with the fourth quarter 
financial report pursuant to Sec.  37.1306.
    (3) Amendments to annual compliance report. (i) Promptly upon 
discovery of any material error or omission made in a previously filed 
annual compliance report, the chief compliance officer shall file an 
amendment with the Commission to correct the material error or 
omission. The chief compliance officer shall submit the amended annual 
compliance report to the board of directors, or in the absence of a 
board of directors, to the senior officer of the swap execution 
facility, pursuant to paragraph (e)(1) of this section.
    (ii) An amendment shall contain the certification required under 
paragraph (d)(5) of this section.
    (4) Request for extension. A swap execution facility may request an 
extension of time to file its annual compliance report from the 
Commission. Reasonable and valid requests for extensions of the filing 
deadline may be granted at the discretion of the Commission.
    (f) Recordkeeping. The swap execution facility shall maintain all 
records demonstrating compliance with the duties of the chief 
compliance officer and the preparation and submission of annual 
compliance reports consistent with Sec. Sec.  37.1000 and 37.1001.
    (g) Delegation of authority. The Commission hereby delegates, until 
it orders otherwise, to the Director of the Division of Market 
Oversight or such other employee or employees as the Director may 
designate from time to time, the authority to grant or deny a request 
for an extension of time for a swap execution facility to file its 
annual compliance report under paragraph (e)(4) of this section. The 
Director may submit to the Commission for its consideration any matter 
that has been delegated in this paragraph. Nothing in this paragraph 
prohibits the Commission, at its election, from exercising the 
authority delegated in this paragraph.

Appendix A to Part 37--Form SEF

BILLING CODE 6351-01-P

[[Page 62108]]

[GRAPHIC] [TIFF OMITTED] TP30NO18.028


[[Page 62109]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.029


[[Page 62110]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.030


[[Page 62111]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.031


[[Page 62112]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.032


[[Page 62113]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.033


[[Page 62114]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.034


[[Page 62115]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.035


[[Page 62116]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.036


[[Page 62117]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.037


[[Page 62118]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.038


[[Page 62119]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.039


[[Page 62120]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.040


[[Page 62121]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.041


[[Page 62122]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.042


[[Page 62123]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.043


[[Page 62124]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.044


[[Page 62125]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.045


[[Page 62126]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.046


[[Page 62127]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.047


[[Page 62128]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.048


[[Page 62129]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.049


[[Page 62130]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.050


[[Page 62131]]


[GRAPHIC] [TIFF OMITTED] TP30NO18.051

BILLING CODE 6531-01-C

[[Page 62132]]

Appendix B to Part 37--Guidance on, and Acceptable Practices in, 
Compliance With Core Principles

    1. This appendix provides guidance on complying with core 
principles, both initially and on an ongoing basis, to maintain 
registration under section 5h of the Act and this part. Where 
provided, guidance is set forth in paragraph (a) following the 
relevant heading and can be used to demonstrate to the Commission 
compliance with the selected requirements of a core principle of 
this part. The guidance for the core principle is illustrative only 
of the types of matters a swap execution facility may address, as 
applicable, and is not intended to be used as a mandatory checklist. 
Addressing the issues set forth in this appendix would help the 
Commission in its consideration of whether the swap execution 
facility is in compliance with the selected requirements of a core 
principle; provided however, that the guidance is not intended to 
diminish or replace, in any event, the obligations and requirements 
of applicants and swap execution facilities to comply with the 
regulations provided under this part.
    2. Where provided, acceptable practices meeting selected 
requirements of core principles are set forth in paragraph (b) 
following the guidance. Swap execution facilities that follow 
specific practices outlined in the acceptable practices for a core 
principle in this appendix will meet the selected requirements of 
the applicable core principle; provided however, that the acceptable 
practice is not intended to diminish or replace, in any event, the 
obligations and requirements of applicants and swap execution 
facilities to comply with the regulations provided under this part. 
The acceptable practices are for illustrative purposes only and do 
not state the exclusive means for satisfying a core principle.

Core Principle 1 of Section 5h of the Act--Compliance With Core 
Principles

    (A) In general. To be registered, and maintain registration, as 
a swap execution facility, the swap execution facility shall comply 
with--the core principles described in section 5h of the Act; and 
any requirement that the Commission may impose by rule or regulation 
pursuant to section 8a(5) of the Act.
    (B) Reasonable discretion of swap execution facility. Unless 
otherwise determined by the Commission by rule or regulation, a swap 
execution facility described in paragraph (A) shall have reasonable 
discretion in establishing the manner in which the swap execution 
facility complies with the core principles described in section 5h 
of the Act.
    (a) Guidance. [Reserved]
    (b) Acceptable Practices. [Reserved]

Core Principle 2 of Section 5h of the Act--Compliance With Rules

    A swap execution facility shall:
    (A) Establish and enforce compliance with any rule of the swap 
execution facility, including the terms and conditions of the swaps 
traded or processed on or through the swap execution facility and 
any limitation on access to the swap execution facility;
    (B) Establish and enforce trading, trade processing, and 
participation rules that will deter abuses and have the capacity to 
detect, investigate, and enforce those rules, including means to 
provide market participants with impartial access to the market and 
to capture information that may be used in establishing whether rule 
violations have occurred;
    (C) Establish rules governing the operation of the facility, 
including rules specifying trading procedures to be used in entering 
and executing orders traded or posted on the facility, including 
block trades; and
    (D) Provide by its rules that when a swap dealer or major swap 
participant enters into or facilitates a swap that is subject to the 
mandatory clearing requirement of section 2(h) of the Act, the swap 
dealer or major swap participant shall be responsible for compliance 
with the mandatory trading requirement under section 2(h)(8) of the 
Act.
    (a) Guidance. (1) Ethics training. (i) Section 37.201(c)(4) 
requires a swap execution facility to ensure that its SEF trading 
specialists receive ethics training on a periodic basis. Such 
training should help SEF trading specialists be aware, and remain 
abreast, of, their continuing obligations with respect to the rules, 
policies, and procedures of the swap execution facility, as well as 
the applicable provisions of the Act and Commission regulations 
thereunder.
    (ii) Ethics training for SEF trading specialists should account 
for the level and nature of SEF trading specialists' 
responsibilities within a swap execution facility. The training 
should address topics such as an explanation of applicable laws and 
regulations and the rules, policies, and procedures of the swap 
execution facility; how to act honestly and fairly and with due 
skill, care, and diligence in furtherance of the interests of market 
participants and the integrity of the market; protection of 
confidential information; and avoidance, proper disclosure, and 
handling of conflicts of interest. Such ethics training should also 
seek to ensure that SEF trading specialists remain current with 
regard to the ethical ramifications of new developments with respect 
to evolving technology, trading practices, products, and other 
relevant changes.
    (iii) A swap execution facility, at its discretion, may develop 
and implement its own ethics training program or utilize a program 
offered by a third-party provider, or may implement some combination 
thereof. Third-party providers may include independent persons, 
firms, or industry associations. No specific format or class 
training is required, as the needs of a swap execution facility may 
vary according to its size and number of personnel that are SEF 
trading specialists. A swap execution facility may utilize 
electronic media, such as video presentations, internet-based 
transmissions, and interactive software programs as part of its 
ethics training program. A swap execution facility should ascertain 
the credentials of any provider of ethics training or training 
materials and should ensure that such persons have the appropriate 
level of industry experience and knowledge, including with respect 
to the swap execution facility's rules, policies, procedures, and 
operations.
    (iv) A swap execution facility may determine the frequency and 
duration of ethics training but such frequency and duration should 
promote a corporate culture of high ethical and professional conduct 
and a continuous awareness of industry standards and practices.
    (2) Investigations--Timeliness. A swap execution facility has 
reasonable discretion to determine the timely manner in which to 
complete investigations under Sec.  37.203(f)(2).
    (3) Investigations--Investigation reports. A swap execution 
facility's compliance staff should submit all investigation reports 
to the Chief Compliance Officer or other compliance department staff 
responsible for reviewing such reports and determining the next 
steps in the process. The Chief Compliance Officer or other 
responsible staff should have reasonable discretion to decide 
whether to take any action, such as presenting the investigation 
report to a disciplinary panel for disciplinary action.
    (4) Audit trail required. A swap execution facility's audit 
trail data should be sufficient to reconstruct all indications of 
interest, requests for quotes, orders, and trades within a 
reasonable period of time and to provide evidence of any violations 
of the rules of the swap execution facility.
    (5) Audit trail reconstruction. An effective audit trail 
reconstruction program should annually review an adequate sample of 
executed and unexecuted orders and trades from each execution method 
offered by the swap execution facility to verify the swap execution 
facility's ability to comprehensively and accurately reconstruct 
trading in a timely manner. A swap execution facility should have 
reasonable discretion to determine the meaning of adequate sample as 
used in this paragraph.
    (6) Enforcement staff. A swap execution facility's enforcement 
staff should not include either members of the swap execution 
facility or persons whose interests conflict with their enforcement 
duties. A member of the enforcement staff should not operate under 
the direction or control of any person or persons with trading 
privileges at the swap execution facility.
    (7) Disciplinary panel procedures. The rules of a swap execution 
facility governing the requirements that apply to the adjudication 
of a matter by a swap execution facility disciplinary panel should 
be fair, equitable, and publicly available. Such rules should 
require the disciplinary panel to promptly issue a written decision 
following a hearing or the acceptance of a settlement offer.
    (8) Emergency disciplinary actions. A swap execution facility 
may impose a sanction, including suspension, or take other summary 
action against a person or entity subject to its jurisdiction upon a 
reasonable belief that such immediate action is necessary to protect 
the best interest of the marketplace.
    (9) Warning letters and sanctions. A swap execution facility 
should have reasonable discretion to determine when to issue warning 
letters and apply sanctions under Sec.  37.206(c)(1).
    (b) Acceptable Practices. [Reserved]

[[Page 62133]]

Core Principle 3 of Section 5h of the Act--Swaps Not Readily 
Susceptible to Manipulation

    The swap execution facility shall permit trading only in swaps 
that are not readily susceptible to manipulation.
    (a) Guidance. Guidance in appendix C to this part--
``Demonstration of Compliance that a Swap Contract is Not Readily 
Susceptible to Manipulation''--may be used as guidance in meeting 
this core principle for both new product listings and existing 
listed contracts.
    (b) Acceptable Practices. [Reserved]

Core Principle 4 of Section 5h of the Act--Monitoring of Trading and 
Trade Processing

    The swap execution facility shall:
    (A) Establish and enforce rules or terms and conditions 
defining, or specifications detailing:
    (1) Trading procedures to be used in entering and executing 
orders traded on or through the facilities of the swap execution 
facility; and
    (2) Procedures for trade processing of swaps on or through the 
facilities of the swap execution facility; and
    (B) Monitor trading in swaps to prevent manipulation, price 
distortion, and disruptions of the delivery or cash settlement 
process through surveillance, compliance, and disciplinary practices 
and procedures, including methods for conducting real-time 
monitoring of trading and comprehensive and accurate trade 
reconstructions.
    (a) Guidance. The swap execution facility should have rules in 
place that allow it to intervene to prevent and reduce disorderly 
trading and disruptions. Once threatened or actual disorderly 
trading or disruption is detected, the swap execution facility 
should take steps to prevent the disorderly trading or disruption, 
or reduce its severity.
    (1) General requirements. Real-time monitoring for disorderly 
trading and market or system anomalies is the most effective, but 
the swap execution facility's program may also be acceptable if some 
of the monitoring is accomplished on a T+1 basis. The monitoring of 
trading should use automated alerts to detect disorderly trading and 
any market or system anomalies, including abnormal price movements 
and unusual trading volumes in real-time and instances or threats of 
manipulation, price distortion, and disruptions on at least a T+1 
basis. The T+1 detection and analysis should incorporate any 
additional data that becomes available on a T+1 basis, including the 
trade reconstruction data. In some cases, a swap execution facility 
may demonstrate that its manual processes are effective. The swap 
execution facility should act promptly to address the conditions 
that are causing price distortions or disruptions, including, when 
appropriate, changes to contract terms.
    (2) Physical-delivery swaps. For a physical-delivery swap listed 
on the swap execution facility, the swap execution facility should 
monitor for conditions that may cause the swap to become susceptible 
to manipulation, price distortion, or market disruptions, including: 
Conditions influencing the convergence between the swap's price and 
the price of the underlying commodity such as the general 
availability of the commodity specified by the swap, the commodity's 
characteristics, and the delivery locations; and if available, 
information related to the size and ownership of deliverable 
supplies. Price convergence refers to the process whereby the price 
of a physically-delivered swap converges to the spot price of the 
underlying commodity, as the swap nears expiration. The hedging 
effectiveness of a physically-delivered swap depends in part upon 
the extent to which the swap price reliably converges to the 
comparable cash market price, or to a predictable differential to 
the comparable cash market price.
    (3) Ability to obtain information. The swap execution facility 
should be able to obtain position and trading information directly 
from the market participants that conduct trading on its facility.
    (4) Risk controls for trading. In developing and implementing an 
acceptable program for preventing and reducing the potential risk of 
price distortions and market disruptions, a swap execution facility 
should establish and maintain appropriate trading risk controls, in 
addition to pauses and halts. Risk controls should be adapted to the 
unique characteristics of the swap execution facility's trading 
system or platform and the swap contracts listed for trading and 
should be designed to avoid price distortions and market disruptions 
without unduly interfering with that market's price discovery 
function. The swap execution facility may choose from among controls 
that include: Pre-trade limits on order size, price collars or bands 
around the current price, message throttles, and daily price limits, 
or design other types of controls, as well as clear order-
cancellation policies. Within the specific array of controls that 
are selected, the swap execution facility should set the parameters 
for those controls, so that the specific parameters are reasonably 
likely to serve the purpose of preventing price distortions and 
market disruptions. If a swap is fungible with, linked to, or a 
substitute for other swaps on the swap execution facility or 
contracts on other trading venues, such risk controls should, to the 
extent practicable, be coordinated with any similar controls placed 
on those other swaps or contracts. If a swap is based on the level 
of an equity index, such risk controls should, to the extent 
practicable, be coordinated with any similar controls placed on 
national security exchanges.
    (b) Acceptable Practices. [Reserved]

Core Principle 5 of Section 5h of the Act--Ability To Obtain 
Information

    The swap execution facility shall:
    (A) Establish and enforce rules that will allow the facility to 
obtain any necessary information to perform any of the functions 
described in section 5h of the Act;
    (B) Provide the information to the Commission on request; and
    (C) Have the capacity to carry out such international 
information-sharing agreements as the Commission may require.
    (a) Guidance. If position and trading information is available 
through information-sharing agreements with other trading venues or 
a third-party regulatory service provider, the swap execution 
facility should cooperate, to the extent practicable, in such 
information-sharing agreements.
    (b) Acceptable Practices. [Reserved]

Core Principle 6 of Section 5h of the Act--Position Limits or 
Accountability

    (A) In general. To reduce the potential threat of market 
manipulation or congestion, especially during trading in the 
delivery month, a swap execution facility that is a trading facility 
shall adopt for each of the contracts of the facility, as is 
necessary and appropriate, position limitations or position 
accountability for speculators.
    (B) Position limits. For any contract that is subject to a 
position limitation established by the Commission pursuant to 
section 4a(a) of the Act, the swap execution facility shall:
    (1) Set its position limitation at a level no higher than the 
Commission limitation; and
    (2) Monitor positions established on or through the swap 
execution facility for compliance with the limit set by the 
Commission and the limit, if any, set by the swap execution 
facility.
    (a) Guidance. [Reserved]
    (b) Acceptable Practices. [Reserved]

Core Principle 7 of Section 5h of the Act--Financial Integrity of 
Transactions

    The swap execution facility shall establish and enforce rules 
and procedures for ensuring the financial integrity of swaps entered 
on or through the facilities of the swap execution facility, 
including the clearance and settlement of the swaps pursuant to 
section 2(h)(1) of the Act.
    (a) Guidance. [Reserved]
    (b) Acceptable Practices. [Reserved]

Core Principle 8 of Section 5h of the Act--Emergency Authority

    The swap execution facility shall adopt rules to provide for the 
exercise of emergency authority, in consultation or cooperation with 
the Commission, as is necessary and appropriate, including the 
authority to liquidate or transfer open positions in any swap or to 
suspend or curtail trading in a swap.
    (a) Guidance.
    (1) A swap execution facility should have rules that authorize 
it to take certain actions in the event of an emergency, as defined 
in Sec.  40.1(h) of this chapter. A swap execution facility should 
have the authority to intervene as necessary to maintain markets 
with fair and orderly trading and to prevent or address manipulation 
or disruptive trading practices, whether the need for intervention 
arises exclusively from the swap execution facility's market or as 
part of a coordinated, cross-market intervention. A swap execution 
facility should have the flexibility and independence to address 
market emergencies in an effective and timely manner consistent with 
the nature of the emergency, as long as all such actions taken by 
the swap execution facility are made in good faith to protect the 
integrity of the markets. However, the swap execution facility 
should also have rules that allow it to take market actions as may 
be directed by the Commission, including actions that the Commission 
requires the swap execution facility to take as part of a 
coordinated, cross-market intervention.

