[Federal Register Volume 85, Number 33 (Wednesday, February 19, 2020)]
[Proposed Rules]
[Pages 9407-9430]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-02721]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 36, 37, and 43

RIN 3038-AE94


Swap Execution Facility Requirements and Real-Time Reporting 
Requirements

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') proposes to amend certain parts of its regulations relating 
to the execution of package transactions on swap execution facilities 
(``SEFs''); the execution of block trades on SEFs; and the resolution 
of error trades on SEFs. These matters are currently the subject of 
relief in certain no-action letters from Commission staff.

DATES: Comments must be received on or before April 20, 2020.

ADDRESSES: You may submit comments, identified by RIN 3038-AE94, 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. 
Submissions through the CFTC Comments Portal are encouraged.
    All comments must be submitted in English, or if not, accompanied 
by an

[[Page 9408]]

English translation. Comments will be posted as received to https://www.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''),\1\ a petition for confidential treatment of 
the exempt information may be submitted according to the procedures 
established in the Commission's regulations, 17 CFR 145.9.
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    \1\ 5 U.S.C. 552.
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse, or remove any or all of 
your submission from https://www.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 
FOIA.

FOR FURTHER INFORMATION CONTACT: Roger Smith, Special Counsel, (202) 
418-5344, [email protected], Division of Market Oversight, Commodity 
Futures Trading Commission, 525 West Monroe Street, Suite 1100, 
Chicago, Illinois 60661, or Michael Penick, Senior Economist, (202) 
418-5279, [email protected], Office of the Chief Economist, Commodity 
Futures Trading Commission, Three Lafayette Centre, 1151 21st Street 
NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. Parts 37 and 43 of the Commission's Regulations
    B. Summary of Proposed Changes to Parts 36, 37, and 43
    C. Consultation With Other U.S. Financial Regulators
II. The Proposed Regulations
    A. Execution of Package Transactions
    1. Background
    2. Proposed Addition of Sec.  37.9(d) and Amendment of Sec.  
37.9(a)(2)
    3. Request for Comment
    4. Existing Sec.  37.3(a)
    5. Proposed Addition of Sec.  37.3(a)(4)
    6. Request for Comment
    7. Exemption of New Issuance Bond Package Transaction From the 
Trade Execution Requirement
    8. Discussion of CEA Section 4(c) Enumerated Factors
    9. Request for Comment
    B. Error Trades: Execution of Trades To Correct Operational and 
Clerical Errors on Swap Execution Facilities
    1. Background
    2. Proposed Sec.  37.9(e)
    3. Request for Comment
    C. Real-Time Public Reporting: Block Trade Definition
    1. Existing Sec.  43.2
    2. Proposed Amendment to Sec.  43.2
    3. Request for Comment
III. Effective Date and Transition Period
IV. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost-Benefit Considerations
    D. Antitrust Considerations

I. Background

A. Parts 37 and 43 of the Commission's Regulations

    The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(``Dodd-Frank Act'') amended the Commodity Exchange Act (``CEA'' or 
``Act'') by adding section 5h, which establishes registration 
requirements and core principles for swap execution facilities 
(``SEFs'').\2\ The Commission implemented section 5h by adopting 
regulations that establish various trading requirements for swaps 
traded on SEFs \3\ and articulating, where appropriate, guidance and 
acceptable practices. In particular, the Commission promulgated part 37 
of its regulations to implement section 5h of the CEA and set forth the 
registration and operational requirements for SEFs.\4\ Among those are 
requirements in part 37 specifying minimum trading functionality that a 
SEF must offer to participants for all listed swaps, i.e., an ``order 
book,'' as defined in Sec.  37.3 (``Order Book''); \5\ specifying the 
types of systems or platforms that a SEF must offer for swaps trading, 
including swaps subject to the trade execution requirement under CEA 
section 2(h)(8); \6\ and setting forth other relevant regulations 
applicable to the fifteen core principles with which a SEF must comply 
to obtain and maintain registration with the Commission.
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    \2\ 7 U.S.C. 7b-3.
    \3\ The Dodd-Frank Act also added to the CEA certain provisions 
related to the trading of swaps on designated contract markets 
(``DCMs''). Given that almost all platform trading of swaps in the 
U.S. occurs on SEFs, the Commission is not at this time proposing to 
amend any regulatory requirements pertaining to DCMs within part 38 
of the Commission's regulations.
    \4\ Core Principles and Other Requirements for Swap Execution 
Facilities, 78 FR 33476 (June 4, 2013) (hereinafter ``SEF Core 
Principles Final Rule'').
    \5\ 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. See 17 
CFR 37.3(a)(3).
    \6\ CEA section 2(h)(8) requires that transactions involving 
swaps subject to the CEA section 2(h)(1) clearing requirement be 
executed on or pursuant to the rules of a DCM or SEF, or a SEF that 
is exempt from registration, unless no DCM or SEF makes such swaps 
available to trade (``MAT'') or such swaps qualify for the clearing 
exception under CEA section 2(h)(7) (the ``trade execution 
requirement''). See 7 U.S.C. 2(h)(8).
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    Commission regulation 37.9 prescribes the methods of execution that 
a SEF must offer to market participants to execute swap transactions on 
the SEF. In particular, Sec.  37.9 defines ``Required Transactions'' as 
swaps subject to the trade execution requirement. Section 37.9 also 
requires a SEF to offer, as required methods of execution, 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.\7\ 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.\8\ The Commission's 
regulations specify additional requirements that correspond to the use 
of an Order Book or RFQ System to execute Required Transactions.\9\
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    \7\ 17 CFR 37.9(a). With the exception of block trades, as 
defined in Sec.  43.2 of the Commission's regulations, Required 
Transactions must be executed on a SEF's Order Book or RFQ System. 
See 17 CFR 37.9(a)(2)(i).
    \8\ 17 CFR 37.9(c).
    \9\ For example, 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. See 17 CFR 37.9(b).
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    Pursuant to section 727 of the Dodd-Frank Act, the Commission also 
established a regulatory framework for the real-time public reporting 
of swap transaction and pricing data, including swap block trades 
within CEA section 2(a)(13).\10\ Part 43 of the Commission's 
regulations implements section 727 of the Dodd-Frank Act by, among 
other things, defining the requisite criteria for when a publicly 
reportable swap transaction will be classified as a block trade, 
including the requirement that

[[Page 9409]]

the swap transaction ``occur[] away'' from a SEF's trading system or 
platform, but pursuant to the SEF's rules and procedures.\11\ Part 43 
also sets forth the procedures for calculating appropriate minimum 
block sizes for each swap asset class \12\ and specifying the public 
reporting delays available for such trades.\13\
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    \10\ 7 U.S.C. 2(a)(13).
    \11\ 17 CFR 43.2.
    \12\ 17 CFR 43.6.
    \13\ 17 CFR 43.5(d).
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B. Summary of Proposed Changes to Parts 36, 37, and 43