[[Page 62134]]

Additionally, in situations where a swap is traded on more than one 
platform, emergency action should be taken as directed or agreed to 
by the Commission or the Commission's staff. A swap execution 
facility's rules should include procedures and guidelines for 
decision-making and implementation of emergency intervention that 
avoid conflicts of interest and include alternate lines of 
communication and approval procedures to address emergencies 
associated with real time events. To address perceived market 
threats, the swap execution facility should have rules that allow it 
to take emergency actions, including imposing or modifying position 
limits, imposing or modifying price limits, imposing or modifying 
intraday market restrictions, ordering the fixing of a settlement 
price, extending or shortening the expiration date or the trading 
hours, suspending or curtailing trading in any contract, or altering 
any contract's settlement terms or conditions, or, if applicable, 
providing for the carrying out of such actions through its 
agreements with its third-party provider of clearing or regulatory 
services.
    (2) A swap execution facility should promptly notify the 
Commission of its exercise of emergency action, explaining its 
decision-making process, the reasons for using its emergency 
authority, and how conflicts of interest were minimized, including 
the extent to which the swap execution facility considered the 
effect of its emergency action on the underlying markets and on 
markets that are linked or referenced to the contracts traded on its 
facility, including similar markets on other trading venues. 
Information on all regulatory actions carried out pursuant to a swap 
execution facility's emergency authority should be included in a 
timely submission of a certified rule pursuant to part 40 of this 
chapter.
    (b) Acceptable Practices. [Reserved]

Core Principle 9 of Section 5h of the Act--Timely Publication of 
Trading Information

    (A) In general. The swap execution facility shall make public 
timely information on price, trading volume, and other trading data 
on swaps to the extent prescribed by the Commission.
    (B) Capacity of swap execution facility. The swap execution 
facility shall be required to have the capacity to electronically 
capture and transmit trade information with respect to transactions 
executed on the facility.
    (a) Guidance. [Reserved]
    (b) Acceptable Practices. [Reserved]

Core Principle 10 of Section 5h of the Act--Recordkeeping and Reporting

    (A) In general. A swap execution facility shall:
    (1) Maintain records of all activities relating to the business 
of the facility, including a complete audit trail, in a form and 
manner acceptable to the Commission for a period of five years;
    (2) Report to the Commission, in a form and manner acceptable to 
the Commission, such information as the Commission determines to be 
necessary or appropriate for the Commission to perform the duties of 
the Commission under the Act; and
    (3) Keep any such records relating to swaps defined in section 
1a(47)(A)(v) of the Act open to inspection and examination by the 
Securities and Exchange Commission.
    (B) Requirements. The Commission shall adopt data collection and 
reporting requirements for swap execution facilities that are 
comparable to corresponding requirements for derivatives clearing 
organizations and swap data repositories.
    (a) Guidance. [Reserved]
    (b) Acceptable Practices. [Reserved]

Core Principle 11 of Section 5h of the Act--Antitrust Considerations

    Unless necessary or appropriate to achieve the purposes of the 
Act, the swap execution facility shall not:
    (A) Adopt any rules or take any actions that result in any 
unreasonable restraint of trade; or
    (B) Impose any material anticompetitive burden on trading or 
clearing.
    (a) Guidance. An entity seeking registration as a swap execution 
facility may request that the Commission consider under the 
provisions of section 15(b) of the Act, any of the entity's rules, 
including trading protocols or policies, and including both 
operational rules and the terms or conditions of products listed for 
trading, at the time of registration or thereafter. The Commission 
intends to apply section 15(b) of the Act to its consideration of 
issues under this core principle in a manner consistent with that 
previously applied to contract markets.
    (b) Acceptable Practices. [Reserved]

Core Principle 12 of Section 5h of the Act--Conflicts of Interest

    The swap execution facility shall:
    (A) Establish and enforce rules to minimize conflicts of 
interest in its decision-making process; and
    (B) Establish a process for resolving the conflicts of interest.
    (a) Guidance. [Reserved]
    (b) Acceptable Practices. [Reserved]

Core Principle 13 of Section 5h of the Act--Financial Resources

    (A) In general. The swap execution facility shall have adequate 
financial, operational, and managerial resources to discharge each 
responsibility of the swap execution facility.
    (B) Determination of resource adequacy. The financial resources 
of a swap execution facility shall be considered to be adequate if 
the value of the financial resources exceeds the total amount that 
would enable the swap execution facility to cover the operating 
costs of the swap execution facility for a one-year period, as 
calculated on a rolling basis.
    (a) Guidance. [Reserved]
    (b) Acceptable Practices.
    (1) Reasonable calculation of projected operating costs. In 
connection with a swap execution facility calculating its projected 
operating costs, the Commission has determined that a reasonable 
calculation should include all expenses necessary for the swap 
execution facility to comply with the core principles set forth in 
section 5h of the Act and any applicable Commission regulations. 
This calculation should be based on the swap execution facility's 
current level of business and business model, and should take into 
account any projected modification to its business model (e.g., the 
addition or subtraction of business lines or operations or other 
changes), and any projected increase or decrease in its level of 
business over the next 12 months. The Commission believes, however, 
that it may be reasonable for a swap execution facility to exclude 
the following expenses (``excludable expenses'') from its projected 
operating cost calculations:
    (i) Costs attributable solely to sales, marketing, business 
development, product development, or recruitment and any related 
travel, entertainment, event, or conference costs;
    (ii) Compensation and related taxes and benefits for swap 
execution facility personnel who are not necessary to ensure that 
the swap execution facility is able to comply with the core 
principles set forth in section 5h of the Act and any applicable 
Commission regulations;
    (iii) If a swap execution facility offers two or more bona fide 
execution methods (e.g., it offers both an electronic central limit 
order book and voice execution via voice brokers), the swap 
execution facility may include the costs related to at least one of 
the execution methods that it offers, and may exclude the costs 
related to the other execution method(s) that it offers (i.e., if a 
swap execution facility includes in its projected operating costs 
the costs associated with its central limit order book, it may 
exclude the costs related to its voice execution service, or vice-
versa). A bona fide method here refers to a method actually used by 
the SEF's market participants and not established by a SEF on a pro 
forma basis for the purpose of complying with--or evading--Core 
Principle 13.
    (iv) Costs for acquiring and defending patents and trademarks 
for swap execution facility products and related intellectual 
property;
    (v) Magazine, newspaper, and online periodical subscription 
fees;
    (vi) Tax preparation and audit fees;
    (vii) To the extent not covered by paragraphs (b)(1)(ii) or 
(iii) above, the variable commissions that a voice-based swap 
execution facility may pay to its SEF trading specialists (as 
defined under Sec.  37.201(c)), calculated as a percentage of 
transaction revenue generated by the voice-based swap execution 
facility. Unlike fixed salaries or compensation, such variable 
commissions are not payable unless and until revenue is collected by 
the swap execution facility; and
    (viii) Any non-cash costs, including depreciation and 
amortization.
    (2) Pro-rated expenses. The Commission recognizes that, in the 
normal course of a swap execution facility's business, there may be 
an expense (e.g., typically related to overhead) that is only 
partially attributable to a swap execution facility's ability to 
comply with the core principles set forth in section 5h of the Act 
and any applicable Commission regulations; accordingly, such expense 
may need to be only partially attributed to the swap execution 
facility's projected operating costs. For example, if a swap 
execution facility's office rental space includes marketing 
personnel and compliance personnel, the swap execution facility may 
exclude the pro-rated office rental expense

[[Page 62135]]

attributable to the marketing personnel. In order to pro-rate an 
expense, a swap execution facility should:
    (i) Maintain sufficient documentation that reasonably shows the 
extent to which an expense is partially attributable to an 
excludable expense;
    (ii) Identify any pro-rated expense in the financial reports 
that it submits to the Commission pursuant to Sec.  37.1306; and
    (iii) Sufficiently explain why it pro-rated any expense. Common 
allocation methodologies that can be used include actual use, 
headcount, or square footage. A swap execution facility may provide 
documentation, such as copies of service agreements, other legal 
documents, firm policies, audit statements, or allocation 
methodologies to support its determination to pro-rate an expense.
    (3) Expenses allocated among affiliates. The Commission 
recognizes that a swap execution facility may share certain expenses 
with affiliated entities, such as parent entities or other 
subsidiaries of the parent. For example, a swap execution facility 
may share employees (including employees on secondment from an 
affiliate) that perform similar tasks for the affiliated entities or 
may share office space with its affiliated entities. Accordingly, 
the Commission believes that it would be reasonable, for purposes of 
calculating its projected operating costs, for a swap execution 
facility to pro-rate any shared expense that the swap execution 
facility pays for, but only to the extent that such shared expense 
is actually attributable to the affiliate and for which the swap 
execution facility is reimbursed. Similarly, a reasonable 
calculation of a swap execution facility's projected operating costs 
must include the pro-rated amount of any expense paid for by an 
affiliated entity to the extent that the shared expense is 
attributable to the swap execution facility. In order to pro-rate a 
shared expense, the swap execution facility should:
    (i) Maintain sufficient documentation that reasonably shows the 
extent to which the shared expense is attributable to and paid for 
by the swap execution facility and/or affiliated entity;
    (ii) Identify any shared expense in the financial reports that 
it submits to the Commission; and
    (iii) Sufficiently explain why it pro-rated any shared expense. 
A swap execution facility may provide documentation, such as copies 
of service agreements, other legal documents, firm policies, audit 
statements, or allocation methodologies, that reasonably shows how 
expenses are attributable to, and paid for by, the swap execution 
facility and/or its affiliated entities to support its determination 
to pro-rate an expense.

Core Principle 14 of Section 5h of the Act--System Safeguards

    The swap execution facility shall:
    (A) Establish and maintain a program of risk analysis and 
oversight to identify and minimize sources of operational risk, 
through the development of appropriate controls and procedures, and 
automated systems, that:
    (1) Are reliable and secure; and
    (2) Have adequate scalable capacity;
    (B) Establish and maintain emergency procedures, backup 
facilities, and a plan for disaster recovery that allow for:
    (1) The timely recovery and resumption of operations; and
    (2) The fulfillment of the responsibilities and obligations of 
the swap execution facility; and
    (C) Periodically conduct tests to verify that the backup 
resources of the swap execution facility are sufficient to ensure 
continued:
    (1) Order processing and trade matching;
    (2) Price reporting;
    (3) Market surveillance; and
    (4) Maintenance of a comprehensive and accurate audit trail.
    (a) Guidance.
    (1) Risk analysis and oversight program. In addressing the 
categories of its risk analysis and oversight program, a swap 
execution facility should follow generally accepted standards and 
best practices with respect to the development, operation, 
reliability, security, and capacity of automated systems.
    (2) Testing. A swap execution facility's testing of its 
automated systems and business continuity-disaster recovery 
capabilities should be conducted by qualified, independent 
professionals. Such qualified independent professionals may be 
independent contractors or employees of the swap execution facility, 
but should not be persons responsible for development or operation 
of the systems or capabilities being tested.
    (3) Coordination. To the extent practicable, a swap execution 
facility should:
    (i) Coordinate its business continuity-disaster recovery plan 
with those of the market participants it depends upon to provide 
liquidity, in a manner adequate to enable effective resumption of 
activity in its markets following a disruption causing activation of 
the swap execution facility's business continuity-disaster recovery 
plan;
    (ii) Initiate and coordinate periodic, synchronized testing of 
its business continuity-disaster recovery plan with those of the 
market participants it depends upon to provide liquidity; and
    (iii) Ensure that its business continuity-disaster recovery plan 
takes into account such plans of its telecommunications, power, 
water, and other essential service providers.
    (b) Acceptable Practices. [Reserved]

Core Principle 15 of Section 5h of the Act--Designation of Chief 
Compliance Officer

    (A) In general. Each swap execution facility shall designate an 
individual to serve as a chief compliance officer.
    (B) Duties. The chief compliance officer shall:
    (1) Report directly to the board or to the senior officer of the 
facility;
    (2) Review compliance with the core principles in this 
subsection;
    (3) In consultation with the board of the facility, a body 
performing a function similar to that of a board, or the senior 
officer of the facility, resolve any conflicts of interest that may 
arise;
    (4) Be responsible for establishing and administering the 
policies and procedures required to be established pursuant to this 
section;
    (5) Ensure compliance with the Act and the rules and regulations 
issued under the Act, including rules prescribed by the Commission 
pursuant to section 5h of the Act; and
    (6) Establish procedures for the remediation of noncompliance 
issues found during compliance office reviews, look backs, internal 
or external audit findings, self-reported errors, or through 
validated complaints.
    (C) Requirements for procedures. In establishing procedures 
under paragraph (B)(6) of this section, the chief compliance officer 
shall design the procedures to establish the handling, management 
response, remediation, retesting, and closing of noncompliance 
issues.
    (D) Annual reports.
    (1) In general. In accordance with rules prescribed by the 
Commission, the chief compliance officer shall annually prepare and 
sign a report that contains a description of:
    (i) The compliance of the swap execution facility with the Act; 
and
    (ii) The policies and procedures, including the code of ethics 
and conflict of interest policies, of the swap execution facility.
    (2) Requirements. The chief compliance officer shall:
    (i) Submit each report described in clause (1) with the 
appropriate financial report of the swap execution facility that is 
required to be submitted to the Commission pursuant to section 5h of 
the Act; and
    (ii) Include in the report a certification that, under penalty 
of law, the report is accurate and complete.
    (a) Guidance. [Reserved]
    (b) Acceptable Practices.
    (1) Qualifications of chief compliance officer. In determining 
whether the background and skills of a potential chief compliance 
officer are appropriate for fulfilling the responsibilities of the 
role of the chief compliance officer, the swap execution facility 
has the discretion to base its determination on the totality of the 
qualifications of the potential chief compliance officer, including, 
but not limited to, compliance experience, related career 
experience, training, and any other relevant factors to the 
position. A swap execution facility should be especially vigilant 
regarding potential conflicts of interest when appointing a chief 
compliance officer.

Appendix C to Part 37--Demonstration of Compliance That a Swap Contract 
Is Not Readily Susceptible to Manipulation

    The swap execution facility shall permit trading only in swaps 
that are not readily susceptible to manipulation.
    (a) Guidance for cash-settled swaps.
    (1) General provision. In general, a cash-settled swap contract 
is an agreement to exchange a series of cash flows over a period of 
time based on some reference price, which could be a single price, 
such as an absolute level or a differential, or a price index 
calculated based on multiple observations. Such a reference price 
may be reported by the swap execution facility itself or by an 
independent third party. When listing a swap

[[Page 62136]]

contract for trading, a swap execution facility shall ensure the 
swap contract's compliance with Core Principle 3, focusing on the 
reference price used to determine the exchanges of cash flows. A 
swap execution facility should either (i) calculate its own 
reference price, using suitable and well-established acceptable 
methods; or (ii) carefully select a reliable third-party index.
    (2) Reference price susceptibility to manipulation. A swap 
execution facility must specify the reference price used for its 
swap contract and determine that the reference price is not readily 
susceptible to manipulation pursuant to SEF Core Principle 3. 
Accordingly, any reference price that is used in establishing the 
swap contract's cash settlement price should be assessed for its 
reliability as an indicator of cash market values in the underlying 
commercial market. Documentation demonstrating that the reference 
price is a reliable indicator of market values and conditions and is 
widely recognized by industry/market agents should be provided. Such 
documentation may be in various forms, including carefully 
documented interviews with principal market trading agents, pricing 
experts, marketing agents, etc. Additionally, careful consideration 
should be given to the potential for manipulation or distortion, 
when using the reference price to establish the swap's cash 
settlement price. The cash-settlement calculation should involve 
appropriate computational procedures that eliminate or reduce the 
impact of potentially unrepresentative data (i.e., outliers).
    (i) Where a swap execution facility itself generates the 
reference price, the swap execution facility should establish 
calculation procedures that safeguard against potential attempts to 
artificially influence the price. For example, if the reference 
price is derived by the swap execution facility based on a survey of 
cash market sources, then the swap execution facility should 
maintain a list of such reputable sources with knowledge of the cash 
market. In addition, the sample of sources polled should be 
representative of the cash market, and the poll should be conducted 
at a time when trading in the cash market is active and include the 
most liquid markets.
    (ii) Where an independent, private-sector third party calculates 
the reference price, the swap execution facility should verify that 
the third party utilizes business practices that minimize the 
opportunity or incentive to manipulate the cash-settlement price 
series. Such safeguards may include lock-downs, prohibitions against 
derivatives trading by its employees, or public dissemination of the 
names of sources and the price quotes they provide. Because a cash-
settled swap contract may create an incentive to manipulate or 
artificially influence the underlying commercial market from which 
the cash-settlement price is derived or to exert undue influence on 
the cash-settlement computation in order to profit on a derivative 
position in that commodity, a swap execution facility should, 
whenever practicable, enter into an information-sharing agreement 
with the third-party provider which would enable the swap execution 
facility to better detect and prevent manipulative behavior. A swap 
execution facility should also consider the need for a licensing 
agreement that will ensure the swap execution facility's rights to 
the use of the price series to settle the listed contract.
    (3) Contract terms and conditions. An acceptable specification 
of the terms and conditions of a cash-settled swap contract would 
include, but may not be limited to, rules that address, as 
appropriate, the following criteria and comply with the associated 
standards:
    (i) Commodity characteristics. The terms and conditions of a 
cash-settled swap contract should describe or define all of the 
economically significant characteristics or attributes of the 
commodity underlying the contract.
    (ii) Contract size and trading unit. For standardized swap 
contracts, the contract size or size range should be clearly defined 
and consistent with customary transactions in the cash market. A 
swap execution facility may opt to set the swap contract size 
smaller than that of standard cash market transactions. For non-
standardized swap contracts, a swap execution facility may allow the 
contract size or size range to be negotiable.
    (iii) Cash settlement procedure. A cash settlement price should 
be an accurate and reliable indicator of prices in the underlying 
cash market. A cash settlement price also should be acceptable to 
commercial users of the cash-settled swap contract. A swap execution 
facility should fully document that a settlement price is accurate, 
reliable, widely regarded by industry/market participants. To the 
extent possible, the cash settlement price series of the swap should 
be based on reference prices that are publicly available on a timely 
basis. A swap execution facility should make the cash settlement 
price, as well as any other supporting information that is 
appropriate for release to the public, available to the public when 
cash settlement is conducted. If the cash settlement price is based 
on reference prices that are obtained from non-public sources (e.g., 
cash market surveys conducted by the swap execution facility or by 
third parties on behalf of the swap execution facility), then a swap 
execution facility should make available to the public the cash 
settlement price as well as any other supporting information that is 
appropriate or feasible to make available to the public.
    (iv) Minimum price fluctuation (minimum tick). For standardized 
swap contracts, the minimum price increment (tick) should be set at 
a level that is consistent with cash market transactions for the 
underlying commodity. For non-standardized swap contracts, a swap 
execution facility may choose to not specify a minimum price 
increment (tick).
    (v) Intraday market restrictions. A swap execution facility may 
have intraday market restrictions that pause or halt trading in the 
event of extraordinary price moves that may result in distorted 
prices. If a swap execution facility adopts such restrictions, they 
should not be unduly restrictive of trading. For swap contracts 
based on security indexes, intraday price limits and trading halts 
should be coordinated with circuit breakers of national security 
exchanges.
    (vi) Last trading day. If a swap execution facility chooses to 
allow trading to occur through the determination of a settlement 
price, then the swap execution facility should demonstrate that swap 
trading would not distort the settlement price calculation. For 
standardized swap contracts, specification of the last trading day 
should take into consideration whether the volume of transactions 
underlying the cash settlement price would be unduly limited by the 
occurrence of holidays or traditional holiday periods in the cash 
market. For non-standardized swap contracts, a swap execution 
facility may allow the last trading day to be negotiable.
    (b) Guidance for physically-settled swaps.
    (1) General definition. A physically-settled swap contract is 
any swap agreement, as defined in section 1a(47) of the Act, that 
may result in physical settlement. Generally, these are agreements 
where the primary intent is to transfer the financial risk 
associated with the underlying commodity and not primarily to make 
or take delivery of the commodity.
    (2) Estimating deliverable supplies. A swap execution facility 
should estimate the deliverable supply for which a swap contract is 
not readily susceptible to manipulation. The estimate of deliverable 
supply should be adequate to ensure that the swap contract is not 
readily susceptible to price manipulation. In general, the term 
``deliverable supply'' means the quantity of the commodity meeting 
the swap contract's delivery specifications that reasonably can be 
expected to be readily available to short traders and salable by 
long traders at its market value in normal cash marketing channels 
at the swap contract's delivery points during the specified delivery 
period, barring abnormal movement in interstate commerce. For a non-
financial physically-settled swap contract, this estimate should 
include all available supply that meets the swap contract's 
specifications and can be delivered at prevailing market prices via 
the delivery procedures set forth in the swap contract. Among this 
eligible supply, the estimate of deliverable supply can consist of:
    (i) Commercially available imports;
    (ii) Product which is in storage at the delivery point(s) 
specified in the swap contract; and
    (iii) Product which is available for sale on a spot basis within 
the marketing channels that normally are tributary to the delivery 
point(s). Furthermore, an estimate of deliverable supply should 
exclude quantities that at current price levels are not economically 
obtainable or deliverable or were previously committed for long-term 
agreements. The size of commodity supplies that are committed to 
long-term agreements may be estimated by consulting with market 
participants. However, if the estimated deliverable supply that is 
committed for long-term agreements, or significant portion thereof, 
can be demonstrated by the swap execution facility to be 
consistently and regularly made available to the spot market for 
shorts to acquire at prevailing economic values, then those 
``available'' supplies committed for long-term contracts may be 
included in the swap execution facility's estimate of deliverable 
supply for that

[[Page 62137]]

commodity. To the extent possible and that data resources permit, 
deliverable supply estimates should be constructed such that the 
data reflect the market defined by the swap contract's terms and 
conditions, and should be formulated, whenever possible, with 
government or publicly available data. All deliverable supply 
estimates should be fully defined, have all underlying assumptions 
explicitly stated, and have documentation of all data/information 
sources in order to permit estimate replication by Commission staff.
    (iv) Accounting for variations in deliverable supplies. To 
assure the availability of adequate deliverable supplies, a swap 
contract's terms and conditions should assess adequately the 
potential range of deliverable supplies and account for variations 
in the patterns of production, consumption, and supply over a period 
of at least three years. This assessment also should consider 
seasonality, growth, and market concentration in the production/
consumption of the underlying cash commodity. Patterns of variations 
in the deliverable supply are more apparent when deliverable supply 
estimates are calculated on a monthly basis and when such monthly 
estimates are provided for at least the most recent three years for 
which data resources permit. For commodities with seasonal supply or 
demand characteristics, the deliverable supply analysis should 
include that period when potential supplies typically are at their 
lowest levels. In addition, consideration should be given to the 
relative roles of producers, merchants, and consumers in the 
production, distribution, and consumption of the cash commodity and 
whether the underlying commodity exhibits a domestic or 
international export focus. Careful consideration also should be 
given to the quality of the cash commodity, the movement or flow of 
the cash commodity in normal commercial channels, and any external 
factors or regulatory controls that could affect the price or supply 
of the cash commodity.
    (3) Contract terms and conditions. For a swap contract that is 
settled by physical delivery, the terms and conditions of the 
contract should conform to the most common commercial practices and 
conditions in the cash market for the commodity underlying the swap 
contract. The terms and conditions should be designed to avoid any 
impediments to the delivery of the commodity so as to promote 
convergence between the value of the swap contract and the cash 
market value of the commodity at the expiration of the swap 
contract. An acceptable specification of terms and conditions would 
include, but may not be limited to, rules that address, as 
appropriate, the following criteria and comply with the associated 
standards:
    (i) Quality standards. The terms and conditions of a swap 
contract should describe or define all of the economically 
significant characteristics or attributes of the commodity 
underlying the contract. In particular, the quality standards should 
be described or defined so that such standards reflect those used in 
transactions in the commodity in normal cash marketing channels. 
Documentation establishing that the quality standards of the swap 
contract's underlying commodity comply with those accepted/
established by the industry, by government regulations, and/or by 
relevant laws should also be submitted. For any particular swap 
contract, the specific attributes that should be enumerated depend 
upon the individual characteristics of the underlying commodity. 
These may include, for example, the following items: Grade, quality, 
purity, weight, class, origin, growth, issuer, originator, maturity 
window, coupon rate, source, hours of trading, etc. If the terms of 
the swap contract provide for the delivery of multiple qualities of 
a specific attribute of the commodity having different cash market 
values, then a ``par'' quality should be specified with price 
differentials applicable to the ``non-par'' qualities that reflect 
discounts or premiums commonly observed or expected to occur in the 
cash market for that commodity.
    (ii) Delivery points and facilities. Delivery point/area 
specifications should provide for delivery at a single location or 
at multiple locations where the underlying cash commodity is 
normally transacted or stored and where there exists a viable cash 
market(s). If multiple delivery points are specified and the value 
of the commodity differs between these locations, a swap contract's 
terms should include price differentials that reflect usual and 
observed differences in value between the different delivery 
locations. If the price relationships among the delivery points are 
unstable and a swap execution facility chooses to adopt fixed 
locational price differentials, such differentials should fall 
within the range of commonly observed or expected commercial price 
differences. In this regard, any price differentials should be 
supported with cash price data for the delivery location(s) for a 
period of three years. The price differential should be updated 
periodically to reflect prevailing market conditions. The terms and 
conditions of a swap contract also should specify, as appropriate, 
any conditions the delivery facilities and/or delivery facility 
operators should meet in order to be eligible for delivery. 
Specification of any requirements for delivery facilities also 
should consider the extent to which ownership of such facilities is 
concentrated and whether the level of concentration would be 
susceptible to manipulation of the swap contract's prices. 
Physically-settled swap contracts also should specify appropriately 
detailed delivery procedures that describe the responsibilities of 
deliverers, receivers, and any required third parties in carrying 
out the delivery process. Such responsibilities could include 
allocation between buyer and seller of all associated costs such as 
load-out, document preparation, sampling, grading, weighing, 
storage, taxes, duties, fees, drayage, stevedoring, demurrage, 
dispatch, etc. Required accreditation for third-parties also should 
be detailed. These procedures should seek to minimize or eliminate 
any impediments to making or taking delivery by both deliverers and 
takers of delivery to help ensure convergence of the cash price and 
swap price.
    (iii) Delivery period and last trading day. An acceptable 
specification of the delivery period would allow for sufficient time 
for deliverers to acquire the deliverable commodity and make it 
available for delivery, considering any restrictions or requirements 
imposed by the swap execution facility. For standardized swap 
contracts, specification of the last trading day for expiring swap 
contracts should consider whether adequate time remains after the 
last trading day to allow for delivery on the contract. For non-
standardized swap contracts, a swap execution facility may allow the 
delivery period to be negotiable.
    (iv) Contract size and trading unit. Generally, swap contract 
sizes and trading units for standardized contracts should be 
determined after a careful analysis of relevant cash market trading 
practices, conditions, and deliverable supply estimates, so as to 
ensure that the underlying commodity market and available supply 
sources are able to support the contract sizes and trading units at 
all times. For non-standardized swap contracts, a swap execution 
facility may allow the contract sizes and trading units to be 
negotiable.
    (v) Delivery pack. The term ``delivery pack'' refers to the 
specific cash market packaging standards (e.g., product may be 
delivered in burlap or polyethylene bags stacked on wooden pallets) 
or non-quality related standards regarding the composition of 
commodity within a delivery unit (e.g., product must all be imported 
from the same country or origin). An acceptable specification of the 
delivery pack or composition of a swap contract's delivery unit 
should reflect, to the extent possible, specifications commonly 
applied to the commodity traded or transacted in the cash market.
    (vi) Delivery instrument. An acceptable specification of the 
delivery instrument (e.g., warehouse receipt, depository certificate 
or receipt, shipping certificate, bill of lading, in-line transfer, 
book transfer of securities, etc.) would provide for its conversion 
into the cash commodity at a commercially-reasonable cost. 
Transportation terms (e.g., FOB, CIF, freight prepaid to 
destination) as well as any limits on storage or certificate daily 
premium fees should be specified. These terms should reflect cash 
market practices and the customary provision for allocating delivery 
costs between buyer and seller.
    (vii) Inspection provisions. Any inspection/certification 
procedures for verifying compliance with quality requirements or any 
other related delivery requirements (e.g., discounts relating to the 
age of the commodity, etc.) should be specified in the swap 
contract's rules. An acceptable specification of inspection 
procedures would include the establishment of formal procedures that 
are consistent with procedures used in the cash market. To the 
extent that formal inspection procedures are not used in the cash 
market, an acceptable specification would contain provisions that 
assure accuracy in assessing the commodity, that are available at a 
low cost, that do not pose an obstacle to delivery on the swap 
contract and that are performed by a reputable, disinterested third 
party or by qualified swap execution facility employees.

[[Page 62138]]

Inspection terms also should detail which party pays for the 
service, particularly in light of the possibility of varying 
inspection results.
    (viii) Delivery months. Delivery months should be established 
based on the risk management needs of commercial entities as well as 
the availability of deliverable supplies in the specified months.
    (ix) Minimum price fluctuation (minimum tick). For standardized 
swap contracts, the minimum price increment (tick) should be set at 
a level that is in line with cash market transactions for the 
underlying commodity. For non-standardized swap contracts, a swap 
execution facility may choose to not specify a minimum price 
increment (tick).
    (x) Maximum price fluctuation limits. A swap execution facility 
may adopt price limits to (1) reduce or constrain price movements in 
a trading day that may not be reflective of true market conditions 
but might be caused by traders overreacting to news and (2) provide 
a ``cooling-off'' period for swap market participants to respond to 
bona fide changes in market supply and demand fundamentals that 
would lead to large cash and swap price changes. If price limit 
provisions are adopted, the limits should be set at levels that are 
not overly restrictive in relation to price movements in the cash 
market for the commodity underlying the swap contract.
    (c) Guidance for options on swap contracts.
    The Commission believes that, provided the underlying swap 
complies with the relevant guidance in this Appendix C, any 
specification of the following terms would be acceptable; the 
primary requirement is that such terms be specified in an objective 
manner in the option contract's rules:
    (1) Exercise method;
    (2) Exercise procedure;
    (3) Strike price provisions;
    (4) Automatic exercise provisions;
    (5) Contract size;
    (6) Option expiration and last trading day; and (vii) option 
type and trading convention; and
    (7) For non-standardized swap contracts, a swap execution 
facility may allow these contract terms to be negotiable.
    (d) Guidance for options on physicals contracts.
    (1) Under the Commission's regulations, the term ``option on 
physicals'' refers to option contracts that do not provide for 
exercise into an underlying futures contract. Upon exercise, options 
on physicals can be settled via physical delivery of the underlying 
commodity or by a cash payment. Thus, options on physicals raise 
many of the same issues associated with trading in other types of 
swap contracts such as the adequacy of deliverable supplies or 
acceptability of the cash settlement price series. In this regard, 
an option that is cash settled based on the settlement price of a 
futures contract or a swap contract would be considered an ``option 
on physicals'' and the futures or swap settlement price would be 
considered the cash price series.
    (2) In view of the above, acceptable practices for the terms and 
conditions of options on physicals contracts include, as 
appropriate, those practices set forth above for physical-delivery 
or cash-settled swap contracts plus the practices set forth for 
options on swap contracts.

PART 38--DESIGNATED CONTRACT MARKETS

0
9. The authority citation for part 38 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 6, 6a, 6c, 6d, 6e, 6f, 6g, 6i, 6j, 
6k, 6l, 6m, 6n, 7, 7a-2, 7b, 7b-1, 7b-3, 8, 9, 15, and 21, as 
amended by the Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Pub. L. 111-203, 124 Stat. 1376.


Sec.  Sec.  38.11 and 38.12  [Removed and reserved]

0
10. Remove and reserve Sec. Sec.  38.11 and 38.12.

PART 39--DERIVATIVES CLEARING ORGANIZATIONS

0
11. The authority citation for part 39 continues to read as follows:

    Authority: 7 U.S.C. 2, 7a-1, and 12a; 12 U.S.C. 5464; 15 U.S.C. 
8325.

0
12. In Sec.  39.12, revise paragraph (b)(7) to read as follows:


Sec.  39.12   Participant and product eligibility.

* * * * *
    (b) * * *
    (7) Time frame for clearing--(i) Coordination with markets and 
clearing members. (A) Each derivatives clearing organization shall 
coordinate with each designated contract market and swap execution 
facility that lists for trading a product that is cleared by the 
derivatives clearing organization in developing rules and procedures to 
facilitate prompt, efficient, and accurate processing and routing of 
all agreements, contracts, and transactions submitted to the 
derivatives clearing organization for clearing.
    (B) Each derivatives clearing organization shall coordinate with 
each clearing member that is a futures commission merchant, swap 
dealer, or major swap participant to establish systems that enable the 
clearing member, or the derivatives clearing organization acting on its 
behalf, to accept or reject each agreement, contract, or transaction 
submitted to the derivatives clearing organization for clearing by or 
for the clearing member or a customer of the clearing member as quickly 
as would be technologically practicable if fully automated systems were 
used.
    (ii) Agreements, contracts, and transactions submitted for clearing 
to a derivatives clearing organization. Each derivatives clearing 
organization shall have rules that provide that the derivatives 
clearing organization will accept or reject for clearing all 
agreements, contracts, and transactions as quickly after submission to 
the derivatives clearing organization as would be technologically 
practicable if fully automated systems were used. The derivatives 
clearing organization shall accept all agreements, contracts, and 
transactions:
    (A) For which the executing parties have clearing arrangements in 
place with clearing members of the derivatives clearing organization;
    (B) For which a derivatives clearing organization has been 
identified as the intended clearinghouse; and
    (C) That satisfy the criteria of the derivatives clearing 
organization, including, but not limited to, applicable risk filters; 
provided that such criteria are non-discriminatory across trading 
venues and are applied as quickly as would be technologically 
practicable if fully automated systems were used.
* * * * *

PART 43--REAL-TIME PUBLIC REPORTING

0
13. The authority citation for part 43 continues to read as follows:

    Authority: 7 U.S.C. 2(a), 12a(5) and 24a, as amended by Pub. L. 
111-203, 124 Stat. 1376 (2010).

0
14. Revise Sec.  43.2 to read as follows:


Sec.  43.2   Definitions.