    During the implementation of parts 37 and 43, market participants 
and SEFs identified certain operational and compliance burdens related 
to various requirements. To mitigate these burdens, Commission staff 
issued to SEFs and market participants time-limited no-action relief 
from certain provisions of the CEA and the Commission's 
regulations.\14\ Based on this implementation experience, the 
Commission believes it may be appropriate to amend the current SEF 
regulatory framework to address the following issues, which have been 
identified in staff no-action letters: \15\
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    \14\ As defined in Sec.  140.99(a)(2) of the Commission's 
regulations, a no-action letter is a written statement issued by a 
Division stating that it will not recommend enforcement action to 
the Commission for failure to comply with a specific provision of 
the Act or a Commission rule, regulation, or order. A no-action 
letter represents only the issuing Division's position and binds 
only that Division. 17 CFR 140.99(a)(2).
    \15\ In November 2018, the Commission issued a comprehensive 
proposal to amend the SEF regulatory framework. See generally Swap 
Execution Facilities and Trade Execution Requirement, 83 FR 61946 
(Nov. 30, 2018) (``2018 SEF Proposal''). Among other things, the 
2018 SEF Proposal addresses existing relief under various no-action 
letters as part of the proposal's holistic approach to amending the 
SEF regulatory framework. Given the complex, expansive, and 
comprehensive nature of the 2018 SEF Proposal, however, the 
Commission continues to evaluate it. Therefore, the Commission is 
proposing rules herein independent of that proposal. To be clear, 
this rule proposal does not supersede the 2018 SEF Proposal in any 
way.
    Further, while the proposals and rationales contained herein 
are, in some cases, identical or similar to the proposals and 
rationales used in the 2018 SEF Proposal, the Commission believes 
the context surrounding these two proposals distinguishes them in 
application and scope. While the Commission received comments on the 
2018 SEF Proposal, the Commission believes that it is important for 
the public to be able to provide comments focused on the facts and 
circumstances of the proposal at hand. Therefore, comments made on 
the 2018 SEF Proposal relevant to this rulemaking should be 
resubmitted as comments to this rule proposal in order to be 
considered.
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     The Commission proposes to amend part 37 to allow the swap 
components of certain categories of ``package transactions'' \16\ to be 
executed on-SEF through flexible means of execution pursuant to Sec.  
37.9(c)(2), rather than through the required methods of execution under 
Sec.  37.9 for ``Required Transactions.'' In addition, the Commission 
is proposing to amend part 36 to include an exemption from the trade 
execution requirement for swap transactions that are executed as a 
component of a package transaction that also includes a component that 
is a new issuance bond (``New Issuance Bond package transactions''). 
CFTC No-Action Letter No. 17-55 (``NAL No. 17-55'') \17\ currently 
provides no-action relief for the swap components of certain categories 
of package transactions from the required methods of execution, and in 
some instances, from the trade execution requirement.
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    \16\ As used herein a package transaction consists of two or 
more component transactions executed between two or more 
counterparties where: (i) At least one component transaction is a 
Required Transaction; (ii) execution of each component transaction 
is contingent upon the execution of all other component 
transactions; and (iii) the component transactions are priced or 
quoted together as one economic transaction with simultaneous or 
near-simultaneous execution of all components.
    \17\ NAL 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 
extended no-action relief and related conditions previously granted 
by Commission staff. 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, 2015) (``NAL No. 15-55''); and 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''). NAL No. 17-55 also provided relief for package 
transactions where at least one individual swap component is subject 
to the trade execution requirement and all other components are 
futures contracts (``MAT/Futures package transactions''). The 
Commission continues to evaluate MAT/Futures package transactions 
and their regulatory treatment. Therefore, this rulemaking does not 
encompass MAT/Futures package transactions.
    Further, NAL No. 17-55 also applies to package transactions 
occurring on a DCM. See supra note 3.
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     The Commission proposes to amend part 37 to establish a 
principles-based approach for SEF error trade policies that 
incorporates relief from the required methods of execution under Sec.  
37.9 for Required Transactions for trades intended to resolve error 
trades.\18\ The amendment would enable SEFs to permit market 
participants to execute swaps transactions to correct operational or 
clerical errors using execution methods other than those required under 
Sec.  37.9 for Required Transactions. This proposal does not seek to 
codify the specific conditions contained in CFTC No-Action Letter No. 
17-27 (``NAL No. 17-27'').\19\ Rather, this proposal is intended to 
capture the intent of NAL No. 17-27 to permit market participants to 
correct error trades in Required Transactions through non-required 
methods of execution while ensuring flexibility for SEFs to determine 
the most suitable error trade rules for their markets and 
participants.\20\
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    \18\ The Commission notes that in addition to relief from the 
required methods of execution, staff has also provided relief from 
Sec.  37.203(a) of the Commission's regulations, which prohibits 
``pre-arranged trading,'' for offsetting trades and correcting 
trades. See NAL 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). As discussed 
further below, the Commission does not, however, view a regulatory 
amendment corresponding to that relief as necessary. See infra note 
70.
    \19\ This proposal also does not codify the supplemental 
conditions to NAL No. 17-27 contained in CFTC No-Action Letter No. 
20-01, Re: Supplemental 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 (Jan. 8, 2020) (``NAL No. 20-
01''), conditions that allow market participants to correct error 
trades that have been accepted for clearing with an ex post facto 
review by the SEF. As discussed below, nothing in this proposal 
would prohibit SEFs from incorporating such conditions within their 
error trade rules. See infra note 74.
    \20\ NAL 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). NAL No. 17-27 
extended no-action relief and related conditions previously granted 
by Commission staff. See 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 10, 
2016) (``NAL No. 16-58''); CFTC Letter 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''); and 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) (initial relief provided by Commission 
staff with respect to error trades that are rejected from 
clearing)(``NAL No. 13-66''). NAL No. 17-27 also applies to swap 
transactions occurring on a DCM. See supra note 3. In addition, DMO 
recently released NAL No. 20-01, which supplements the conditions in 
NAL No. 17-27 to allow market participants, sua sponte, to correct 
error trades that have been accepted to clearing with an ex post 
facto review by the SEF.

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[[Page 9410]]

     The Commission proposes to amend the definition of ``block 
trade'' in Sec.  43.2, which requires the execution of block trades 
pursuant to the rules of a SEF to ``occur[] away'' from the SEF, i.e., 
to be executed outside of any of the SEF's trading systems or 
platforms. The amendment would enable SEFs to offer non-Order Book 
methods of execution for market participants to execute swap block 
trades on the SEF. The proposal codifies CFTC No-Action Letter No. 17-
60 (``NAL No. 17-60'') while also allowing block trades for swaps that 
are not intended to be cleared (``ITBC'') to be executed on SEF via 
non-Order Book methods of execution.\21\
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    \21\ NAL 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). NAL No. 17-60 extended 
no-action relief and related conditions previously granted by 
Commission staff. See 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) 
(``NAL No. 16-74''); 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) 
(``NAL No. 15-60''); and CFTC Letter No. 14-118, No-Action Relief 
for Swap Execution Facilities from Certain ``Block Trade'' 
Requirements in Commission Regulation 43.2 (Sept. 19, 2015) (``NAL 
No. 14-118''). NAL No. 17-60 only provides relief for swap block 
trades that are ITBC.
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    The Commission believes that the above-described amendments would 
continue to effectuate the statutory SEF provisions and better promote 
the statutory SEF goals, as discussed below.

C. 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.\22\
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    \22\ Dodd-Frank Act, Public Law 111-203, title VII, sec. 
712(a)(1), 124 Stat. 1376 (2010).
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II. The Proposed Regulations