    As used in this part:
    Act means the Commodity Exchange Act, as amended, 7 U.S.C. 1 et 
seq.
    Affirmation means the process by which parties to a swap verify 
(orally, in writing, electronically or otherwise) that they agree on 
the primary economic terms of a swap (but not necessarily all terms of 
the swap). Affirmation may constitute ``execution'' of the swap or may 
provide evidence of execution of the swap, but does not constitute 
confirmation (or confirmation by affirmation) of the swap.
    Appropriate minimum block size means the minimum notional or 
principal amount for a category of swaps that qualifies a swap within 
such category as a block trade or large notional off-facility swap.
    As soon as technologically practicable means as soon as possible, 
taking into consideration the prevalence, implementation and use of 
technology by comparable market participants.
    Asset class means a broad category of commodities including, 
without limitation, any ``excluded commodity'' as defined in section 
1a(19) of the Act, with common characteristics underlying a swap. The 
asset classes include interest rate, foreign exchange, credit,

[[Page 62139]]

equity, other commodity and such other asset classes as may be 
determined by the Commission.
    Block trade means a publicly reportable swap transaction that:
    (1) Involves a swap that is listed on a registered swap execution 
facility or designated contract market;
    (2) Is executed on a registered swap execution facility or occurs 
away from a designated contract market's trading system or platform and 
is executed pursuant to that designated contract market's rules;
    (3) Has a notional or principal amount at or above the appropriate 
minimum block size applicable to such swap; and
    (4) Is reported subject to the rules and procedures of the 
registered swap execution facility or designated contract market and 
the rules described in this part, including the appropriate time delay 
requirements set forth in Sec.  43.5.
    Business day means the twenty-four hour day, on all days except 
Saturdays, Sundays and legal holidays, in the location of the reporting 
party or registered entity reporting data for the swap.
    Business hours mean the consecutive hours of one or more 
consecutive business days.
    Cap size means, for each swap category, the maximum notional or 
principal amount of a publicly reportable swap transaction that is 
publicly disseminated.
    Confirmation means the consummation (electronic or otherwise) of 
legally binding documentation (electronic or otherwise) that 
memorializes the agreement of the parties to all terms of a swap. A 
confirmation shall be in writing (electronic or otherwise) and shall 
legally supersede any previous agreement (electronic or otherwise) 
relating to the swap.
    Confirmation by affirmation means the process by which one party to 
a swap acknowledges its assent to the complete swap terms submitted by 
the other party to the swap. If the parties to a swap are using a 
confirmation service vendor, complete swap terms may be submitted 
electronically by a party to such vendor's platform and the other party 
may affirm such terms on such platform.
    Economically related means a direct or indirect reference to the 
same commodity at the same delivery location or locations, or with the 
same or a substantially similar cash market price series.
    Embedded option means any right, but not an obligation, provided to 
one party of a swap by the other party to the swap that provides the 
party holding the option with the ability to change any one or more of 
the economic terms of the swap as those terms previously were 
established at confirmation (or were in effect on the start date).
    Executed means the completion of the execution process.
    Execution means an agreement by the parties (whether orally, in 
writing, electronically, or otherwise) to the terms of a swap that 
legally binds the parties to such swap terms under applicable law. 
Execution occurs simultaneous with or immediately following the 
affirmation of the swap.
    Futures-related swap means a swap (as defined in section 1a(47) of 
the Act and as further defined by the Commission in implementing 
regulations) that is economically related to a futures contract.
    Large notional off-facility swap means an off-facility swap that 
has a notional or principal amount at or above the appropriate minimum 
block size applicable to such publicly reportable swap transaction and 
is not a block trade as defined in Sec.  43.2.
    Major currencies mean the currencies, and the cross-rates between 
the currencies, of Australia, Canada, Denmark, New Zealand, Norway, 
South Africa, South Korea, Sweden, and Switzerland.
    Non-major currencies mean all other currencies that are not super-
major currencies or major currencies.
    Novation means the process by which a party to a swap transfers all 
of its rights, liabilities, duties and obligations under the swap to a 
new legal party other than the counterparty to the swap. The transferee 
accepts all of the transferor's rights, liabilities, duties and 
obligations under the swap. A novation is valid as long as the 
transferor and the remaining party to the swap are given notice, and 
the transferor, transferee and remaining party to the swap consent to 
the transfer.
    Off-facility swap means any publicly reportable swap transaction 
that is not executed on or pursuant to the rules of a registered swap 
execution facility or designated contract market.
    Other commodity means any commodity that is not categorized in the 
other asset classes as may be determined by the Commission.
    Physical commodity swap means a swap in the other commodity asset 
class that is based on a tangible commodity.
    Public dissemination and publicly disseminate means to publish and 
make available swap transaction and pricing data in a non-
discriminatory manner, through the internet or other electronic data 
feed that is widely published and in machine-readable electronic 
format.
    Publicly reportable swap transaction means:
    (1) Unless otherwise provided in this part--
    (i) Any executed swap that is an arm's-length transaction between 
two parties that results in a corresponding change in the market risk 
position between the two parties; or
    (ii) Any termination, assignment, novation, exchange, transfer, 
amendment, conveyance, or extinguishing of rights or obligations of a 
swap that changes the pricing of the swap.
    (2) Examples of executed swaps that do not fall within the 
definition of publicly reportable swap may include:
    (i) Internal swaps between one-hundred percent owned subsidiaries 
of the same parent entity; and
    (ii) Portfolio compression exercises.
    (3) These examples represent swaps that are not at arm's length and 
thus are not publicly reportable swap transactions, notwithstanding 
that they do result in a corresponding change in the market risk 
position between two parties.
    Real-time public reporting means the reporting of data relating to 
a swap transaction, including price and volume, as soon as 
technologically practicable after the time at which the swap 
transaction has been executed.
    Reference price means a floating price series (including 
derivatives contract prices and cash market prices or price indices) 
used by the parties to a swap or swaption to determine payments made, 
exchanged or accrued under the terms of a swap contract.
    Remaining party means a party to a swap that consents to a 
transferor's transfer by novation of all of the transferor's rights, 
liabilities, duties and obligations under such swap to a transferee.
    Reporting party means the party to a swap with the duty to report a 
publicly reportable swap transaction in accordance with this part and 
section 2(a)(13)(F) of the Act.
    Super-major currencies mean the currencies of the European Monetary 
Union, Japan, the United Kingdom, and United States.
    Swaps with composite reference prices mean swaps based on reference 
prices that are composed of more than one reference price from more 
than one swap category.
    Transferee means a party to a swap that accepts, by way of 
novation, all of a transferor's rights, liabilities, duties and 
obligations under such swap with respect to a remaining party.
    Transferor means a party to a swap that transfers, by way of 
novation, all of

[[Page 62140]]

its rights, liabilities, duties and obligations under such swap, with 
respect to a remaining party, to a transferee.
    Trimmed data set means a data set that has had extraordinarily 
large notional transactions removed by transforming the data into a 
logarithm with a base of 10, computing the mean, and excluding 
transactions that are beyond four standard deviations above the mean.
    Unique product identifier means a unique identification of a 
particular level of the taxonomy of the product in an asset class or 
sub-asset class in question, as further described in Sec.  43.4(f) and 
appendix A to this part. Such unique product identifier may combine the 
information from one or more of the data fields described in appendix A 
to this part.
    Widely published means to publish and make available through 
electronic means in a manner that is freely available and readily 
accessible to the public.

    Issued in Washington, DC, on November 6, 2018, by the 
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

    Note: The following appendices will not appear in the Code of 
Federal Regulations.

Appendices To Swap Execution Facilities and Trade Execution 
Requirement--Commission Voting Summary, Chairman's Statement, and 
Commissioners' Statements

Appendix 1--Commission Voting Summary

    On this matter, Chairman Giancarlo and Commissioners Quintenz, 
Behnam, and Stump voted in the affirmative. Commissioner Berkovitz 
voted in the negative.

Appendix 2--Statement of Chairman J. Christopher Giancarlo

    I start by referencing an important White Paper written in 1970 
by a young graduate student in economics at UC Berkeley. That White 
Paper, entitled, ``Preliminary Design for an Electronic Market,'' 
written for the Pacific Commodity Exchange, was the world's first 
written conceptualization of a fully electronic, for-profit futures 
exchange.
    The White Paper was written by Dr. Richard Sandor. That White 
Paper has now been republished in a new book by Dr. Sandor.\1\ In 
it, he recounts how his idea lay mostly dormant through the 1970s to 
mid-1980s before being slowly developed, in fits and starts, first 
in Europe in the 1990s and then in the United States in the 2000s. 
His book notes that electronic execution of futures products with 
continuous liquidity has become almost ubiquitous today, while other 
exchange traded asset classes with more episodic liquidity, like 
options and swaps, continue to trade by voice.
---------------------------------------------------------------------------

    \1\ Sandor, Richard L., ``Electronic Trading & Blockchain: 
Yesterday, Today and Tomorrow,'' 2018, World Scientific Publishing 
Co. Pte. Ltd.
---------------------------------------------------------------------------

    What I found fascinating in Dr. Sandor's recounting of this 
five-decade long evolution from trading pits to electronic trading 
of futures was the absence of any grand plan behind the 
transformation. Instead, it was a series of incremental commercial 
developments and technology innovations. At all times, the impetus 
was the demands of market participants and the response of market 
operators to reduce trading costs and transaction friction. At no 
time, did government step in and say, ``Henceforth, all futures 
trading shall be on electronic exchanges.'' Instead, market 
evolution happened because a good idea was coupled with capable 
technology and mutual commercial interest with enough time to catch 
on and gain traction.
    Before I joined the Commission, I spent a decade and a half at a 
leading operator of swaps marketplaces. We launched many innovative 
electronic platforms still in use today. Some of the platforms 
caught right on with our customers, others did not. Yet, we designed 
all of them to increase efficiency and reduce trading friction. It 
was just that sometimes our competitors designed better or cheaper 
ones or just simply got the timing right.
    The point is that the design of trading platforms and the 
evolution of market structure is best done by platform operators, 
through trial and error, customer demand, commercial response and 
technological innovation. Regulators will never be close enough to 
the heartbeat of the markets, the spark of technology or the cost of 
development to prescribe the optimal design of trading platforms or 
business methods. Regulators can never know which trading methods 
will work best in the full range of market conditions, from low to 
extreme volatility.
    Congress understood this. That is why Title VII of Dodd-Frank 
permits Swap Execution Facilities (SEFs) to conduct their activities 
through ``any means of interstate commerce,'' not ``such means that 
may be chosen by regulators.''
    Once regulators step in and dictate who serves who with what 
type of service, we are picking winners and losers. We are simply 
not authorized, nor are we competent, to act in this way. If we do, 
the winners will invariably be those with the most persuasive voices 
and best lobbyists.
    Congress knew that swaps are not traded by retail participants, 
but for sophisticated, institutional traders. Wall Street banks, 
hedge funds, prop shops and large energy companies have the 
wherewithal to demand the transaction services they need without 
regulators holding their hands. And the platform operators are not 
public utilities, but seasoned competitors. If there is money to be 
made, trading efficiencies to be achieved, customers to be served or 
costs to be saved, they will find them. If there is a better 
mousetrap to be built, they will build it.
    Unfortunately, the CFTC did not listen to Congress. Contrary to 
provisions of Dodd-Frank that permit SEFs to operate by ``any means 
of interstate commerce,'' the current SEF rules constrain swaps 
trading to two methods of execution--request-for-quote or order 
book. While swaps not subject to the trade execution mandate can 
utilize other methods, SEFs must nevertheless provide an order book 
for such permitted transactions. All other ``required'' transactions 
have to be executed exclusively on one of those two options. 
Further, the rules incorporate a number of practices from futures 
markets that are antithetical to swaps trading, such as the 15 
second ``cross'' and execution of block trades off platform. 
Additionally, the SEF core principles are interpreted in ways that 
are not conducive to environments in which swaps liquidity is formed 
and price discovery is conducted.
    One effect of this approach has been to incentivize the shift of 
swaps price discovery and liquidity formation away from SEFs to 
introducing brokers (or ``IBs''). SEFs have turned into booking 
engines for trades formulated elsewhere, often on IBs. Yet, IBs are 
not appropriate vehicles to formulate swaps transactions. The 
intended purpose of IBs in the CFTC's regulatory framework is to 
solicit orders for futures transactions, not swaps. Moving swaps 
price discovery and liquidity formation away from SEFs to IBs is not 
what Congress intended in Dodd-Frank. The goal was to have the 
entire process of swaps liquidity formation, price discovery and 
trade execution take place on licensed SEF platforms. IBs are not 
subject to conduct and compliance requirements appropriate for swaps 
trading. Their employees are not required to pass exams for 
proficiency in serving institutional market participants in over-
the-counter swaps markets but they are for retail customers who are 
prohibited from trading swaps.
    Another effect of the current approach is the paucity of 
platform innovation and new platform operators competing for market 
share. The stagnation has allowed a few incumbents to consolidate 
and dominate market share. According to one large swaps trader, 
``the biggest disappointment of SEFs is that nothing has really 
changed. I'm still trading the same way today as I was 10 years 
ago.'' \2\ And, yet, the current rules were supposed to have caused 
as much as a hundred firms to register as SEFs.\3\
---------------------------------------------------------------------------

    \2\ Robert Mackenzie Smith, ``SEF reforms could distort new, 
sounder benchmark rates,'' Risk.net, 19 Oct. 2016, at: https://www.risk.net/derivatives/6049931/sef-reforms-could-distort-new-sounder-benchmark-rates.
    \3\ Christopher Doering & Roberta Rampton, ``US May See 100 New 
Swaps Execution Entities: Broker,'' Reuters, Oct. 12, 2010, at: 
https://www.reuters.com/article/us-financial-regulation-sefs/u-s-may-see-100-new-swap-execution-entities-broker-idUSTRE69B69020101012.
---------------------------------------------------------------------------

    I have written a few white papers of my own. I have called for 
revising our current restrictions on SEF activity and allowing 
flexible methods of execution for swaps transactions using any means 
of interstate commerce, exactly as Congress intended.\4\
---------------------------------------------------------------------------

    \4\ Commissioner J. Christopher Giancarlo, Pro-Reform 
Reconsideration of the CFTC Swaps Trading Rules: Return to Dodd-
Frank, Jan. 29, 2015, http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/sefwhitepaper012915.pdf; (``2015 SEF White 
Paper''); and Swaps Regulation Version 2.0: An Assessment of the 
Current Implementation of Reform and Proposals for Next Steps, April 
26, 2018.

---------------------------------------------------------------------------

[[Page 62141]]

    Today's proposal does just that. It will allow SEFs to innovate 
to meet customer demand and operate trading environments that are 
more salutatory to the more episodic nature of swaps liquidity. At 
the same time, it will make the ``made available for trading'' 
determination synonymous with the clearing determination to include 
all swaps subject to the clearing requirement and listed by a SEF or 
DCM. This is meant to bring the full range of liquidity formation, 
price discovery and trade execution on SEFs for a broader range of 
swaps products.
    The promotion of swaps trading on SEFs brings ``daylight to the 
marketplace'' by subjecting a much broader range of swaps products 
to SEF record keeping, regulatory supervision and oversight, just as 
Congress intended.
    It is said that if CFTC mandates for minimum trading 
functionality go away, so will the current degree of electronic 
execution in the market. Sorry, but that is a na[iuml]ve concern. 
Those electronic SEF platforms that are successful provide too much 
competitive advantage and cost efficiency and sunk costs to be shut 
down simply because they are no longer subject to a regulatory 
mandate. No firm is going to give up electronic trading market share 
and profitability and increase trading friction because regulation 
suddenly becomes less prescriptive.
    A word about ``impartial access,'' Dodd-Frank requires SEFs to 
have rules to provide market participants with ``impartial access'' 
to the market and permits SEFs to establish rules regarding any 
limitation on access.
    ``Impartial access'' means just that, ``impartial''. It does not 
mean that SEFs must serve every type of market participant in an 
all-to-all environment. If it did, then Congress would not have 
allowed SEFs to establish rules for limitation of access.
    The new proposal would establish what is meant by ``impartial 
access''. The proposal will generally define ``impartial'' as 
transparent, fair and non-discriminatory as applied to all similarly 
situated market participants in a fair and non-discriminatory manner 
based on objective, pre-established requirements.
    Today's proposal would also enhance the professionalism of SEF 
personnel who exercise discretion by adopting proficiency 
requirements and conduct standards suitable for swaps. Furthermore, 
the proposal adopts rule changes in a number of places where staff 
has previously issued guidance or no-action relief from the current 
rules, thereby increasing regulatory clarity and certainty.
    We have approached today's proposal with the principle that the 
CFTC engage its international counterparts with respect and due 
consideration. The staff of the CFTC and I have made every effort to 
ensure that non-U.S. authorities had the opportunity to review and 
discuss the 2015 SEF White Paper that set out the concepts 
underlying today's proposal. Based on that outreach, I see no reason 
why today's proposal would be viewed as inconsistent with the 
regulatory systems of other G20 jurisdictions. We certainly welcome 
further dialogue with them. In fact, today's proposal is entirely 
consistent with, and anticipated by, recent discussions with foreign 
authorities about the CFTC's SEF regime, including the equivalence 
agreement for swaps trading platforms with the European Commission 
that EC Vice President Dombrovskis and I announced one year ago here 
in this room. That agreement, which focused on an outcomes-based 
approach toward EU equivalence and CFTC exemptions, was made by both 
parties with full knowledge and understanding of the changes 
advocated in the 2015 SEF White Paper and presented to us today.
    Let me briefly address today's request for comment on the 
practice of name give up in swaps markets. There are a range of 
perspectives on this market practice. I have an open mind as to the 
advisability of restrictions on the practice and what form a rule 
would take, if at all. I look forward to comments and hearing more 
about the current impact of this practice in the marketplace.
    One final point: Today's proposal will invariably be slammed by 
opponents of change as a ``rollback'' of Dodd-Frank. Any such 
characterization would be disingenuous.
    Those who examine my record know that I have been a consistent 
supporter of the swaps reforms embodied in Title VII of the Dodd-
Frank Act. In fact, of the current five Commissioners, I may have 
been the first to publicly state my support for Title VII.\5\ And, I 
have not waivered since. Congress got Title VII right. There, I said 
it again.
---------------------------------------------------------------------------

    \5\ Wholesale Markets Brokers' Association, Americas, Commends 
Historic US Financial legislation, Jul. 21 2010, available at: 
http://www.lexissecuritiesmosaic.com/gateway/CFTC/Speech/01_WMBAA-Dodd-Frank-Law-press-release-final123.pdf.
---------------------------------------------------------------------------

    My support for the Title VII reforms--swaps clearing, swap 
dealer registration and requirements, trade reporting and regulated 
swaps execution--is not based on academic theory or political 
ideology. It is based on fifteen years of commercial experience. 
Done right, the reforms are good for American markets.
    So is today's proposal. It is not a rollback, but a policy 
improvement, a step forward, to enhance swaps market health and 
vitality that is true to Congressional intent and purpose. I trust 
that market participants and interested parties will fairly consider 
it with the good faith with which it is presented. I look forward to 
a broad and active discussion.
    In closing, I compliment the DMO staff for putting together a 
balanced rule proposal and request for comment. I would like to 
commend them for their many hours of hard work, the quality of the 
written proposal and their thoughtfulness and engagement throughout.
    You know, it is satisfying to see how an old White Paper, with 
ample time and reflection, can become a formal proposal, an arrow 
hitting its mark.
    I look forward to the public's comments, healthy discussion, and 
a final rule in 2019.

Appendix 3--Supporting Statement of Commissioner Brian D. Quintenz

    I will vote in favor of issuing today's proposed rule and the 
request for comment reforming the regulatory regime of swap 
execution facilities (SEFs). The Chairman has shown great thought 
leadership and transparency in consistently and fully articulating 
his vision for swaps trading rules that would create a more 
cohesive, liquid swap marketplace. Today's proposal represents a 
significant step toward executing that vision. I look forward to 
hearing from market participants about how these broad reforms will 
work collectively to impact SEF trading dynamics and liquidity 
formation. Mr. Chairman, I know this day has been a long time 
coming, and I congratulate you and the Division of Market Oversight 
for all of your and their tireless work on this proposed rule.

Appendix 4--Concurring Statement of Commissioner Rostin Behnam

Introduction

    Today, the Commission votes to issue proposed rules that would 
constitute an overhaul of the existing framework for swap execution 
facilities (SEFs). Given the breadth and complexity of the proposed 
rules before us, the process of public comment is particularly 
important. I look forward to receiving input from market 
participants and the public who would be impacted, in any way, by a 
reworking of the SEF rules.

Background

    As we consider the goals and therefore the direction of any SEF 
reform, I think it is very important that we first review how we got 
where we are today. Prior to the 2008 financial crisis, swaps were 
largely exempt from regulation and traded exclusively over-the-
counter, rather than on a regulated exchange.\1\ Lack of 
transparency in the over-the-counter swaps market contributed to the 
financial crisis because both regulators and market participants 
lacked the visibility necessary to identify and assess swaps market 
exposures and counterparty relationships.\2\ In the aftermath of the 
financial crisis, Congress enacted the Dodd-Frank Wall Street Reform 
and Consumer Protection Act in 2010 (Dodd-Frank Act).\3\ The Dodd-
Frank Act largely incorporated the international financial reform 
initiatives for over-the-counter derivatives laid out at the 2009 
G20 Pittsburgh Summit aimed at improving transparency, mitigating 
systemic

[[Page 62142]]

risk, and protecting against market abuse.\4\ Title VII of the Dodd-
Frank Act amended the Commodity Exchange Act (CEA or Act) to 
establish a comprehensive new swaps regulatory framework that 
includes the registration and oversight of a new registered entity--
SEFs. A key goal of Title VII of the Dodd-Frank Act is to bring 
greater pre-trade and post-trade transparency to the swaps market. 
The concept of transparency runs throughout Title VII--starting with 
the title itself: The ``Wall Street Transparency and Accountability 
Act of 2010.'' \5\
---------------------------------------------------------------------------

    \1\ See Commodity Futures Modernization Act of 2000, Public Law 
106-554, 114 Stat. 2763 (2000).
    \2\ See The Financial Crisis Inquiry Commission, The Financial 
Crisis Inquiry Report: Final Report of the National Commission on 
the Causes of the Financial and Economic Crisis in the United States 
(Official Government Edition), at 299, 352, 363-364, 386, 621 n. 56 
(2011), available at https://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf.
    \3\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010).
    \4\ G20, Leaders' Statement, The Pittsburgh Summit (Sept. 24-25, 
2009) at 9, available at https://www.treasury.gov/resource-center/international/g7-g20/Documents/pittsburgh_summit_leaders_statement_250909.pdf.
    \5\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, title VII, Section 701, 124 Stat. 1376 
(2010).
---------------------------------------------------------------------------

    As part of the Dodd-Frank effort to provide more transparency, 
in 2013 the Commission adopted the part 37 rules in order to 
implement a regulatory framework for SEFs.\6\ In so doing, the 
Commission emphasized that ``[pre-trade] transparency lowers costs 
for investors, consumers, and businesses; lowers the risks of the 
swaps market to the economy; and enhances market integrity to 
protect market participants and the public.'' \7\
---------------------------------------------------------------------------

    \6\ Core Principles and Other Requirements for Swap Execution 
Facilities, 78 FR 33476 (Jun. 4, 2013).
    \7\ Id. at 33477.
---------------------------------------------------------------------------

    The relatively young SEF framework has in many ways been a 
success. There are currently 25 registered SEFs.\8\ Trading volume 
on SEF has been steadily growing each year.\9\ The Commission's work 
to promote swaps trading on SEFs has resulted in increased 
liquidity, while adding pre-trade price transparency and 
competition.\10\
---------------------------------------------------------------------------

    \8\ See Trading Organizations--Swap Execution Facilities (SEF), 
CFTC.gov, https://sirt.cftc.gov/SIRT/SIRT.aspx?Topic=SwapExecutionFacilities (last visited Nov. 4, 2018).
    \9\ See FIA SEF Tracker, FIA.org, https://fia.org/node/1901/ 
(last visited Nov. 4, 2018).
    \10\ See Bank of England Staff Working Paper No. 580, 
Centralized Trading, Transparency and Interest Rate Swap Market 
Liquidity: Evidence from the Implementation of the Dodd-Frank Act 
(May 2018), pp. 2-4, 18-24, available at https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2018/centralized-trading-transparency-and-interest-rate-swap-market-liquidity-update.
---------------------------------------------------------------------------

    This is not to say that the SEF rules were perfect from the 
start and would not benefit from some targeted changes. Most SEFs 
operate under multiple no-action letters granted by the Division of 
Market Oversight. While the purpose of this form of targeted relief 
was often to smooth the implementation of the SEF framework, 
codifying or eliminating the need for existing no-action relief 
would provide market participants with greater legal certainty.
    The current SEF rules have not brought as much trading onto SEFs 
as intended or envisioned. We can improve upon that. Currently, the 
Commission has a regulatory process for SEFs to demonstrate through 
a multi-factor analysis that a swap has been made-available-to-
trade, or ``MAT,'' \11\ meaning that it is required to trade on a 
SEF or DCM. The current process has resulted in relatively few MAT 
determinations and, after an initial flurry of submissions for the 
most standardized and liquid products, no further submissions have 
been made. I believe that addressing the MAT process could bring 
more activity on SEF, bringing pre-trade transparency to more 
products without dismantling the aspects of the SEF rules that are 
working currently.
---------------------------------------------------------------------------

    \11\ See 17 CFR 37.10, 38.12.
---------------------------------------------------------------------------

Notice of Proposed Rulemaking (NPRM)

    While I believe targeted reforms could bring more products onto 
SEFs, increase transparency, and lower costs for market 
participants, today's NPRM is far from targeted, and in some 
instances may represent a regulatory overreach. I therefore have a 
number of very serious concerns with the NPRM's approach and its 
far-ranging alterations. First, the NPRM violates the clear language 
of the Act, which states that one of the major goals of the SEF 
regulatory regime is to promote pre-trade transparency in the swaps 
market. As discussed below, the NPRM does exactly the opposite. 
Second, in addition to reducing transparency, the proposed rule also 
increases limitations on access to SEFs. The NPRM purports to 
increase choice and flexibility for SEFs; however, it simultaneously 
allows SEFs to limit choice and flexibility for market participants. 
Third, as commenters and the Commission think about the NPRM, I 
think it is also important to consider whether we would be creating 
a new registration scheme that adds significant costs for market 
participants, while failing to address the fixable issues that exist 
in the market today.

Pre-Trade Transparency

    Section 1a(50) of the Act 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. . . .'' \12\ Section 5h(e) of the Act states 
that ``[t]he goal of this section is to promote trading of swaps on 
swap execution facilities and to promote pre-trade transparency in 
the swaps market.'' \13\ The existing SEF rules establish two 
methods of execution for required transactions: The central limit 
order book (CLOB) and the Request for Quote (RFQ) system.\14\ These 
methods were chosen specifically because they provide pre-trade 
transparency.
---------------------------------------------------------------------------

    \12\ 7 U.S.C. 1a(50).
    \13\ 7 U.S.C. 7b-3(e).
    \14\ See 17 CFR 37.9.
---------------------------------------------------------------------------

    I am concerned that the NPRM goes too far by allowing, 
literally, any means of execution. The NPRM's preamble states that 
the approach ``should also promote pre-trade transparency in the 
swaps market by allowing execution methods that maximize 
participation and concentrate liquidity. . . .'' This simply cannot 
be true. Absent a clear standard of what constitutes pre-trade 
transparency, it is fairly easy to envision an execution method that 
would not provide pre-trade transparency--one need look no further 
than the over-the-counter system that preceded the financial crisis. 
But this is more than a case of what the Commission should or should 
not do. The statute is clear. The Commission must ``promote pre-
trade transparency in the swaps market.'' Today's NPRM would not do 
that.
    That is not to say that expanding methods of execution--in a 
more limited and targeted way--is a bad idea or violates the Act. 
There are likely other execution methods that fit within section 
1a(50) and would promote pre-trade transparency. I look forward to 
hearing from commenters as to what those methods might be, and 
debating with my fellow Commissioners as to whether they are 
appropriate within the confines of congressional intent and 
ultimately the Act.

Made Available To Trade

    As I mentioned earlier, the MAT process is seemingly broken. The 
Commission stopped receiving MAT submissions after an initial set of 
submissions for the most standardized and liquid swaps 
contracts.\15\ The Commission has not received any MAT submissions 
or made any MAT determinations since 2014.\16\ This is not what the 
Commission envisioned in promulgating the Made Available to Trade 
rule.\17\ The solution posited today is, in a sense, a simple, 
elegant one. The NPRM states that the phrase ``makes the swap 
available to trade'' in CEA section 2h(8) should be interpreted to 
mean that ``once the clearing requirement applies to a swap, then 
the trade execution requirement applies to that swap upon any single 
SEF or DCM listing the swap for trading.'' This would take both the 
SEF and the Commission out of the determination process.
---------------------------------------------------------------------------

    \15\ See CFTC, Industry Oversight, Industry Filings, Swaps Made 
Available to Trade Determination, https://sirt.cftc.gov/sirt/sirt.aspx?Topic=%20SwapsMadeAvailableToTradeDetermination.
    \16\ Id.
    \17\ See Process for a Designated Contract Market or Swap 
Execution Facility To Make a Swap Available to Trade, Swap 
Transaction Compliance and Implementation Schedule, and Trade 
Execution Requirement Under the Commodity Exchange Act, 78 FR 33606 
(Jun. 4, 2013).
---------------------------------------------------------------------------

    My concern, however, is that there may be products that are more 
appropriately traded off SEF. In addition, tying the trade execution 
requirement to the clearing requirement could have unintended 
consequences--it could actually discourage voluntary central 
clearing.
    I look forward to hearing from commenters regarding the 
appropriate interpretation of the term ``made available to trade'', 
including how to improve the existing process.

Impartial Access

    One of the most troubling aspects of the NPRM is that it would 
alter the Commission's interpretation of ``impartial access'' under 
SEF Core Principle 2. Core Principle 2 of the Act requires SEFs to 
establish and enforce participation rules that ``provide market 
participants with impartial access to the market.'' \18\ Current 
Commission regulation 37.202(a) states that a SEF ``shall provide 
any eligible contract participant . . .

[[Page 62143]]

with impartial access to its market(s) and market services.'' 
(emphasis added). The Commission was clear in the preamble to the 
existing rules that ``the purpose of the impartial access 
requirement is to prevent a SEF's owners from using discriminatory 
access requirements as a competitive tool'' against certain eligible 
contract participants.\19\ The current rule provides that a SEF can 
restrict access based on disciplinary history or financial or 
operational soundness, if objective, pre-established criteria are 
used. What a SEF cannot do is restrict access to certain types of 
participants.
---------------------------------------------------------------------------

    \18\ 7 U.S.C. 7b-3(f)(2).
    \19\ Supra note 7 at 33508.
---------------------------------------------------------------------------

    Today's NPRM would roll back this interpretation, leaving the 
term ``impartial access'' an empty shell. The proposed rule would 
``allow SEFs to serve different types of market participants or have 
different access criteria for different execution methods.'' This is 
exactly the type of discrimination that the ``impartial access'' 
provision in the Act was intended to prevent.
    I believe that all market participants should have impartial 
access to a SEF whose access criteria is applied in a fair and non-
discriminatory manner. Rather than erecting new barriers to 
participation, we should focus on applying our existing regulations 
as they are clearly written. It seems to me that impartial access 
theoretically would go hand-in-hand with the proposed widening of 
SEF execution methods. Instead, the Commission seems to be bending 
over backwards to be impartial regarding SEFs' modes of execution, 
while allowing the SEFs themselves to discriminate. This threatens 
to take us back to the world as it was pre-Dodd-Frank and pre-
financial crisis, undermining some of the key successes of the 
existing SEF regulatory regime regarding transparency and market 
access.

Registration/Costs

    I would like to turn for a minute to the potential costs to 
market participants--and the Commission--from this proposed rule. 
Currently, there are 25 registered SEFs.\20\ The Proposal will 
drastically increase the number of SEFs--likely by multiples. In the 
cost benefit considerations to the NPRM, the Commission estimates 
that approximately 40-60 swaps broking entities, including 
interdealer brokers, and one single-dealer aggregator platform would 
need to register as a SEF. That is the universe that we know--the 
market as we understand it to exist today. There could be more--
perhaps many more--entities that will fall under the expanded 
registration requirements. Just as importantly, we do not know how 
these new rules will incentivize SEFs--whether they will lead to 
consolidation or myriad SEFs with myriad methods of execution.
---------------------------------------------------------------------------

    \20\ See Trading Organizations--Swap Execution Facilities (SEF), 
CFTC.gov, https://sirt.cftc.gov/SIRT/SIRT.aspx?Topic=SwapExecutionFacilities (last visited Nov. 4, 2018).
---------------------------------------------------------------------------

    The new registration regime, and the many changes that come 
along with it, will result in substantial costs all around: To both 
existing SEFs and new SEF registrants, and to their participants. I 
note with some concern that, while the preamble provides a laundry 
list of what rule changes will result in costs, there is no effort 
to quantify them. Operating or participating in a regulated market 
comes with costs; but, these incremental costs are offset, in part, 
by the benefits of having access to a transparent, safe market 
ecosystem that demands accountability and punishes wrongdoers. I do 
not mean to suggest anything else. However, as the Commission 
proceeds with this NPRM, I am hopeful that the best, most cost 
effective regulatory solutions will prevail as the Commission seeks 
to improve and advance the health and vibrancy of the SEF 
marketplace.

Comment Period

    I also want to quickly raise a non-substantive concern, but one 
that may greatly impact the substance of the NPRM. The comment 
period for the proposal is only 75 days. As I have stated 
previously, this rulemaking is complex and impacts a wide range of 
market participants in fundamental ways. There are 105 numbered 
questions for commenters in the NPRM's preamble, in addition to 
general requests for comment. I think it is very important that we 
give market participants time to carefully consider the proposed 
rule and make reasoned comments. Recent proposed rules that raised 
complex issues, like the capital rule and Reg AT, had 90 day comment 
periods followed by extensions of at least an additional 60 
days.\21\ The original part 37 notice of proposed rulemaking 
ultimately had open comment periods totaling 90 days, and market 
participants had 7 months between publication of the notice of 
proposed rulemaking and the end of the final comment period.\22\ 
Today's NPRM deserves careful consideration, both from the public 
and from the Commission, and I hope that the Commission will give 
market participants the time they need to respond thoughtfully and 
thoroughly.
---------------------------------------------------------------------------

    \21\ Capital Requirements of Swap Dealers and Major Swap 
Participants, 81 FR 91252 (proposed Dec. 16, 2016), and Capital 
Requirements of Swap Dealers and Major Swap Participants, 82 FR 
13971 (March 16, 2017) (extending comment period an additional 60 
days); Regulation Automated Trading, 80 FR 78824 (proposed Dec. 17, 
2015), Regulation Automated Trading, 81 FR 85334 (proposed Nov. 25, 
2016), and Regulation Automated Trading, 82 FR 8502 (Jan. 26, 2017).
    \22\ Reopening and Extension of Comment Periods for Rulemakings 
Implementing the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, 76 FR 25274 (May 4, 2011), available at https://www.gpo.gov/fdsys/pkg/FR-2011-05-04/pdf/2011-10884.pdf.
---------------------------------------------------------------------------

Name Give Up Request for Comment

    Before I conclude, I would like to turn briefly to the name 
give-up request for comment that is before us as well, as it is 
inextricably tied to the SEF NPRM. Post-trade name give-up also 
relates to the issue of impartial access, which I discussed earlier. 
While today's SEF NPRM reworks the SEF rules generally, the NPRM 
does not address the long standing practice of disclosing the 
identity of each swap counterparty to the other after a trade has 
been matched anonymously. Instead, the Commission is voting to issue 
a request for comment seeking public comment on the practice. While 
I appreciate the desire to be measured and thoughtful on this issue, 
I fear that not taking a view at this time in the proposal may 
function as an endorsement of the status quo. The request for 
comment puts name give-up on a slower track than the rest of the 
rule. Any rule to address the issue will now be well behind the 
process for the rest of the SEF rules.