A. Execution of Package Transactions

1. Background
    Package transactions generally involve the execution of multiple 
component transactions together that market participants consider to 
represent one economic transaction.\23\ The types of transactions that 
constitute a package transaction are wide-ranging and diverse. In 
particular, there are package transactions that consist solely of swaps 
subject to the trade execution requirement; those that include a mix of 
swaps subject to the trade execution requirement and swaps that are 
not; those made up of swaps and non-swaps; and those comprised of both 
swaps that are and swaps that are not exclusively subject to the 
Commission's jurisdiction.\24\ These components range from being very 
liquid and standardized to being illiquid and bespoke.\25\ The variety 
of package transactions derives, in part, from the fact that the 
different types of package transactions are fit for distinct purposes. 
The Commission understands that certain package transactions are 
utilized as tools within market participants' portfolio management and 
hedging programs, while other types of package transactions are used to 
allow market participants to express views of the market--for example, 
by allowing participants to trade the spread between certain products 
or different maturities in the same product.
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    \23\ See supra note 16. The Commission notes that there are 
transactions that otherwise meet the package transaction definition 
but do not involve a swap subject to the trade execution 
requirement. While these transactions may colloquially be referred 
to as package transactions, the Commission notes that such 
transactions are not the subject of this proposal.
    \24\ See infra note 36 for a more precise description of various 
package transactions.
    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.
    \25\ Some non-swap components may be subject to different 
regulatory requirements than the swap components in the package 
transactions.
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    Given the diverse characteristics of the component transactions 
that may be involved, the Commission understands that package 
transactions often pose unique pricing and execution characteristics. 
The Commission understands that 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 based primarily on the components that are not 
subject to the trade execution requirement. Further, given the 
individual liquidity and trading characteristics of each component, 
certain package transactions will have to trade through methods of 
execution that are suitable for an illiquid and bespoke component, 
which in many cases are not the required methods of execution.\26\
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    \26\ For example, while a swap that is subject to the trade 
execution requirement is suitable to be executed through the 
required methods of execution as an outright transaction, when that 
same swap is bundled together with an illiquid and bespoke component 
in a package transaction, the package transaction takes on the 
liquidity and trading profile of the illiquid and bespoke component.
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    Notwithstanding the complexity of their pricing and execution, the 
Commission is aware of their benefits of such package transactions. By 
executing multiple components together as part of a package 
transaction, market participants can improve transaction pricing and 
cost, increase execution efficiency, and decrease execution risk beyond 
what would have been possible if the market participant had executed 
each component individually, i.e., ``legged'' or ``legging'' into the 
transaction.\27\
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    \27\ For example, a market participant seeking to execute two 
component transactions independent of one another, instead of 
executing the two components together in a package transaction, 
would be forced to pay the bid/offer spread on each leg, which in 
many cases is more costly and less efficient than paying the single 
bid/offer spread for a package transaction composed of the same two 
components.
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    During the implementation of the trade execution requirement for 
certain interest rate swaps and credit default swaps, SEFs and market 
participants informed the Commission that requiring swaps that are 
otherwise Required Transactions--but are components of a package 
transaction \28\--to be executed through the required methods of 
execution \29\ under Sec.  37.9 was in many cases impracticable and 
increased execution risks and operational challenges. Market 
participants and SEFs informed the Commission that these risks and 
challenges generally

[[Page 9411]]

reflect (i) an initial lack of market infrastructure available to trade 
and clear certain package transactions; \30\ and (ii) the complex, 
bespoke, and idiosyncratic nature of several categories of package 
transactions that precluded them from being suitable for execution 
through required methods of execution.\31\
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    \28\ See supra note 16. Consistent with the proposed definition 
of package transaction under Sec.  37.9(d) the Commission notes 
that, unless otherwise stated, the term ``swap component(s)'' as 
used herein refers to a swap component that is subject to the trade 
execution requirement under CEA section 2h(8), and therefore a 
Required Transaction.
    \29\ As noted above, pursuant to Sec.  37.9, SEFs must provide 
as the required methods of execution for Required Transactions 
either an Order Book or an RFQ System.
    \30\ See, e.g., NAL No. 14-12 at 2-3 n.10 (describing the 
inability of a DCO to simultaneously screen and accept all 
components of a package transaction for clearing).
    \31\ See, e.g., CFTC Public Roundtable: Trade Execution 
Requirements and Package Transactions, 72, 84-85 (Feb. 12, 2014), 
available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/transcript021214.pdf (commenting on 
the challenges of applying required methods of execution to package 
transactions with complex component swaps).
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    In response to concerns from market participants, Commission staff 
in the Division of Market Oversight (``DMO'') provided a series of 
time-limited no-action relief in order to allow the swap components of 
certain package transactions to be executed through flexible methods of 
execution on a SEF, and in some cases completely away from a SEF. Over 
time, the initial dearth of available market infrastructure to trade 
and clear certain package transactions has diminished, especially for 
package transactions composed of liquid and standardized components. As 
a result, Commission staff has allowed the relief for certain package 
transactions to expire as the capabilities and functionalities of 
market participants and SEFs have progressed to the point of permitting 
the swap component of various package transactions to be executed 
through the required methods of execution.\32\ The Commission notes 
that the expiration of relief has been successful for many types of 
package transactions given (i) market participants now actively trade 
the swap component of several types of package transactions through the 
required methods of execution, and (ii) the trading of such package 
transactions constitutes a significant portion of swaps trading.\33\
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    \32\ See infra note 36 for an overview and description of the 
evolution of the relief for package transactions.
    \33\ For example, according to publicly available data from 
ClarusFT, nearly seventy percent of U.S. Dollar interest rate swaps 
trading in the inter-dealer swap market were carried out as part of 
just a single type of package transaction: U.S. Dollar Spreadover 
package transactions, as defined in note 35. See Chris Barnes, USD 
Spreadovers and SEF Market Share, Clarus Financial Technology Blog 
(August 14, 2018), available at https://www.clarusft.com/usd-spreadovers-and-sef-market-share/. Further, package transactions 
involving spreads and butterflies of interest rate swaps make up a 
material amount of trading in the swaps markets.
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    Despite the progress, however, Commission staff has continued to 
provide relief for the swap components of certain package transactions 
where relief is necessary for market participants to be able to 
effectively execute the package transaction due to specific attributes 
of such transactions.
2. Proposed Addition of Sec.  37.9(d) and Amendment of Sec.  37.9(a)(2)
    In light of the complex nature of these package transactions, the 
Commission recognizes that the required methods of execution under 
Sec.  37.9 may inhibit market participants from tailoring the execution 
of the swap component of the relevant package transactions. This may 
force market participants to effect such transactions on a leg-by-leg 
basis--leading to increased execution and operational risk--or prevent 
them from engaging in the relevant package transactions altogether, 
precluding effective hedging strategies and decreasing market 
liquidity. Since DMO's issuance of this no-action relief, the 
Commission has gained considerable knowledge and experience with the 
dynamics of the trading of package transactions, particularly with 
respect to the existing no-action relief from the required methods of 
execution. Based on this knowledge and experience, the Commission 
believes that certain aspects of the current requirements for the 
required methods of execution under Sec.  37.9 should be enhanced to 
better account for the complex nature of the relevant package 
transactions.
    Therefore, the Commission proposes to add Sec.  37.9(d) and amend 
Sec.  37.9(a)(2) to permit the swap components of certain package 
transactions to be executed via flexible methods of execution pursuant 
to Sec.  37.9(c)(2). The Commission proposes to define a ``package 
transaction'' as a transaction consisting of two or more component 
transactions executed between two or more counterparties where: (i) At 
least one component transaction is a Required Transaction; (ii) 
execution of each component transaction is contingent upon the 
execution of all other component transactions; and (iii) the component 
transactions are priced or quoted together as one economic transaction 
with simultaneous or near-simultaneous execution of all components.\34\ 
Based on this proposed definition and consistent with existing no-
action relief, the Commission proposes to allow the Required 
Transaction swap component of the following three categories of package 
transactions to be executed via flexible means of execution pursuant to 
Sec.  37.9(c)(2):
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    \34\ See proposed Sec.  37.9(d)(1). The Commission notes that 
there are transactions which otherwise meet the package transaction 
definition but do not involve a swap that is subject to the trade 
execution requirement. While these transactions may colloquially be 
referred to as package transactions, the Commission notes that such 
transactions are not the subject of this proposal. See supra note 
16.
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    (1) A package transaction where at least one of the components is a 
swap exclusively within the Commission's jurisdiction that is not 
subject to the clearing requirement (``MAT/Non-MAT Uncleared'');
    (2) A package transaction where at least one of the components is 
not a swap (excluding certain package transaction categories as 
discussed below) (``MAT/Non-Swap Instrument''); \35\ and
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    \35\ Under proposed Sec.  37.9(d)(3), consistent with the no-
action relief, this category specifically excludes package 
transactions in which all non-swap components are U.S. Treasury 
securities (``U.S. Dollar Spreadover package transactions''); MAT/
Futures package transactions; package transactions in which all 
other non-swap components are agency mortgage-backed securities 
(``MAT/Agency MBS package transactions''); and New Issuance Bond 
package transactions. See also Section II.A.7--Exemption of New 
Issuance Bond Package Transactions from the Trade Execution 
Requirement.
    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.
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    (3) A package transaction where at least one of the components is a 
swap for which the CFTC does not have exclusive jurisdiction, e.g., a 
mixed swap (``MAT/Non-Exclusive CFTC Swap'').\36\
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    \36\ 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 package transactions''); (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) U.S. Dollar Spreadover package 
transactions; (iv) MAT/Agency MBS package transactions; (v) New 
Issuance Bond package transactions; (vi) MAT/Futures package 
transactions; (vii) MAT/Non-MAT (Uncleared); (viii) excluding 
aforementioned categories, MAT/Non-Swap Instruments; and (ix) MAT/
Non-Exclusive CFTC Swap. See NAL No. 14-12; NAL No. 14-62; NAL No. 
14-121; NAL No. 14-137; NAL No. 15-55; NAL No. 16-76; and NAL No. 
17-55.
    Over time, the swap components of the following categories of 
package transactions were no longer provided relief: MAT/MAT package 
transactions, MAT/Non-MAT (Cleared) package transactions, U.S. 
Dollar Spreadover package transactions, and MAT/Agency MBS package 
transactions. As a result, the swap components of these package 
transactions must be executed through the required methods of 
execution under Sec.  37.9(a).
    Currently, the swap components of the following categories of 
package transactions receive no-action relief from the required 
methods of execution under Sec.  37.9 under NAL No. 17-55: (i) MAT/
Non-MAT (Uncleared) package transactions; (ii) MAT/Non-Swap 
Instruments package transactions (subject to the exclusions 
previously discussed); and (iii) MAT/Non-Exclusive CFTC Swap package 
transactions. The proposed addition of Sec.  37.9(d) is consistent 
with the relief from the required methods of execution under NAL No. 
17-55. Within this section, the term ``relevant package 
transactions,'' unless context requires otherwise, refers to these 
three categories of package transactions.
    In addition to the relief from the required methods of execution 
in Sec.  37.9, NAL No. 17-55 also provides relief from the trade 
execution for the swap components of MAT/Futures package 
transactions and New Issuance Bond Package transactions. As 
discussed above, the Commission is still evaluating MAT/Futures 
package transactions. See supra note 17.
    Further, as discussed in more detail below, the Commission is 
proposing to exempt the swap components of New Issuance Bond package 
transactions from the trade execution requirement. This is 
consistent with the relief currently provided to New Issuance Bond 
package transactions under 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.