Conclusion

    As outlined above, I have numerous concerns about this NPRM, 
both in terms of what the Commission should do as policy makers, and 
in terms of what the Commission can do under the law. Congress was 
clear in the Dodd-Frank Act--the Commission is tasked with bringing 
greater pre-trade transparency to the swaps market. Today's NPRM not 
only fails to advance pre-trade transparency, it actually undermines 
pre-trade transparency that has been achieved through our existing 
regulations. In addition to the few issues I raise today, the NPRM's 
changes also demand thoughtful deliberation on equally important 
issues related to cross-border implications, investigations, audit 
trails, recordkeeping, and disciplinary hearings to name just a few.
    As I read through the NPRM, I noticed a common thread that 
naturally aims to shift the current part 37 regime to a less 
prescriptive, and more principles based regime. The frequent weaving 
of words into the text of the NPRM like, defer, flexible, 
reasonable, and discretion stand as a clear declaration of where 
this proposal's authors want it to go. I have long been a proponent 
of sensible principles based regulation. I believe our markets, and 
more importantly this agency, are strongly rooted in a principles 
based regulatory regime. However, like the words of this NPRM, I 
have woven my own thoughts on striking the right balance between 
principles based and rules based regulation. Principles based 
regulation certainly does not mean an absence of rules--or the 
absence of supervision.
    In remarks I delivered in February of this year, I stated, ``. . 
. [w]hile I strongly oppose any roll backs of Dodd-Frank 
initiatives, I believe a principles-based approach to implementation 
can be suitable in certain instances. A principles-based approach 
provides greater flexibility, but more importantly focuses on 
thoughtful consideration, evaluation, and adoption of policies, 
procedures, and practices as opposed to checking the box on a 
predetermined, one-size-fits-all outcome. However, the best 
principles-based rules in the world will not succeed absent: (1) 
Clear guidance from regulators; (2) adequate means to measure and 
ensure compliance; and (3) willingness to enforce compliance and 
punish those who fail to ensure compliance with the rules.'' \23\
---------------------------------------------------------------------------

    \23\ Rostin Behnam, Commissioner, U.S. Comm. Fut. Trading 
Comm'n, Remarks of Rostin Behnam before FIA/SIFMA Asset Management 
Group, Asset Management Derivatives Forum 2018, Dana Point, 
California (Feb. 8, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam2.
---------------------------------------------------------------------------

    If the Commission was voting on a final rule today, my vote 
would be no. However,

[[Page 62144]]

I fully recognize that our existing part 37 rules are not perfect. 
Bringing more activity on SEF is a laudable goal, both from a policy 
perspective and because Congress has tasked the Commission with 
doing so. I will support today's proposed rule because I believe 
that it is important that we hear from market participants regarding 
what aspects of the NPRM will improve the regulatory framework for 
SEFs, while staying within our responsibilities under the law.

Appendix 5--Dissenting Statement of Commissioner Dan M. Berkovitz

I. Summary of Dissenting Views

    I respectfully dissent from the Commodity Futures Trading 
Commission's (``CFTC'' or ``Commission'') notice of proposed 
rulemaking regarding Swap Execution Facilities and Trade Execution 
Requirement (the ``Proposal''). This Proposal would reduce 
competition and diminish price transparency in the swaps market, 
which will lead to higher costs for end users and increase systemic 
risks.
    The Proposal would abandon the commitments the United States 
made at the G20 Summit in Pittsburgh in 2009 to trade standardized 
swaps on exchanges or electronic trading platforms and is contrary 
to Congressional direction in the Dodd-Frank Act and the Commodity 
Exchange Act (``CEA'') reflecting those commitments. It would 
retreat from the progress made by the Commission and the financial 
industry in implementing those reforms.
    The Proposal would reduce competition by cementing the oligopoly 
of the largest bank dealers as the main source of liquidity and 
pricing in the swaps markets. It would diminish transparency by 
removing the requirement that highly liquid swaps be traded through 
competitive methods of trading. By reducing competition and 
diminishing price transparency, the Proposal would increase systemic 
risks and lead to higher swaps prices for commercial and financial 
end-users. Ultimately, the millions of Americans who indirectly 
participate in the swaps market through their investments in 
retirement accounts, pension plans, home mortgages, and mutual funds 
will pay that higher cost. Finally, the Proposal would provide SEFs 
with too much discretion to set their own rules and in so doing, 
weaken regulatory oversight and enforcement capabilities.

II. Major Flaws in the Proposal

    The evidence is clear that the Dodd-Frank reforms, including the 
Commission's swap execution regulations, have led to more 
competition, greater liquidity, more electronic trading, better 
price transparency, and lower prices for swaps that are required to 
be traded on regulated platforms. Numerous academic studies and 
reports by market consultants have documented these benefits.\1\ The 
Proposal ignores this evidence and analysis.
---------------------------------------------------------------------------

    \1\ See infra section II.
---------------------------------------------------------------------------

    The Proposal would jettison the regulatory foundation for the 
way swap execution facilities (``SEFs'') currently operate. It would 
delete the requirement that swaps that are subject to the trade 
execution mandate (``Required Transactions'') be traded either on 
Order Book or by a request for quote from at least three market 
participants (``RFQ-3''). This would undermine the Congressional 
directive in the Dodd-Frank Act that for Required Transactions, a 
SEF provide multiple participants with ``the ability to execute or 
trade swaps by accepting bids and offers made by multiple 
participants in the facility or system.'' \2\ Consequently, the 
Proposal would lead to less price transparency and less competition.
---------------------------------------------------------------------------

    \2\ 7 U.S.C. 1a(50).
---------------------------------------------------------------------------

    The Proposal also would gut the impartial access requirement in 
the Dodd-Frank Act. The statute requires SEFs to establish rules 
that ``provide market participants with impartial access to the 
market.'' \3\ Authorizing discrimination based on the type of entity 
will permit the largest bank-dealers to establish and maintain 
exclusive pools of liquidity for themselves. By denying other market 
participants access to the most favorable prices in the dealer-to-
dealer market, bank dealers can prevent others from cost-effectively 
competing with them for customers. Eliminating competition will 
result in higher prices for customers. Permitting large banks and 
dealers to discriminate in this manner is inconsistent with sound 
economic principles underpinning competitive markets and the CEA's 
impartial access requirement.
---------------------------------------------------------------------------

    \3\ 7 U.S.C. 7b-3(f)(2)(B)(i).
---------------------------------------------------------------------------

    In pursuit of the goal of ``flexibility'' for SEF markets, the 
Proposal deletes, reverses, or waters down many key trading, access, 
and compliance requirements for SEFs. The wide latitude that would 
be granted to SEFs as to how swaps may be traded, who may trade 
them, the oversight of the marketplace, and the conduct of the 
brokers looks very much like the ``light-touch'' approach to 
regulation that was discredited by the financial crisis.
    Seven years ago, as the Commission was formulating the current 
regulations, very little data was available on swap trading and 
pricing. But now, after six years of experience with those 
regulations, we have an extensive amount of data, collected by SEFs 
and swap data repositories. The Commission should base its 
regulatory decisions on this data and the studies and literature 
that have analyzed this data and demonstrated the benefits of the 
current swap trading requirements.
    Unfortunately, the Proposal does not consider the available data 
and market studies that demonstrate the current RFQ-3 system is 
working well to provide highly competitive prices and low 
transaction costs. For example, the Proposal ignores the following 
studies and conclusions:
     CFTC economists' study (2018).\4\ This study, conducted 
by four CFTC economists, concluded: ``Judged from our evidence, SEF-
traded index CDS market seems to be working well after Dodd-Frank--
dealers' response rates are high, the vast majority of customer 
orders result in trades, and customers' transaction costs are low.'' 
\5\ With respect to the most liquid CDS index swaps, the CFTC 
economists found that ``the average transaction cost is 
statistically and economically close to zero.'' \6\
---------------------------------------------------------------------------

    \4\ Lynn Riggs (CFTC), Esen Onur (CFTC), David Reiffen (CFTC) & 
Haoxiang Zhu (MIT, NBER, and CFTC), Swap Trading after Dodd-Frank: 
Evidence from Index CDS (Jan. 26, 2018) (``CFTC Economist Study'').
    \5\ Id. at 50.
    \6\ Id. at 43.
---------------------------------------------------------------------------

     Bank of England Staff Working Paper (2018).\7\ This 
Bank of England paper concluded that the CFTC's trade execution 
mandate, including the RFQ-3 requirement, has led to a ``sharp 
increase in competition between swap dealers'' in dealer-to-customer 
transactions for interest rate swaps subject to the mandate.\8\ The 
study concluded that this competition had led to ``a substantial 
reduction in execution costs,'' amounting ``to daily savings in 
execution costs of as much as $3-$6 million for end-users of USD 
swaps.'' \9\
---------------------------------------------------------------------------

    \7\ Evangelos Benos, Richard Payne & Michalis Vasios, 
Centralized trading, transparency and interest rate swap market 
liquidity: Evidence from the implementation of the Dodd-Frank Act, 
Bank of England Staff Working Paper No. 580 (May 2018) (``Bank of 
England Study'').
    \8\ Id. at 31.
    \9\ Id. The authors explain that during this period these EUR-
mandated swaps were not traded on SEFs due to the fragmentation of 
the EUR swaps market. Id. at 28.
---------------------------------------------------------------------------

     Study of ``Market Structure and Transaction Costs of 
Index CDSs'' (2017).\10\ This study found that prices customers 
obtained in the dealer-to-customer market through the RFQ system 
often were better than the prices that were available on the 
interdealer Order Book.\11\ ``[O]ur results show that the current 
market structure delivers very low transaction costs. . . .\12\
---------------------------------------------------------------------------

    \10\ Pierre Collin-Dufresne, Benjamin Junge & Anders B. Trolle, 
Market Structure and Transaction Costs of Index CDSs (Sept. 12, 
2017) (``Collin-Dufresne, Junge, and Trolle Study'').
    \11\ Id. at 38.
    \12\ Id. at 6.
---------------------------------------------------------------------------

    The Proposal conjectures that novel ``flexible methods of 
execution'' will benefit the trading of all swaps. The Proposal, 
however, does not identify any trading methodology that can provide 
lower costs than the RFQ-3 method as applied to interest rate swaps 
and index CDS subject to the current trade execution mandate. In 
discarding the trading requirements for Required Transactions to 
bring more swaps onto SEFs, the Proposal throws the baby out with 
the bathwater.
    Today, a small number of large dealers provide liquidity to the 
swaps market. Five very large banks were party to over 60 percent of 
interest rate swap transactions.\13\ Liquidity in highly 
standardized swaps is fragmented between a dealer-to-dealer market 
and a dealer-to-customer market. There are no non-dealers in the 
dealer-to-dealer market. This high degree of reliance on a few large 
bank dealers to supply liquidity to all swaps market participants 
presents systemic risks as well as other types of risk that arise in 
highly concentrated markets.
---------------------------------------------------------------------------

    \13\ Quantifying Interest Rate Swap Order Book Liquidity, 
Greenwich Associates, Q1 2016 (``Greenwich Report''), at 8.
---------------------------------------------------------------------------

    One of the fundamental purposes of the CEA is to ``promote 
responsible innovation

[[Page 62145]]

and fair competition among boards of trade, other markets and market 
participants.'' \14\ It is the CFTC's mission, and incumbent upon 
this agency in carrying out that mission, to ensure that there is 
fair competition among all market participants. This means ensuring 
no market participant or limited group of participants has excessive 
market power. Market structure and price competition should develop 
in the interest of all market participants, rather than in the 
interest of just a few of the largest banks. The Commission should 
strive to remove the existing barriers to broader participation and 
fair competition in the swaps markets. In my view, the Proposal 
seeks to perpetuate existing barriers.
---------------------------------------------------------------------------

    \14\ 7 U.S.C. 5(b).
---------------------------------------------------------------------------

III. Targeted Reforms To Consider

    The current system is not perfect; there are flaws that should 
be addressed. But the evidence is clear that the current system has 
provided substantial benefits over the unregulated system that 
existed prior to the financial crisis and the Dodd-Frank reforms. 
The Proposal would return the swaps market to the dealer-dominated, 
trade-however-you-want system heavily reliant on voice brokers that 
existed prior to the financial crisis. At the G20 Summit in 
Pittsburgh in 2009, the United States made an international 
commitment to move away from the dealer-dominated, voice-brokered 
approach and Congress expressly rejected the dealer-dominated, 
flexible approach when it adopted the Dodd-Frank Act.
    My sense from working with and talking to swap market 
participants is that many do not see a need for a major overhaul of 
the swaps regulatory framework. The benefits of the current system 
are due not just to the regulations, but also are the result of 
major efforts and investments by market participants and operators 
of SEFs in electronic trading technology and personnel. Many market 
participants do not want to deal with another round of costs and 
uncertainties that wholesale regulatory changes will generate. They 
believe the current system is working, despite its flaws. They 
prefer that we consider more targeted reforms to address specific 
issues with the current system, rather than scrap the current system 
entirely. They do not want to face the possibility that the 
Commission will continue to engage in a repetitive cycle of de-
regulation and re-regulation.
    Rather than completely rewrite the SEF regulatory structure, and 
turn our back on the progress made in transparency and competition, 
I favor a more limited, data-based approach to build on our progress 
and improve upon the current structure. This could be accomplished 
by removing some of the unnecessary barriers to greater 
participation on SEFs. Banks and other swap dealers play a critical 
role in providing liquidity. We need them to participate. However, a 
highly concentrated dealer oligopoly is not a prerequisite for 
sufficient liquidity. We should seek ways to bring in more sources 
of liquidity and competition. Robust competition leads to healthier 
markets and improves the overall welfare of all market participants.
    I support the goal of bringing more types of swaps onto the SEF 
trading environment. I could support a more narrow approach to 
achieve this goal that does not undermine the progress that has been 
made to date.
    I am not persuaded that we should continue to have two separate 
pools of liquidity in the swaps market for all types of swaps, 
regardless of liquidity characteristics--one in which the dealers 
trade amongst themselves, and another in which the dealers trade 
with customers. Perhaps we should look for ways to consolidate 
rather than separate the swaps markets.
    Specifically, I support considering the following regulatory 
measures to improve competition in the swaps market:
     Abolish Name Give-Up. The Commission should prohibit 
the practice of name give-up for cleared swaps. On many platforms 
that provide anonymous trading, the identity of a counterparty is 
provided to the dealer after the completion of a trade. Name give-up 
is a major deterrent to non-dealers seeking to participate on 
dealer-only platforms as it provides the dealers with valuable 
information about a counterparty's positions. Name give-up is a 
relic of the pre-Dodd-Frank era when most swaps were not cleared and 
the identity of the counterparty was necessary to manage credit 
risks.
     Expand Floor Trader registration. The Commission should 
amend the floor trader provision in the swap dealer definition to 
remove overly restrictive conditions. This would permit a wider 
range of proprietary traders to provide liquidity and compete with 
large bank dealers on price.
     Revise capital requirements. The Commission should work 
with the prudential regulators to ensure that capital requirements 
do not unduly restrict the availability of clearing services by 
futures commission merchants (``FCMs''). The current capital 
requirements have had the unintended consequences of discouraging 
FCMs from providing additional clearing services to the cleared 
swaps market.
     Enable average pricing. The Commission should work with 
market participants and facilities to enable buy-side firms to 
obtain average pricing for buy-side swap trades. Although average 
pricing is available for futures, it currently is not available for 
swaps, which limits the direct participation of buy-side asset 
managers on SEFs.
    We should explore these and other ways to increase competition 
in the swaps market rather than retreat from the progress that has 
been made. What follows is a more detailed explanation of how the 
current regulatory system has improved the swaps market and how the 
Proposal would undermine those improvements.