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[[Page 9412]]

    While, as noted above, the swap components of several types of 
package transactions have been successfully transitioned to SEF and are 
executed via the required methods of execution, the Commission believes 
that the types of package transactions covered by this proposal may not 
be suitable to be traded through the required methods of execution due 
to their specific characteristics. In particular, the Commission 
recognizes that these package transactions contain components that are 
illiquid and bespoke, such as swaptions, or contain components that are 
subject to regulatory requirements other than or in addition to the CEA 
and the Commission's regulations issued thereunder.\37\
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    \37\ The Commission will continue to evaluate these categories 
of package transactions for new developments in execution methods on 
SEFs and may in the future revise the categories of package 
transactions in which the swap component is eligible to be executed 
through flexible means of execution. For example, the Commission 
notes that Tradeweb Markets Inc. recently released an electronic 
trading method for package transactions involving swaps and bonds. 
Such transactions--provided they are not U.S. Dollar Spreadover 
package transactions--would fall under the MAT/Non-Swap Instruments 
category of package transactions. Therefore, the Commission asks in 
this proposal whether the proposed package transaction categories 
are appropriate.
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    The Commission believes that if market participants are unable to 
utilize flexible methods of execution for the swap components of these 
package transactions, they would potentially be forced to break the 
package transaction into its individual components, otherwise known as 
``legging'' into the transaction. The Commission understands from 
market participants that legging into a package transaction is 
inefficient and increases transaction costs and execution risks. Given 
that components of package transactions are each priced or quoted 
together as part of one economic transaction, the Commission recognizes 
the impracticality of breaking the package transaction into individual 
legs or components in order to trade the swap components via the 
required methods of execution under Sec.  37.9.
    Based on its experience with the existing no-action relief, the 
Commission believes that the proposed addition of Sec.  37.9(d) and 
amendment of Sec.  37.9(a) will allow market participants to choose the 
most suitable execution method for their package transactions, which 
will decrease execution risks, improve efficiency, and decrease 
transaction costs because market participants will no longer be forced 
to leg into transactions. Given the inherent complexity of the relevant 
package transactions, the Commission believes that this proposal 
ensures that market participants are able to trade these package 
transactions in the most effective, efficient, transparent, and 
economical manner. SEFs would be able to offer, and market participants 
would be able to utilize, methods of execution that best suit the 
characteristics of the relevant package transaction being traded. The 
Commission believes this would preserve the benefits and purpose of 
executing such package transactions.
    In addition to causing inefficient execution and increasing risks 
and cost, forcing the swap components of the relevant package 
transactions through required methods of execution may also limit the 
commercial utility of such transactions or entirely frustrate the 
purposes of entering in such package transactions in the first place. 
For example, the Commission understands that in some of the relevant 
package transactions, (i) the swap component serves as the hedging 
instrument to other instruments in the package transaction, or (ii) the 
package transaction as a whole may be utilized as part of a market 
participant's portfolio management program. If the swap component of 
such package transactions were impractical or unable to be executed due 
to the required methods of execution, market participants would be 
prevented from entering or effectively entering into the package 
transaction, nullifying the package transaction's purpose and benefits 
as a hedging and portfolio management tool. Based on its experience 
with the existing no-action relief, the Commission believes that this 
proposal would allow market participants to utilize flexible methods of 
execution for the swap component of the relevant package transaction, 
thereby ensuring that market participants are able to continue to 
utilize these effective hedging tools.
    Finally, the Commission believes that its proposed approach would 
advance the SEF statutory goal of promoting trading on SEFs.\38\ The 
proposed rule provides relief from execution method requirements that 
are generally intended to help promote trading on SEFs. However, the 
relevant package transactions are not suitable for trading via such 
required methods of execution, as discussed above. Accordingly, the 
Commission believes that in this case flexibility with respect to 
execution methods will better promote trading of such component swaps 
on SEFs, consistent with the statutory SEF goals.
---------------------------------------------------------------------------

    \38\ See 7 U.S.C. 7b-3(e).
---------------------------------------------------------------------------

3. Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.9(d) and the proposed amendment of Sec.  37.9(a)(2). The Commission 
also invites specific comments on the following:
    (1) Is the proposed definition of ``package transaction'' in 
proposed Sec.  37.9(d)(1) appropriate? Please explain why or why not.
    (2) Is the proposed definition's condition that the ``execution of 
each component transaction is contingent upon the execution of all 
other component transactions'' clear in its meaning? If not, please 
explain how the Commission should clarify this provision.
    (3) Similarly, is the proposed definition's condition that ``[t]he 
component transactions are priced or quoted together as one economic 
transaction'' clear in its meaning? If not, please explain how the 
Commission should clarify this provision.
    (4) Is it clear what is meant within the proposed definition's 
statement that execution of all component transactions is to be 
``simultaneous or near-simultaneous''? If not, please explain how the 
Commission should clarify this provision.
    (5) Is the proposed addition of Sec.  37.9(d)(2) for MAT/Non-MAT 
(Uncleared) package transactions

[[Page 9413]]

appropriate? Please explain why or why not.
    (6) Is the proposed addition of Sec.  37.9(d)(3) for MAT/Non-Swap 
package transactions appropriate? Please explain why or why not.
    (7) Are the categories of package transactions that are excluded 
from Sec.  37.9(d)(3) appropriate? Please explain why or why not.
    (8) Are there additional package transactions that should be 
excluded from Sec.  37.9(d)(3)?
    (9) Is the proposed addition of Sec.  37.9(d)(4) for MAT/Non-
Exclusive CFTC Swap package transactions appropriate? Please explain 
why or why not.
    (10) Are there additional types or categories of package 
transactions not covered in this proposal for which the Commission 
should allow the swap component to be executed through the flexible 
means of execution in Sec.  37.9(c)(2)? Please explain in detail why or 
why not.
    (11) Should the Commission allow swap components to be executed via 
flexible methods of execution where a package transaction contains more 
than four components or legs, regardless of the types of components?
    (12) In addition to U.S. Dollar Spreadover package transactions, 
are there additional package transactions with sovereign debt 
components for which the Commission should exclude the swap component 
from flexible methods of execution? Please explain why or why not.
    (13) Should the Commission allow all swap components of a package 
transaction to be executed via flexible means of execution where a 
single swap component subject to the trade execution requirement is 
above the applicable block size? Please explain why or why not.
    (14) Should the Commission allow a package transaction composed of 
a Credit Default Swap (``CDS'') index swap subject to the trade 
execution requirement and a CDS index swap that is several series off-
the-run to be executed through flexible means of execution? Please 
explain why or why not.
4. Existing Sec.  37.3(a)
    An Order Book is one of the two required methods of execution under 
Sec.  37.9(a). The Commission designated an Order Book as the ``minimum 
trading functionality'' each SEF must maintain and offer for each swap 
that it lists for trading. An Order Book is defined under Sec.  
37.3(a)(3) as (i) an electronic trading facility; \39\ (ii) a trading 
facility; \40\ 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.'' \41\
---------------------------------------------------------------------------