IV. Specific Concerns With the Proposal

    The Proposal raises the following specific concerns:

 Less competition
 Less transparency
 Higher prices for end-users
 Diminished CFTC supervision and enforcement abilities

A. Less Competition, Less Transparency, and Higher Prices

    The first three concerns--higher prices, less competition, and 
less transparency--arise from the repeal of two critical and inter-
related provisions of the current regulations.
    Elimination of Order Book/RFQ-3. The Dodd-Frank Act sets forth a 
Rule of Construction that the goal of the SEF regulations is ``to 
promote the trading of swaps on swap execution facilities and to 
promote pre-trade price transparency in the swaps market.'' \15\ A 
key requirement facilitating the statutory goal of pre-trade price 
transparency is that all Required Transactions must be traded by 
Order Book or RFQ-3.\16\ Under RFQ-3, a customer must request quotes 
from at least three dealers prior to entering into a transaction. In 
this manner, dealers must compete on price.
---------------------------------------------------------------------------

    \15\ 7 U.S.C. 7b-3(e).
    \16\ 17 CFR 37.9. In the 2013 rulemaking adopting the current 
SEF regulations, the Commission explained the rationale for this 
requirement: ``[T]he Commission believes that an RFQ System, as 
defined in Sec.  37.9, operating in conjunction with a SEF's minimum 
trading functionality (i.e., Order Book) is consistent with the SEF 
definition and promotes the goals provided in [CEA Section 5h(e), 7 
U.S.C. 7b-3(e)], which are to: (1) Promote the trading of swaps on 
SEFs and (2) promote pre-trade price transparency in the swaps 
market. The Commission notes that the RFQ System definition requires 
SEFs to provide market participants the ability to access multiple 
market participants, but not necessarily the entire market, in 
conformance with the SEF definition.'' Core Principles and Other 
Requirements for Swap Execution Facilities (``2013 SEF 
Rulemaking''), 78 FR 33476, 33496 (June 4, 2013).
---------------------------------------------------------------------------

    The Proposal would delete the Order Book/RFQ-3 requirement, even 
for swaps already traded on SEFs and subject to the trade execution 
requirement. Instead, the Proposal states that ``a SEF may utilize 
`any means of interstate commerce' for purposes of execution and 
communication, including, but not limited to, the mail, internet, 
email and telephone.'' \17\
---------------------------------------------------------------------------

    \17\ Notice of proposed rulemaking, Swap Execution Facilities 
and Trade Execution Requirement (``Proposal''), section IV.I.4.b.
---------------------------------------------------------------------------

    Authorizing discrimination; eviscerating impartial access. Next, 
the Proposal flips on its head the impartial access requirement. CEA 
section 5h(f)(2)(B)(i) requires a SEF to ``provide market 
participants with impartial access to the market.'' \18\ Under 
existing Commission Regulation 37.202, which implements this 
statutory provision, any SEF criteria governing access must be 
``impartial, transparent, and applied in a fair and non-
discriminatory manner.'' \19\ In the 2013 SEF rulemaking, the 
Commission explicitly rejected a proposed interpretation that would 
permit SEFs to discriminate against types of market participants. 
``[T]he Commission believes that the impartial access requirement of 
Core Principle 2 does not allow a SEF to limit access to its trading 
systems or platforms to certain types of [eligible contract 
participants (``ECPs'')] or [independent software vendors 
(``ISVs'')] as requested by some commenters. The Commission notes 
that the rule states

[[Page 62146]]

`impartial' criteria and not `selective' criteria as recommended by 
some commenters.'' \20\
---------------------------------------------------------------------------

    \18\ 7 U.S.C. 7b-3(f)(2)(B)(i).
    \19\ 17 CFR 37.202(a)(1).
    \20\ 2013 SEF Rulemaking, 78 FR at 33508. The Commission also 
stated that ``the purpose of the impartial access requirements is to 
prevent a SEF's owners or operators from using discriminatory access 
requirements as a competitive tool against certain ECPs or ISVs.'' 
Id.
---------------------------------------------------------------------------

    The Proposal would replace this critical requirement and allow 
each SEF to establish exclusionary criteria determining what types 
of market participants are ``similarly situated market 
participants'' that are allowed to trade on the SEF (let's call this 
what it is, the ``Discriminatory Access Provision''). This approach 
flips the statutory ``impartial access'' requirement on its head by 
empowering SEFs to build limited liquidity pools for a select few 
market participants such as the dealers seeking to hedge with each 
other.
    Under the Discriminatory Access Provision, it is reasonable to 
expect that the large bank swap dealers would encourage 
discriminatory SEF participation criteria such that only large bank 
swap dealers would be ``similarly situated market participants'' 
able to participate in dealer-to-dealer liquidity pools. Proprietary 
trading firms and smaller dealers provide competition to the large 
banks in pricing swaps, and are one major reason customers are able 
to obtain favorable prices through the current RFQ process. If 
discrimination is permitted, these other types of firms would not be 
able to use the dealer-to-dealer market to effectively hedge or 
offset trades with customers, and therefore would not be able to 
compete with the large bank swap dealers in the dealer-to-customer 
market. In this manner, the Discriminatory Access Provision would 
result in a significant loss of competition in the dealer-to-
customer market, which ultimately would result in higher prices for 
end users.\21\
---------------------------------------------------------------------------

    \21\ It is unclear under the Proposal what happens to market 
participants subject to the SEF trading requirements who are not 
given access to a SEF because of the Discriminatory Access 
Provision.
---------------------------------------------------------------------------

    If the current trade execution requirement is repealed, dealers 
also could establish single-dealer platforms and call them SEFs to 
siphon liquidity away from the RFQ platforms. The dealers wield 
significant market power in the swaps market. Five dealers currently 
account for nearly two-thirds of the interest rate swap market, 
which is the largest swap product category.\22\ Although SEFs that 
currently offer RFQ-3 functionality might continue to do so even if 
the requirement is repealed, once the customers are no longer 
required to use that functionality, the dealers could undermine the 
effectiveness of the RFQ process by offering incentives to trade on 
single-dealer platforms or voice-brokered SEFs. This outcome would 
reduce liquidity for the RFQ platforms. In the long run, draining 
liquidity from RFQ-3 platforms to single-dealer or voice-brokered 
systems will result in less direct competition between dealers, less 
transparency, and higher costs for customers.\23\
---------------------------------------------------------------------------

    \22\ Greenwich Report at 8. One market participant has commented 
on the ability of the dealers to determine market structure through 
the exercise of their market power:
    ``There is no commercial explanation for having a market that is 
not open to a lot more people. It just doesn't make any sense. But 
the ability of people to enforce change outside the incumbent 
dealers is very limited,'' says the expert. ``The part that 
frustrates me more than anything is pretending that the leverage of 
the incumbent dealers over this market isn't real. When I hear 
people talk about the natural market evolution, I would contend that 
progress has been 100% prevented to date.''
    Robert Mackenzie Smith, US swap trading overhaul may reinforce 
market split, users warn, Risk.net, Mar. 21, 2018, https://www.risk.net/derivatives/5440516/us-swap-trading-overhaul-may-reinforce-market-split-users-warn.
    \23\ In the equities market, the forced transition away from a 
market centered around multiple dealers improved prices 
substantially. See, e.g., Michael J. Barclay, William G. Christie, 
Jeffrey H. Harris, Eugene Kandel & Paul H. Schultz, The Effects of 
Market Reform on the Trading Costs and Depths of Nasdaq Stocks, 
Journal of Finance, Vol. 54, Issue 1, at 1-2 (1999) (``Our results 
indicate that quoted and effective spreads fell dramatically without 
adversely affecting market quality.'').
---------------------------------------------------------------------------

    The Proposal asserts that all-to-all markets are ``inimical'' to 
``fundamental'' swaps trading features.\24\ The Proposal also states 
that ``market participants have rarely used Order Books to trade 
swaps on SEFs,'' and that ``this low level of swaps trading on Order 
Books is attributable to an Order Book's inability to support the 
broad and diverse range of products traded in the swaps market that 
trade episodically, rather than on a continuous basis.'' \25\ 
Following a brief discussion of why the Order Book is unsuitable for 
some swaps, the Proposal states that the Order Book should be 
eliminated for all swaps: ``[B]ased in part on its experience, the 
Commission proposes to eliminate the minimum trading functionality 
requirement and the regulatory Order Book definition.'' \26\
---------------------------------------------------------------------------

    \24\ Proposal at section VII.A.1.a.
    \25\ Id. at section IV.C.2.
    \26\ Id.
---------------------------------------------------------------------------

    Similarly, the Proposal eliminates the RFQ requirement because 
it states that this method of execution may be unsuitable for some 
additional types of swaps that are currently traded off SEF. ``[T]he 
Commission believes that [Order Book and RFQ-3] would not be 
suitable for the broad swath of the swaps market that would become 
newly subject to the trade execution requirement.'' \27\
---------------------------------------------------------------------------

    \27\ Proposal at section IV.I.4.b.
---------------------------------------------------------------------------

    This reasoning is flawed. From the proposition that an Order 
Book may be unsuitable for some episodically traded swaps, it does 
not follow that an Order Book is unsuitable for all swaps, even 
highly liquid ones. Nor does it follow from the proposition that the 
RFQ process may be unsuitable for some swaps that it should be 
removed for all swaps. Yet this flawed logic appears to be the 
rationale for the elimination of both the Order Book and RFQ-3 
functionality requirements, even for highly liquid standardized 
swaps.\28\
---------------------------------------------------------------------------

    \28\ In the Cost-Benefit Considerations, the Proposal 
acknowledges that ``the overall amount of pre-trade price 
transparency in swap transactions currently subject to the trade 
execution requirement may decline if the Order Book and RFQ-to-3 
requirement[s are] eliminated. This potential reduction in pre-trade 
price transparency could reduce the liquidity of certain swaps 
trading on SEFs and increase the overall trading costs.'' Proposal 
at section XXIII.C.
---------------------------------------------------------------------------

    RFQ-3 has improved competition and lowered trading costs. 
Empirical evidence demonstrates that the Order Book/RFQ-3 and 
impartial access requirements for standardized, highly liquid 
cleared swaps have increased competition and transparency and 
brought low trading costs to swap markets. The Bank of England Study 
found that the RFQ-3 requirement significantly improved liquidity 
for U.S. dollar interest rate swaps, which reduced swap execution 
costs for end-users by an estimated $3 to $6 million per day 
relative to Euro swaps, which were not traded pursuant to the trade 
execution mandate.\29\
---------------------------------------------------------------------------

    \29\ Bank of England Study at 31. As discussed further below, 
the Proposal appears to consider liquidity solely in terms of total 
volume of trades. The Bank of England Study measures liquidity using 
various price dispersion measures complemented by a price impact 
measure and a bid-ask spread. See id. at 4. This measure of 
liquidity better assesses how liquidity affects efficient execution, 
pricing, and timing of trading.
---------------------------------------------------------------------------

    The Bank of England Study also assessed the impact of the SEF 
trading mandate on dealer market power.\30\ The study found that, 
prior to the SEF trading mandate, 28 percent of customers for U.S. 
and Euro interest rate swaps that became subject to the mandate 
dealt with only a single dealer, and over 50 percent of customers 
dealt with three or fewer dealers.\31\ After the SEF trading 
requirements went into effect, those percentages dropped to 8 
percent and 20 percent, respectively.\32\ The study states that 
``[w]ith the improvements in pre-trade transparency, customer search 
costs have fallen and it has become easier for customers to trade 
with the dealer showing the best price.'' \33\
---------------------------------------------------------------------------

    \30\ Id. at section 5.
    \31\ Id. at 26.
    \32\ Id.
    \33\ Id.
---------------------------------------------------------------------------

    Other studies have found similar results. Collin-Dufresne, 
Junge, and Trolle compared the prices on the Order Books used in the 
interdealer market with the prices generated in the dealer-to-
customer market through the RFQ system. The authors found that 
prices customers obtained in the dealer-to-customer market through 
the RFQ system often were better than the prices that were available 
on the interdealer Order Book.\34\
---------------------------------------------------------------------------

    \34\ Collin-Dufresne, Junge, and Trolle Study at 38.
---------------------------------------------------------------------------

    Economists in the CFTC's Office of Chief Economist examined data 
regarding the customer trading of index CDS on the Bloomberg and 
Tradeweb SEFs, which are the leading SEFs for dealer-to-customer 
trading.\35\ The CFTC economists found that very little customer 
trading occurred on the Central Limit Order Book (``Clob'') of 
either facility, but rather that most of the trading occurred either 
by RFQ or by request-for-streaming (``RFS'').\36\ Focusing on 
customer

[[Page 62147]]

trading through the RFQ mechanism, the CFTC economists found that, 
on average, a customer requests quotes from 4.1 dealers and gets 
back 3.6 responses.\37\
---------------------------------------------------------------------------

    \35\ The study reports that, according to the SEF Tracker, at 
the time of the study, Bloomberg held a market share of 71% and 
Tradeweb held a market share of 13.6%. CFTC Economist Study at 2.
    \36\ Under RFS, customers ask multiple dealers to send 
indicative quotes in a continuous manner, and can respond to one of 
them by proposing to trade at the dealers' quote.
    \37\ Id. at 17. The study also found that customers are more 
likely to request quotes from dealers with whom they have a clearing 
or pre-existing trading relationship, although customers realize 
small actual price benefits from requesting quotes from relationship 
dealers. Id. at 5.
---------------------------------------------------------------------------

    The CFTC economists concluded that the current regulatory 
structure is working well: ``Judged from our evidence, SEF-traded 
index CDS market seems to be working well after Dodd-Frank--dealers' 
response rates are high, the vast majority of customer orders result 
in trades and customers' transaction costs are low.'' \38\ 
Specifically, the CFTC economists found that transaction costs were 
low for index CDS contracts:
---------------------------------------------------------------------------

    \38\ Id. at 50.

    The transaction costs of on-the-run CDX.NA.IG and iTraxx Europe 
have a mean around 0.2 bps and a standard deviation of 1.4 bps, so 
the average transaction cost is statistically and economically close 
to zero. For on-the-run CDX.NA.HY and iTraxx Crossover, the average 
costs are larger, at about 0.5 and 1.1 bps, but again not 
significant compared to their standard deviations of about 2.6 and 
3.5 bps. The first off-the-run contracts have comparable average 
transaction costs but a much higher standard deviation due to the 
relatively few number of trades in these contracts.\39\
---------------------------------------------------------------------------

    \39\ Id. at 43.

    Market participants have expressed similar concerns about 
removing the Order Book/RFQ-3 and impartial access requirements. One 
senior executive at a trading firm recently stated that the SEF 
regulations have helped halve the bid-offer spread in US dollar 
swaps and increased price competition. ``My fear is we take too big 
a step back from having the competitive pricing in the market,'' he 
said. ``It is still a dealer-controlled market and if the biggest 
dealers simply say: `Great, I don't have to put a competitive price 
on the screen anymore, and if someone wants my most competitive 
price then you've got to pick up the phone again,' I don't want to 
take that step backwards.'' \40\
---------------------------------------------------------------------------

    \40\ Robert Mackenzie Smith, Sef reforms could distort new, 
sounder benchmark rates, Risk.net, Oct. 19, 2018, https://www.risk.net/derivatives/6049931/sef-reforms-could-distort-new-sounder-benchmark-rates (remarks of Stephen Berger, Managing 
Director, Government and Regulatory Policy, Citadel).
---------------------------------------------------------------------------

    Similarly, the CEO of one SEF cautioned, ``[o]ne of the risks of 
this concept of `any means of interstate commerce' is you have 
benchmarks and fixings that rely on better liquidity coming in from 
liquid Clobs. You wouldn't want to go backwards in that respect.'' 
\41\
---------------------------------------------------------------------------

    \41\ Id. (remarks of Scott Fitzpatrick, Chief Executive Officer, 
Tradition SEF).
---------------------------------------------------------------------------

    In 2016, Greenwich Associates reported that ``the buy side feels 
the executions they are receiving under the current paradigm are 
sufficient, if not excellent.'' \42\ Greenwich Associates noted 
that, for many asset managers, sending a request for quote to three 
market participants and selecting the best-priced response (no 
matter how many respond) ``has long been considered an appropriate 
approach to achieving best execution.'' \43\
---------------------------------------------------------------------------

    \42\ Greenwich Report at 7.
    \43\ Id. at 11.
---------------------------------------------------------------------------

    The Proposal does not reference any of these findings or views 
of market participants. In contrast to these data-based empirical 
studies regarding the benefits of the current regulatory system, the 
Proposal speculates--without any evidentiary support--that the 
``flexibility'' afforded by the elimination of the Order Book/RFQ-3 
requirement may provide various benefits. For example, the Proposal 
asserts ``SEFs would have broader latitude to innovate and develop 
new and different methods of execution tailored to their markets.'' 
\44\ The Proposal further opines that these new, flexible methods 
``could be more efficient,'' ``may lead to reduced costs and 
increased transparency,'' and ``may provide opportunities for new 
entrants in the SEF market.'' \45\
---------------------------------------------------------------------------

    \44\ Proposal at section XXIII.C.4.b(1) (emphasis added).
    \45\ Id.
---------------------------------------------------------------------------