    \39\ 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).
    \40\ 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).
    \41\ 17 CFR 37.3(a)(3).
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    Generally speaking, it may be complex to apply the existing Order 
Book requirement in Sec.  37.3(a)(2) to the swap components of the 
package transactions covered by this proposed amendment. In some 
situations, Sec.  37.3(a)(2) may require that a SEF maintain separate 
Order Books for the same type of swap: One Order Book for when the swap 
is executed as a single transaction (referred to as an ``outright 
transaction''), and a separate Order Book for when the swap is executed 
as part of a package transaction. In fact, multiple Order Books could 
be required for the same type of swap if it were included as part of 
multiple types of package transactions. The Commission understands 
that, in part because of the availability of relief under the staff 
letters described above, SEFs have put in place relatively few Order 
Books for swaps to be executed as part of the package transactions 
covered by this proposed amendment, and any such Order Books in place 
are not actively used.
5. Proposed Addition of Sec.  37.3(a)(4)
    The Commission proposes to add Sec.  37.3(a)(4), which would allow 
SEFs not to offer an Order Book for the swap components of the package 
transactions covered by this proposed amendment: (i) MAT/Non-MAT 
Uncleared package transactions; (ii) MAT/Non-Swap Instrument package 
transactions; and (iii) MAT/Non-Exclusive CFTC Swap package 
transactions. However, this proposal would not alter any requirement 
applicable to such swap components to the extent they are executed in 
transactions that are not package transactions covered by this proposed 
amendment. The text of proposed Sec.  37.3(a)(4) makes clear that Sec.  
37.3(a)(2) of the Commission's regulations would continue to apply to 
such swap components and SEFs would be required to offer Order Books 
for these Required Transactions as outright transactions.
    As noted above,\42\ executing Required Transaction swap components 
of certain package transactions through the required methods of 
execution is operationally complex, and in many instances, 
impracticable. Given that the Commission has preliminarily determined 
that it is infeasible or inefficient to facilitate swap components of 
these package transactions through the required methods of execution, 
which includes an Order Book under Sec.  37.3(a), it logically follows 
that requiring SEFs to offer an Order Book for the swap components of 
package transactions would be superfluous.
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    \42\ See section II.A.1--Background and section II.A.2--Proposed 
Addition of Sec.  37.9(d) and Amendment of Sec.  37.9(a)(2).
---------------------------------------------------------------------------

    Finally, the Commission believes that not requiring SEFs to offer 
an Order Book for the swap components of the relevant package 
transactions would help reduce operating costs for SEFs, as they would 
no longer be required to operate and maintain order book systems that 
are not suitable for trading the swap components of the relevant 
package transactions. Instead of employing resources to build (or 
attempt to build) and support an unused or underutilized Order Book for 
the swap components of certain package transactions, the proposal would 
instead provide 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 relevant package 
transactions.\43\
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    \43\ The Commission notes that nothing in this proposal would 
preclude a SEF from offering an Order Book if it is able to develop 
an Order Book solution that is effective in trading the swap 
component of certain package transactions.
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6. Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.3(a)(4). The Commission also invites comments specifically on the 
following:
    (15) Is the addition of Sec.  37.3(a)(4) appropriate?
    (16) Should the Commission still require SEFs to offer an Order 
Book for MAT/Non-MAT (Uncleared) package transactions as defined in 
Sec.  37.9(d)(2)?
    (17) Should the Commission still require SEFs to offer an Order 
Book for

[[Page 9414]]

the swap components of MAT/Non-Swap package transactions as defined in 
Sec.  37.9(d)(3)?
    (18) Should the Commission still require SEFs to offer an Order 
Book for MAT/Non-Exclusive CFTC Swap package transactions as defined in 
Sec.  37.9(d)(4)?
    (19) Are there additional types of package transactions that the 
Commission should consider allowing SEFs to not offer Order Books for?
    (20) Should the Commission allow SEFs not to offer an Order Book 
for swaps that are not subject to the trade execution requirement but 
are components of any package transaction? Would this lead to 
additional types of package transactions being listed and traded on 
SEFs?
7. Exemption of New Issuance Bond Package Transactions From the Trade 
Execution Requirement
    The Commission proposes to establish an exemption to the trade 
execution requirement for swap transactions that are components of a 
``New Issuance Bond'' package transaction.\44\ The Commission believes 
that exempting these types of transactions from the trade execution 
requirement is authorized by, and would be consistent with the 
objectives of, CEA section 4(c).\45\ This proposed approach is 
consistent with the time-limited no-action relief provided by 
Commission staff for this category of package transactions.\46\
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    \44\ The Commission notes that both this proposal and the 2018 
SEF Proposal propose to exempt New Issuance Bond package 
transactions from the trade execution requirement under section 
2(h)(8) of the CEA. See 2018 SEF Proposal at 62039. However, while 
these proposals and the supporting rationales are nearly identical, 
these two proposals are dissimilar in practical effect and scope. 
Under the 2018 SEF Proposal, the Commission proposed to apply the 
trade execution requirement to all swaps that are subject to the 
clearing requirement in section 2(h)(1) of the CEA and are listed on 
a SEF or a DCM. The 2018 SEF Proposal thus would have significantly 
expanded the scope of swaps that are subject to the trade execution 
requirement, including materially expanding the requirement to 
numerous forward starting interest rate swaps which are used as the 
swap components for New Issuance Bond package transactions. 
Contrastingly, this proposal would not alter the scope of swaps that 
are currently subject to the trade execution requirement, the 
majority of which are not swaps that are used as a component in New 
Issuance Bond package transactions. This means that the proposal to 
exempt New Issuance Bond package transaction under the 2018 SEF 
Proposal would have a significantly broader impact on the market 
than the proposed exemption within this proposal.
    \45\ 7 U.S.C. 6(c).
    \46\ See supra note 36 (describing the no-action relief from the 
trade execution requirement provided by Commission staff for 
categories of package transactions).
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    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 \47\ 
issued and sold in the primary market.\48\ An underwriter (on behalf of 
an issuer) arranges the issuance of a bond packaged with a fixed-to-
floating interest rate swap (``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.\49\ To match 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.
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    \47\ 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.
    \48\ 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.
    \49\ 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.
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    Given the process under which the swap is negotiated,\50\ 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 trading venue.\51\ 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 if a SEF were able to offer flexible means of 
execution, as the Commission is proposing for swap components of other 
package transactions within this proposal.\52\
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    \50\ 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.
    \51\ See NAL No. 17-55 at 2-3.
    \52\ See Section II.A.2.
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    Therefore, consistent with current no-action relief provided by 
Commission staff, the Commission proposes to exempt swap components of 
a New Issuance Bond 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) at least one component 
transaction is subject to the trade execution requirement in section 
2(h)(8) of the Act; (ii) execution of each component transaction is 
contingent upon the execution of all other component transactions; and 
(iii) the component transactions are priced or quoted together as one 
economic transaction with simultaneous or near-simultaneous execution 
of all components.\53\ 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.
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    \53\ The Commission notes that this definition is consistent 
with the proposed definition for package transaction in Sec.  
37.9(d)(1).
---------------------------------------------------------------------------

8. Discussion of CEA Section 4(c) Enumerated Factors
    Section 4(c) of the CEA grants the Commission the authority to 
exempt any transaction or class of transactions, including swaps, from 
certain provisions of the CEA, including the Commission's clearing 
requirement, in order to ``promote responsible economic or financial 
innovation and fair competition.'' \54\ Section 4(c)(2) of the CEA 
further provides that the Commission may not grant exemptive relief 
unless it determines that: (i) The exemption is appropriate for the 
transaction and consistent with the public interest; (ii) the exemption 
is consistent with the purposes of the CEA; (iii) the transaction will 
be entered into solely between ``appropriate persons;'' and (iv) the 
exemption will not have a material adverse effect on the ability of the 
Commission or any contract market to discharge its regulatory or self-
regulatory responsibilities under the CEA. In enacting section 4(c), 
Congress noted

[[Page 9415]]

that the purpose of the provision is to give the Commission a means of 
providing certainty and stability to existing and emerging markets so 
that financial innovation and market development can proceed in an 
effective and competitive manner.\55\
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    \54\ 7 U.S.C 6(c).
    \55\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, 
3213.
---------------------------------------------------------------------------

    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. The Commission recognizes that allowing 
the swap components of New Issuance Bond package transactions 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.
    Therefore, the Commission preliminarily believes 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 the exemption is limited in 
scope and the swap components subject to this exemption are still 
required to be reported to a swap data repository pursuant to parts 43 
and 45 of the Commission's regulations. Further, the Commission retains 
its special call, anti-fraud, and anti-evasion authorities, which will 
enable it to adequately discharge its regulatory responsibilities under 
the CEA.
    The Commission notes that under the proposed exemption, swap 
transactions would still be entered into solely between eligible 
contract participants (``ECPs''), whom the Commission believes, for 
purposes of this proposal, to be appropriate persons. Previously, the 
Commission determined that ECPs are appropriate persons within the 
scope of section 4(c)(3)(K) of the CEA.\56\ The Commission noted that 
the elements of the ECP definition (as set forth in section 1a(18)(A) 
of the CEA and Commission regulation 1.3) generally are more 
restrictive than the comparable elements of the enumerated 
``appropriate person'' definition.\57\ Given that only ECPs are 
permitted to enter into swaps off of a DCM, there is no risk that a 
non-ECP or a person who does not satisfy the requirements for an 
``appropriate person'' could enter into a New Issuance Bond package 
transaction using this proposed exemption. Therefore, the Commission 
believes that the class of persons eligible to rely on the exemption 
for New Bond Issuance package transactions will be limited to 
``appropriate persons'' within the scope of section 4(c)(3) of the CEA.
---------------------------------------------------------------------------

    \56\ Clearing Exemption for Swaps Between Certain Affiliated 
Entities, 78 FR 21750, 21754 (Apr. 11, 2013).
    \57\ Id.
---------------------------------------------------------------------------

9. 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(a), 
including whether the proposed exemptive relief is consistent with the 
public interest and the other requirements of CEA section 4(c). As 
noted above, the 2018 SEF Proposal contained a nearly identical 
provision. Comments made on the 2018 SEF Proposal that are relevant to 
this rulemaking must be resubmitted to be considered. The Commission 
specifically requests comment on the following questions:
    (21) 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?
    (22) Is the proposed definition of ``package transaction'' in 
proposed Sec.  36.1(a)(1) appropriate?
    (23) Is it clear what is meant within the proposed definition when 
it states that the ``execution of each component transaction is 
contingent upon the execution of all other component transactions''? If 
not, please explain how the Commission should clarify this provision.
    (24) Is it clear what is meant within the proposed definition when 
it states that ``[t]he component transactions are priced or quoted 
together as one economic transaction''? If not, please explain how the 
Commission should clarify this provision.
    (25) Is it clear what is meant within the proposed definition when 
it states that all component transactions are to be executed on a 
``simultaneous or near-simultaneous'' basis? If not, please explain how 
the Commission should clarify this provision.
    (26) Are there additional swap components of different types or 
categories of package transactions that should be exempt from the trade 
execution requirement? If so, then please describe in detail why such 
swap components of these types or categories of package transactions 
should be exempt from the trade execution requirement.

B. Error Trades: Execution of Trades To Correct Operational and 
Clerical Errors on Swap Execution Facilities

1. Background
    The Commission notes that SEFs have adopted policies to identify 
and resolve error trades as part of the rules and procedures that 
govern their respective trading and trade processing operations. Errors 
in SEF transactions, as observed by the Commission, may be operational 
or clerical in nature and attributable to either the SEF, the 
counterparties to the transaction, the counterparties' intermediaries, 
or the clearing members involved. Clerical errors, in particular, may 
occur in the process of entering trade details into a SEF's trading 
system and may relate to the swap's terms and conditions, such as 
price, size, or direction, as well as counterparty or clearing member 
identities. The adoption of error trade policies by SEFs reflects the 
importance of addressing errors to ensure that counterparties are able 
to execute swap transactions as intended on a SEF, which promotes a 
fair and orderly trading market for SEF market participants.\58\
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    \58\ 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'').
---------------------------------------------------------------------------

    Under the current SEF regulatory framework, however, resolving 
error trades for swaps subject to the Commission's required methods of 
execution and straight-through processing requirements has occurred 
pursuant to no-action relief provided by Commission staff on an ongoing 
basis. Since 2013, the Division of Clearing and Risk (``DCR'') and DMO 
(together, the ``Divisions'') have issued time-limited no-action relief 
to allow counterparties to correct swap ``error trades''--transactions 
containing an ``operational

[[Page 9416]]

or clerical error'' \59\--involving swaps designated as Required 
Transactions, which are subject both to the clearing requirement and 
the trade execution requirement.\60\ This relief, as described further 
below, has facilitated corrections where the error trade has either 
been (i) rejected by a DCO from clearing due to the error; or (ii) 
accepted for clearing, and therefore requires correction through an 
offsetting trade. Pursuant to the relief, SEFs may provide 
counterparties with a bilateral, ``corrective'' execution process for 
Required Transactions that does not satisfy the required methods of 
execution under Sec.  37.9(a)(2) for swaps subject to the trade 
execution requirement.
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    \59\ The Divisions previously defined ``operational or clerical 
error'' as any type of error other than a rejection from clearing 
due to credit reasons. See NAL No. 17-27 at 1 n.2.
    \60\ See NAL No. 13-66. In April 2015, staff issued additional 
no-action relief, which not only reinstated the previous time-
limited no-action relief from NAL No. 13-66 for SEFs from the 
requirements of Sec.  37.9(a)(2) and Sec.  37.203(a) for error 
trades rejected from clearing, but also provided relief for error 
trades accepted for clearing in NAL No. 15-24. Commission staff 
subsequently extended the relief provided in NAL No. 15-24 in June 
2016 with NAL No. 16-58. This relief was most recently extended in 
May 2017 by NAL No. 17-27 and would expire on the effective date of 
any applicable changes in the Commission's regulations. Commission 
staff in DMO recently issued NAL No. 20-01, which supplements NAL 
No. 17-27 to allow market participants, sua sponte, to correct error 
trades that have been accepted for clearing. In instances where 
market participants correct an error trade sua sponte, NAL No. 20-01 
requires an ex post facto review by the SEF of the error trade, 
offsetting trade, and correcting trade on a T+1 basis. Such review 
must consider whether a transaction cancellation or price adjustment 
will adversely impact market integrity, facilitate market 
manipulation or other illegitimate activity, or otherwise violate 
the CEA, Commission regulations, or the SEF's rules.
---------------------------------------------------------------------------