    However, the Proposal provides no factual basis for any of these 
hypothetical benefits. In light of the very low execution costs that 
have been documented for interest rate and index CDS swaps traded 
through RFQ-3, it is difficult to understand why RFQ-3 should be 
eliminated, at least for the swaps to which it currently applies.
    Effect of expanded trading mandate on liquidity. The overriding 
rationale for the Proposal is to attract greater liquidity formation 
to SEFs. The Proposal seeks to accomplish this goal by expanding the 
SEF trading requirement to include all mandatorily cleared swaps for 
which SEF trading exists, with several exceptions. Although the 
Proposal would expand the trade execution mandate in this manner, it 
also would eliminate the Order Book/RFQ-3 requirements and provide 
effectively unlimited flexibility as to the trading methods for all 
swaps subject to the expanded trading mandate. The Proposal broadly 
asserts, without providing any evidentiary support, that the 
expanded trading mandate will improve liquidity and pre-trade price 
transparency and reduce market fragmentation.
    In asserting that the expanded execution mandate will increase 
on-SEF liquidity, the Proposal appears to measure liquidity solely 
in terms of volume. But volume does not equal liquidity. It is not 
apparent how simply moving this volume from off SEF to being traded 
within a SEF will have any effect on other traditional measures of 
liquidity, such as cost of transaction or price dispersion. Indeed, 
the only difference is that the swaps would be traded on SEF, but by 
the same people and using the same methods that they now use to 
trade them off SEF. It is not apparent how this would lead to any 
greater price transparency or lower costs.
    How many and what types of swaps would be brought onto SEFs 
under the expanded trading mandate? The Proposal presents little 
data to answer this question. One approach would be to assume that 
all swap transactions that are currently subject to clearing would 
become subject to the expanded trading mandate under the Proposal. 
This amount may be significantly larger than the actual result 
because many swaps subject to clearing may not be easily traded on 
SEF. But by comparing this amount to the amount of swaps currently 
traded on SEF, we can estimate an upper bound on the incremental 
increase in on-SEF trading resulting from the Proposal.
    The Proposal notes that an estimated 57% of the notional amount 
of interest rate swaps are being traded on SEF, and that 85% are 
subject to the clearing requirement. Accordingly, an upper bound of 
about 28% of interest rate swaps could be moved on SEF under the 
Proposal.\46\ This estimate is consistent with a recent estimate 
provided by Clarus that approximately two-thirds of the fixed/float 
USD interest rate swap market is traded on SEF.\47\ Examining the 
one-third of interest rate swaps that are being traded off SEF, 
Clarus found that ``[g]enerally speaking, everything off-SEF is 
bespoke.'' \48\
---------------------------------------------------------------------------

    \46\ Using the same method, available data from ISDA indicates 
that only about 4-5% of index CDS that are currently subject to 
mandatory clearing are not currently traded on SEF. See SwapsInfo 
Full Year 2017 and Fourth Quarter 2017 Review, ISDA, at 13-14 (Feb. 
2018).
    \47\ What is Left Off-SEF, Clarus Financial Technology (Mar. 16, 
2016), https://www.clarusft.com/what-is-left-off-sef/.
    \48\ Id.
---------------------------------------------------------------------------

    Again, it is not apparent how moving the trading of bespoke 
swaps from being traded by introducing brokers (``IBs'') outside a 
SEF to being traded by swap trading specialists inside a SEF will 
have any effect on the prices of those bespoke swaps. It is even 
less apparent how the trading of these bespoke swaps within a SEF 
will have any impact upon the trading of the highly liquid 
standardized swaps already being traded within a SEF under the RFQ-3 
methodology. In fact, eliminating RFQ-3 for those liquid swaps could 
raise the prices for those swaps, and in turn may also negatively 
impact pricing for less liquid swaps, because most interest rate 
swaps--including bespoke swaps--are priced in part on a standard 
rate curve developed from prices for liquid swaps at various point 
along the curve.
    Other impacts from excessive flexibility and discretion. The 
Proposal establishes an overly flexible approach that allows each 
SEF to self-determine how it will operate in almost every respect. 
Among other areas, a SEF would use discretion (a word used over 150 
times in the Proposal) to tailor policies and procedures regarding 
trading procedures and rules, access, pre-execution communication, 
personnel oversight and ethics training, SEF compliance 
requirements, trading surveillance, error trade policies, record 
keeping, trade documentation, internal investigations and 
enforcement, setting fees, financial resource requirements, and 
supervision of third party services. Most of these changes would 
loosen current regulatory requirements.
    Documentation of executed swaps would no longer be required at 
the time of execution, but as soon as technologically

[[Page 62148]]

possible. The Proposal acknowledges that creating flexibility for 
execution methods and trading technology makes simultaneous 
documentation ``impracticable.'' \49\ In other words, moving away 
from electronic trading back to telephones will delay the time 
within which counterparties receive full confirmation of price and 
terms, preventing precision in the time of pricing, creating a 
higher likelihood of errors, and leading to less pre-trade price 
transparency.
---------------------------------------------------------------------------

    \49\ Proposal at section IV.F.2.b.
---------------------------------------------------------------------------

    Many of the changes in the Proposal would allow the SEF to 
exercise discretion in brokering trades and establishing rules to 
facilitate broking away from electronic platforms. The Proposal 
explains that one of the reasons for granting the SEF greater 
discretion is to allow voice-broking to occur directly within the 
SEF.
    Traditional introducing broking, by its nature, is slower and 
less transparent at establishing prices as compared to electronic 
trading. As a broker calls around to multiple dealers for prices, 
the broker might make trade adjustments over time and prices from 
one call to the next may change. As time passes, prices may become 
stale, even within seconds. Dealers and other liquidity providers 
will add a cushion to the spread to account for this delay. This 
means that as the length of time increases between when a quote is 
first received and when the trade is executed and the price is 
reported, spreads become wider and pricing becomes less transparent. 
For certain trades, such as block trades, timing delays in price 
transparency might be appropriate for reasons related to the unique 
nature of each trade. However, we should not be adopting regulations 
that would degrade the current level of transparency for liquid 
swaps that are being efficiently traded using an Order Book or RFQ 
system.
    Similarly, the Proposal would allow extensive pre-trade 
negotiation for all swaps so long as the SEF defines it into the 
SEF's trading rules. Pre-trade negotiation may be appropriate for 
certain bespoke or large sized swaps. However, to create flexibility 
in SEF trading methods, the Proposal would allow SEFs to include 
pre-trade negotiations for any and all types of swaps including 
standardized swaps currently traded electronically. However, the 
Proposal would allow SEFs to include pre-trade negotiations for more 
liquid, standardized swaps for which pre-trade price transparency is 
better achieved through electronic trading, as explained in the 
studies discussed above.
    In addition, the Proposal would allow SEF trading specialists, 
when acting as brokers, to exercise discretion in sharing different 
market information with different market participants. The Proposal 
acknowledges that this ``trading discretion exercised by SEF trading 
specialists may affect the manner in which market participants are 
treated on a facility.'' \50\ The Proposal suggests that this is 
somehow ``consistent with impartial access'' because it facilitates 
more trading. More likely, this greater degree of sanctioned 
discretion--the extent of which is largely left up to the SEFs to 
determine--would lead to unfair treatment of different market 
participants and less pre-trade price transparency because SEF 
trading specialists can decide who gets what information pre-trade.
---------------------------------------------------------------------------

    \50\ Proposal at section VII.A.1.a(1)(iii).
---------------------------------------------------------------------------

    The statements above should not be interpreted as critical of 
intermediary broking services. These services provide important 
options for trading and pricing certain types of swaps, such as 
bespoke swaps, package trades, and block sizes. Rather, my concern 
is that these important services and the professionals who provide 
them may become less regulated, and that they will become 
intermediaries for transactions that are required to be traded 
electronically.

B. Diminished Oversight and Enforcement

    I am also concerned that this Proposal waters down the robust, 
and uniform, standards of conduct and supervision to which it 
currently holds SEFs, IBs, associated persons (``APs'') of IBs, and 
other market participants. This could lead to SEFs reducing their 
focus on compliance, require the Commission to take on an enhanced 
oversight role, and constrain the Commission's ability to 
investigate and prosecute abusive trade practices involving SEFs.
    As previously discussed, this Proposal grants extensive 
discretion to SEFs to create rules governing their operations and 
does away with some of the specific compliance and recordkeeping 
obligations currently required by the regulations governing SEFs, 
set forth in Part 37 of the Commission's Regulations.\51\ The 
Proposal suggests that providing SEFs with greater flexibility to 
tailor their compliance and oversight programs will mitigate 
compliance challenges that SEFs have encountered in implementing 
part 37, yet fails to describe in any detail those challenges.\52\ 
On the other hand, we know that our current system of oversight 
provides market participants and regulatory authorities with uniform 
and descriptive standards of conduct and compliance procedures. 
Enumerating these standards (1) prevents a race to the bottom, in 
which market participants pare back their policies and procedures to 
the bare minimum, and (2) provides the registrant and the Commission 
with the tools they need to successfully enforce compliance with 
those standards.
---------------------------------------------------------------------------

    \51\ 17 CFR part 37.
    \52\ Proposal at section I.C.
---------------------------------------------------------------------------

    As an example, the Proposal would remove the requirement set 
forth in Regulation 37.203(c) that a SEF establish and maintain 
sufficient compliance staff and resources to (i) conduct specific 
monitoring, including audit trail reviews, trade practice and market 
surveillance, and real-time market monitoring; (ii) address unusual 
market or trading events; and (iii) complete investigations in a 
timely manner. Rather, the Proposal would only require that the SEF 
establish and maintain sufficient compliance staff and resources to 
ensure that it can fulfill its self-regulatory obligations under the 
CEA and Commission Regulations. Without specific requirements on 
what compliance resources are needed, each SEF will be free to 
determine what level of resources is sufficient for such a broad 
mandate. In essence, the SEF need not map its compliance resources 
to specific compliance tasks. Additionally, experience has shown 
that conducting oversight and examinations of the sufficiency of a 
registrant's compliance resources is more difficult to undertake on 
a standard and fair basis across registrants when each one has a 
different view of what resources will meet the generalized 
requirement.
    As another example, the Proposal eliminates the specific 
requirements that a SEF establish an annual audit trail review and 
related enforcement program, and retain certain categories of 
documents currently required by Regulation 37.205. The Proposal 
assumes, however that ``SEFs would continue to fulfill their 
information collection burdens in a manner similar to the status 
quo.'' \53\ If the expectation is that SEFs will continue to comply 
with the current requirements, then why is it necessary to remove or 
weaken them? Many still view the compliance function as a cost 
center. It is unrealistic to assume that we can remove many of the 
specific conduct and recordkeeping obligations and expect that 
market participants will continue to comply, when competitive market 
pressures will drive the allocation of resources elsewhere. 
Moreover, market participants have dedicated significant resources 
to developing these compliance policies and systems, and changing 
them without sufficient justification does not make practical sense.
---------------------------------------------------------------------------

    \53\ Proposal at section XXIII.B.1.f.
---------------------------------------------------------------------------

    As a final example, the Proposal removes some of the specific 
requirements in Regulation 37.204 for oversight of third-party 
regulatory services. SEFs would no longer be required to conduct 
regular meetings with, and periodic reviews of, service providers or 
provide records of such oversight to the Commission. Instead, SEFs 
are given broad latitude to determine the necessary processes to 
supervise these providers. When registrants delegate critical 
functions to third-party providers, it is imperative that the 
registrant maintain diligent supervision over the provider's 
handling of these functions.\54\ In my view, the Proposal does not 
provide satisfactory reasons for removing these unambiguous 
requirements, considering that doing so could hamper the 
Commission's ability hold SEFs accountable for supervising third-
party providers.
---------------------------------------------------------------------------

    \54\ See, e.g., In re AMP Global Clearing LLC, CFTC No. 18-10, 
2018 WL 898755 (Feb. 12, 2018) (consent order) (charging registrant 
with failing to supervise diligently its information technology 
provider's implementation of registrant's information systems 
security program); In re Tillage Commodities, LLC, No. 17-27, 2017 
WL 4386853 (Sept. 28, 2017) (consent order) (charging registrant 
with failing to supervise diligently its fund administrator's 
operation of the registrant's bank account containing participant 
funds).
---------------------------------------------------------------------------

    Equally concerning is the sweeping change the Proposal makes to 
the way in which SEFs and their employees and agents will be 
registered, and in turn, the Commission's oversight of their 
conduct. Under the current system, swaps broking entities that meet 
the definition of an IB must be registered with

[[Page 62149]]

the Commission as such. The individuals who are involved in 
soliciting or accepting orders at IBs, or involved in supervising 
such individuals, must register as APs of IBs. As NFA members, IBs 
and APs are not only subject to the applicable Commission 
Regulations, but are also subject to uniform rules governing swaps 
brokering, trade practices, reporting, minimum financial 
requirements, proficiency testing, training standards, and 
supervision. In addition, NFA monitors IBs' swaps broking activity 
and compliance with all applicable statutes and rules. In 
furtherance of that responsibility, NFA conducts periodic 
examinations of swap IB member firms and has the ability to 
discipline IBs and APs where appropriate.
    Under the Proposal, which limits the activity that can be 
conducted off SEF, IBs will need to register with the Commission as 
SEFs to continue to broker swaps transactions. Given that the 
majority of IBs engaging in swap transactions on SEF are affiliated 
with SEFs, it is likely that many of these entities, or their 
employees, will merge into or join the affiliated SEF. We can also 
expect to see the formation of new SEFs, which presumably would not 
be required to register as IBs.\55\ SEFs and SEF employees would be 
free to withdraw their IB and AP registrations and memberships with 
NFA, leaving a regulatory vacuum with no self-regulatory 
organization oversight. Already strained Commission resources 
inevitably would need to fill that void.
---------------------------------------------------------------------------

    \55\ The Proposal is not clear on whether an existing IB that 
now must register as a SEF, but continues to primarily conduct phone 
broking and other IB-related activities, and continues to meet the 
IB definition, would need to be dually registered.
---------------------------------------------------------------------------

    Further, the Proposal creates an entirely new category of 
persons: The SEF trading specialist. As proposed, SEF trading 
specialists will perform ``core functions'' that facilitate swaps 
trading and execution, including negotiating trade terms, arranging 
bids and offers, and discussing market color with market 
participants, or directly supervising a person who engages in such 
functions. In fact, the Proposal notes that broadening the SEF 
registration and trade execution requirements would increase the 
level of discretion that these SEF employees and agents would 
exercise in connection with swaps trading. However, despite these 
key, customer-facing functions, SEF trading specialists would not be 
required to register with the Commission.
    For this reason, I am also concerned that the Proposal would 
weaken the supervisory function within the SEF. Regulation 166.3 
imposes a duty on all Commission registrants who act in a 
supervisory capacity, including APs, to diligently supervise the 
activities of employees and agents relating to their business as a 
Commission registrant.\56\ However, if the SEF is not registered as 
an IB, and its employees are thereby not registered as APs, the SEF 
employees themselves will have no duty to supervise under Regulation 
166.3. The Proposal imposes a separate duty on SEFs to supervise the 
activities of its SEF trading specialists ``in the facilitation of 
trading and execution on the swap execution facility.'' \57\ 
Critically, however, that duty runs only to the SEF as an entity and 
not to its employees, including the SEF trading specialists. As a 
result, SEF trading specialists or other SEF employees with 
supervisory duties cannot be held individually liable for failure to 
supervise under any Commission regulation if they are not duly 
registered as APs of IBs. Individual accountability is an important 
tool in incentivizing corporate responsibility and I think it must 
be preserved.
---------------------------------------------------------------------------

    \56\ 17 CFR 166.3.
    \57\ Proposal at section VI.A.3.f. Unlike Regulation 166.3, 
which applies to all activities relating to a registrant's business, 
the language ``in facilitation of trading and execution on the swap 
execution facility'' is susceptible to various interpretations and 
could considerably narrow the conduct that is required to be 
supervised.
---------------------------------------------------------------------------

    Finally, in at least one instance, the flexibility afforded to 
SEFs to establish a code of conduct for their SEF trading 
specialists is in direct conflict with the supervision rules 
applicable to all registrants under Regulation 166.3. The Proposal 
states that a SEF's Code of Conduct ``may provide'' that, among 
other things, a SEF trading specialist ``not engage in fraudulent, 
manipulate, or disruptive conduct.'' \58\ However, Regulation 166.3 
requires that Commission registrants establish and maintain 
meaningful procedures for detecting and deterring fraud and other 
prohibited conduct by their employees and agents.\59\ This could 
create another potential gap in our supervisory structure that could 
weaken the Commission's enforcement capabilities.
---------------------------------------------------------------------------

    \58\ Id. at section VI.A.3.e (emphasis added).
    \59\ See, e.g., CFTC v. Sidoti, 178 F.3d 1132, 1137 (11th Cir. 
1999); Sansom Refining Co. v. Drexel Burnham Lambert, Inc., CFTC No. 
82-R448, 1990 WL 10830742 (Feb. 16, 1990) (registrant has ``a duty 
to develop procedures for the `detection and deterrence of possible 
wrongdoing by its agents.' ''). Moreover, various provisions of the 
CEA and Commission Regulations prohibit fraudulent and manipulative 
conduct, so adequate supervision necessarily dictates that entities 
and supervisors monitor for this conduct. See, e.g., 7 U.S.C. 6b, 9.
---------------------------------------------------------------------------

V. Conclusion

    This Proposal is a fundamental overhaul of the SEF regulatory 
regime. The changes create a trading system that is so flexible that 
all swaps traded on SEFs--including the most liquid--could be traded 
the same way they were before the Dodd-Frank reforms were adopted. 
The Proposal would allow the largest dealers to establish separate 
dealer-to-dealer liquidity pools through exclusionary access 
criteria. Competition would be reduced and price transparency 
diminished. This is not what Congress intended when it passed the 
Dodd-Frank Act.
    I am open to appropriate, targeted amendments to the 
regulations, several of which I have suggested above. However, 
empirical studies have shown that the existing SEF regulations have 
made great progress in achieving the statutory goals of promoting 
on-SEF trading and pre-trade price transparency. With respect to the 
swaps markets that are working and providing low costs to the buy 
side and end users, we should live by the adage, ``if it ain't 
broke, don't fix it.''

[FR Doc. 2018-24642 Filed 11-29-18; 8:45 am]
BILLING CODE 6351-01-P