    For error trades rejected from clearing by a DCO, the no-action 
relief has provided operational flexibility from the required methods 
of execution that otherwise apply in conjunction with the Commission's 
``straight-through processing'' requirements for swaps submitted to a 
DCO for clearing.\61\ To promote the ``near[-]instantaneous acceptance 
or rejection of each trade [for clearing],'' \62\ the Divisions issued 
a 2013 staff guidance expressing the view that SEFs should have rules 
stating that trades that are rejected from clearing are ``void ab 
initio.'' \63\ Accordingly, executed swaps that a DCO rejects from 
clearing would be deemed void, including swaps that are rejected due to 
an operational or clerical error by the SEF or the counterparties. 
Where the counterparties still seek to execute the transaction as 
intended, void ab initio compels the counterparties to execute a new 
transaction between one another with the corrected terms. Where the 
counterparties seek to execute a correcting swap that is a Required 
Transaction, the no-action relief allows SEFs to accept bilaterally-
arranged swaps from the counterparties for execution and submission for 
clearing, rather than requiring them to execute the correcting swap 
through an Order Book or RFQ System.
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    \61\ The Commission's ``straight-through processing'' 
requirements address the process of routing transactions from 
execution through clearing. See 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''). 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.'' Id. at 21285.
    \62\ Staff Guidance on Swaps Straight-Through Processing at 2 
(Sept. 26, 2013)(``2013 Staff STP Guidance'').
    \63\ 2013 Staff STP Guidance at 5. The 2013 Staff STP Guidance 
also addresses other elements of ``straight-through processing'' for 
swap transactions, including void ab initio. See 2018 SEF Proposal 
at 61999-62002, 62019-62024. The Commission notes that it proposed 
to address certain provisions from the 2013 Staff STP Guidance in 
the 2018 SEF Proposal, including a clarification that mandatory 
application of void ab initio would be limited to swap transactions 
that are rejected from clearing for credit-related reasons; for 
rejections arising from clerical or operational errors, the proposed 
clarifications would allow a SEF to adopt other corrective 
approaches that may not involve execution of a offsetting trade or a 
correcting trade. Id. at 62000-62001. As noted above, this proposal 
is independent of the 2018 SEF Proposal.
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    For error trades accepted for clearing by a DCO in spite of an 
operational or clerical error in the swap, the no-action relief has 
provided similar operational flexibility from the prescribed execution 
methods under Sec.  37.9(a)(2).\64\ Accordingly, the relief allows SEFs 
to accept a bilaterally arranged swap from the counterparties for 
execution and submission for clearing that (i) economically offsets the 
initial error trade that was accepted from clearing; and (ii) corrects 
the initial error trade with corrected terms as originally intended by 
the counterparties.
---------------------------------------------------------------------------

    \64\ See NAL No. 17-27 at 5.
---------------------------------------------------------------------------

    The Divisions also attached certain conditions to this no-action 
relief that, among other things, specified timing requirements for 
submitting these transactions to a SEF for execution and to a DCO for 
clearing. For transactions correcting error trades that a DCO has 
rejected from clearing, the Divisions specified that the counterparties 
must execute the transaction on a SEF, and the SEF must submit the 
transaction for clearing, as quickly as technologically practicable 
after receipt of notice of the rejection by the DCO to the clearing 
members, but no later than one hour from the notice.\65\ For offsetting 
and correcting transactions to error trades that a DCO has accepted for 
clearing, the Divisions specified that such execution and submission to 
clearing of those transactions must occur no later than three days 
after the error trade was executed.\66\
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    \65\ Id. at 6.
    \66\ Id. In addition, for error trades that are accepted for 
clearing, DMO issued NAL No. 20-01, which supplements NAL No. 17-27 
to allow market participants, sua sponte, to correct error trades 
that have been accepted for clearing with an ex post facto review by 
the SEF. For error trades accepted for clearing and corrected under 
the relief in NAL No. 20-01, DMO specified that such error trades 
would need to be corrected no later than 24 hours after the error 
trade was executed. See NAL No. 20-01 at 4.
---------------------------------------------------------------------------

2. Proposed Sec.  37.9(e)
    The Commission proposes to amend the SEF regulatory framework by 
adding subsection (e) to Sec.  37.9 to establish a flexible SEF error 
trade policy standard that would, among other things, incorporate the 
intent of the existing no-action relief in NAL No. 17-27 for resolving 
errors in Required Transactions. Proposed Sec.  37.9(e)(2)(i) would 
specify that a SEF must maintain rules and procedures that are fair, 
transparent, consistent, and allow for timely resolution of an ``error 
trade,'' as defined under proposed Sec.  37.9(e)(1)(ii).\67\ This 
proposed standard would apply to any error trade that occurs on a SEF, 
regardless of whether the swap is submitted for clearing or not. The 
Commission believes that the proposed standard is a flexible approach 
that also clarifies the key principles that any SEF's error trade 
policy should address.
---------------------------------------------------------------------------

    \67\ As proposed, an ``error trade'' would be defined as any 
trade executed on or subject to the rules of a swap execution 
facility that contains an operational or clerical error. With 
respect to ``package transactions,'' as defined under proposed Sec.  
37.9(d)(1), the Commission deems the submission of the component 
transactions in a sequence that causes a rejection from clearing of 
an individual component to constitute an operational error that 
could be resolved through a correcting trade under proposed Sec.  
37.9(e)(2)(i)(A). Market participants had previously informed the 
Commission that an individual component transaction may be rejected 
from clearing if prematurely submitted because the risk of that 
component, in isolation, could cause a trader to exceed its credit 
limit. Under a different submission sequence of component 
transactions to the DCO, however, the net risk of all of those 
transactions may not have exceeded the credit limit, thereby 
avoiding the rejection. The Commission emphasizes, however, the use 
of a corrective trade may only apply to the rejected component and 
otherwise would not apply to the other legs of the package 
transaction that have been accepted for clearing.
---------------------------------------------------------------------------

    Further, under proposed Sec.  37.9(e)(2)(i) SEFs must have error 
trade rules and procedures that require market participants to provide 
prompt notice to the SEF of an error trade and, as

[[Page 9417]]

applicable, the corresponding correcting trade and offsetting 
trade.\68\ This notice need not be separate from the error trade 
correction process.
---------------------------------------------------------------------------

    \68\ To the extent a SEF implements error trade rules and 
procedures that allow market participants to correct error trades 
sua sponte with an ex post facto review by the SEF, that the SEF 
must require that market participants notify it of the subsequent 
correcting and offsetting trades. Conversely, a SEF that adopts 
error trades rules and procedures in which the SEF is responsible 
for correcting the error trade, that SEF would not be required to 
have market participants notify it of the subsequent correcting and 
offsetting trades. Regardless of the type of error trade rules and 
procedures a SEF adopts, it is required to adopt rules and 
procedures which require its market participants to provide prompt 
notice to it of an error trade that has occurred on its trading 
system(s) or platform(s).
---------------------------------------------------------------------------

    The Commission believes that such a requirement is important to 
facilitate SEFs' fulfillment of their self-regulatory obligations. In 
particular, the Commission believes that providing a SEF prompt notice 
that an error trade has occurred on its trading system(s) or 
platform(s) will further enable it to facilitate direct supervision of 
it markets in order to determine whether a rule violation has occurred 
as required under Sec.  37.203(b) as well as enhance its ability to 
carry out 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 pursuant to Sec.  37.203(e).\69\
---------------------------------------------------------------------------

    \69\ See 17 CFR 37.203(b); 17 CFR 37.203(e).
---------------------------------------------------------------------------

    Proposed Sec.  37.9(e) would also require a SEF to adopt rules to 
resolve error trades that involve swaps submitted for clearing. For an 
error trade rejected from clearing and therefore deemed void ab initio, 
proposed Sec.  37.9(e)(2)(i)(A) would require a SEF to permit the 
counterparties to subsequently execute a correcting trade, as defined 
in proposed Sec.  37.9(e)(1)(i), through any method of execution 
offered by the SEF. For an error trade that has been accepted for 
clearing, proposed Sec.  37.9(e)(2)(i)(B) would require a SEF to permit 
the counterparties to subsequently execute both an offsetting trade, as 
defined in proposed Sec.  37.9(e)(1)(iii), and a correcting trade 
through any method of execution offered by the SEF.\70\
---------------------------------------------------------------------------

    \70\ NAL No. 17-27 also provided relief from Sec.  37.203(a), 
which prohibits pre-arranged trading, for offsetting trades and 
correcting trades. The Commission, however, does not view a 
regulatory amendment corresponding to that relief as necessary. The 
existing prohibition already provides an exception to that 
prohibition by allowing a SEF to adopt trading practices that are 
certified or approved by the Commission pursuant to part 40 of the 
Commission's regulations. See 17 CFR 37.203(a). Accordingly, the 
Commission anticipates that a SEF would implement proposed Sec.  
37.9(e) by self-certifying or adopting rules subject to Commission 
review under part 40 that specify the manner in which counterparties 
may execute offsetting and correcting trades.
---------------------------------------------------------------------------

    Consistent with the existing no-action relief, this approach would 
continue to provide flexibility in the execution methods that a SEF may 
offer to counterparties to execute offsetting and correcting trades 
that involve swaps that are Required Transactions.\71\ Based on its 
experience with the existing no-action relief, the Commission believes 
that this flexibility would continue to promote SEF operational 
efficiency by allowing SEFs to offer error trade protocols that are 
tailored to their markets and to allow identification and resolution of 
operational and clerical errors in a timely manner. Without such 
flexibility, market participants with an error in Required Transactions 
would otherwise be 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 the execution method requirements under 
Sec.  37.9(a)(2), which require that all Required Transactions be 
traded via either an Order Book or RFQ System.
---------------------------------------------------------------------------

    \71\ The Commission notes that swaps that are Permitted 
Transactions, including those that are submitted to a DCO for 
clearing, may already be executed through any method of execution 
offered by a SEF pursuant to Sec.  37.9(c)(2).
---------------------------------------------------------------------------

    The Commission also believes that the proposed approach would 
further the SEF statutory goals of promoting trading on SEFs and pre-
trade price transparency in the swaps market.\72\ The proposed rules 
provide flexibility to depart from required execution methods that are 
otherwise intended to advance those statutory goals; allowing 
counterparties to correctly and efficiently execute swaps with the 
intended terms and conditions, however, enhances market integrity on 
SEFs, which promotes SEF participation. Additionally, the proposed 
rules would also help to ensure that trade data, which market 
participants rely upon to inform their swaps trading decisions, 
accurately reflects prevailing market pricing at any given time.
---------------------------------------------------------------------------

    \72\ See 7 U.S.C. 7b-3(e).
---------------------------------------------------------------------------

    The Commission notes that the existing no-action relief is 
currently subject to several conditions applicable to SEFs and 
counterparties--for example, SEFs must affirmatively determine, or 
determine after an ex post facto review, that an error trade has 
occurred.\73\ Except as incorporated in the proposed rules herein, the 
Commission intends for the proposed approach to otherwise provide SEFs 
with the flexibility to address such aspects of its error trade policy 
in a manner that is best suited to its trading and trade processing 
operations.\74\
---------------------------------------------------------------------------

    \73\ See NAL No. 17-27 at 5-7 and NAL No. 20-01 at 4-5.
    \74\ Under the proposal's principles-based approach, the 
Commission notes that a SEF would not be prohibited from 
incorporating the conditions contained within NAL No. 17-27, or 
implementing rules that allow market participants, sua sponte, to 
correct error trades that have been accepted for clearing with an ex 
post facto review by the SEF of the error trade, offsetting trade, 
and correcting trade on a T+1 basis as is contemplated by NAL No. 
20-01. Further, this proposal would not preclude SEFs from deploying 
error trade rules and procedures which consider whether a 
transaction cancellation or price adjustment will adversely impact 
market integrity, facilitate market manipulation or other 
illegitimate activity, or otherwise violate the CEA, Commission 
regulations, or the SEF's rules. However, regardless of the error 
trade rules and procedures that a SEF may adopt, the Commission 
notes that pursuant to this proposal such rules must be fair, 
transparent, and consistent. For example, in a scenario where a SEF 
is unsure as to how to address an error, the SEF may have rules 
which make it clear that the SEF will seek guidance and consent from 
both counterparties to the error trade before correcting the error 
trade. The Commission believes that such rule would be fair as it 
considers the positions of both counterparties and is transparent as 
it makes clear what the SEF will do in a specific scenario.
---------------------------------------------------------------------------

    The proposed rules, however, would also adopt some limitations that 
are similar to the existing no-action relief, including specified 
timeframes for executing and submitting these trades for clearing. For 
correcting trades associated with an error trade that has been rejected 
from clearing, proposed Sec.  37.9(e)(2)(i)(A) would require the SEF to 
submit the correcting trade for clearing to the registered DCO or 
exempt DCO as soon as technologically practicable, but no later than 
one hour after notice of the rejection to the relevant clearing 
members. For an offsetting trade and a correcting trade associated with 
an error trade that already has been accepted for clearing, proposed 
Sec.  37.9(e)(2)(i)(B) would require the SEF to submit both types of 
trades to the registered DCO or exempt DCO as soon as technologically 
practicable, but no later than three days after the registered DCO or 
exempt DCO accepted the error trade for clearing.\75\

[[Page 9418]]

In addition to these proposed timeframes, proposed Sec.  37.9(e)(2)(ii) 
would prohibit counterparties from executing a second correcting trade 
to fix an error trade if the initial correcting trade is rejected from 
clearing.
---------------------------------------------------------------------------

    \75\ The Commission notes that the supplemental conditions 
contained in NAL No. 20-01 require error trades that have been 
accepted to clearing to be corrected as soon as technologically 
practicable but no later than 24 hours after the error trade was 
executed. See NAL No. 20-01 at 4. However, as noted above, the 
Commission intends for this proposal to provide a SEF with the 
flexibility to address such aspects of its error trade policy in a 
manner that is best suited to its trading and trade processing 
operations. As such, SEFs may continue to have error trade rules and 
procedures that are contemplated in both NAL No. 17-27 and NAL No. 
20-01 for error trades that have been accepted for clearing. 
Therefore, the Commission is proposing that an error trade that has 
already been accepted for clearing would be required to be corrected 
as soon as technologically practicable, but no later than three days 
after the registered DCO or exempt DCO accepted the error trade for 
clearing, as this is the longest timeframe for correcting such error 
trades as contemplated in both NAL No. 17-27 and NAL No. 20-01. 
Nonetheless, the Commission is seeking comment on whether three days 
is an appropriate timeframe for error trades that have been accepted 
for clearing to be corrected. Further, despite the proposed outer 
limit of three days for correcting error trades that have been 
accepted for clearing, the Commission notes that SEFs and market 
participants are expected to correct such error trades as soon as 
technologically practicable as is proposed under Sec.  
37.9(e)(2)(i)(B).
---------------------------------------------------------------------------

    The Commission believes that these proposed limitations are 
consistent with the goal of promoting straight-through processing. The 
proposed timing requirements, in particular, are intended to provide a 
SEF and the counterparties to an error trade with an appropriate amount 
of time to identify and resolve error trades, while also minimizing 
delays to achieving prompt and efficient clearing of transactions. 
Similarly, limiting the number of instances in which counterparties may 
attempt to correct an error trade would also help to facilitate prompt 
and efficient clearing by incentivizing the counterparties to 
accurately execute their correcting trade as quickly as possible. The 
Commission, however, seeks additional public comment regarding this 
proposed limitation, as well as the appropriateness of the proposed 
timeframes.
3. Request for Comment
    The Commission requests comment on all aspects of proposed Sec.  
37.9(e). As noted above, the 2018 SEF Proposal also discussed this 
topic. Comments made on the 2018 SEF Proposal that are relevant to this 
rulemaking must be resubmitted to be considered. The Commission also 
invites comments specifically on the following:
    (27) The Commission notes that Sec.  37.203(e) already specifies 
that a SEF may resolve errors by adjusting trade prices or canceling 
trades to mitigate ``market disrupting events;'' such action by a SEF 
must be ``transparent to the market and subject to standards that are 
clear, fair, and publicly available.'' Should the Commission adopt a 
single rule for all error trades under proposed Sec.  37.9(e) that is 
similar to this standard, or is the proposed standard, i.e., ``fair, 
transparent, consistent, [and] allow for timely resolution'' more 
appropriate? If the Commission should maintain separate standards, 
please explain why.
    (28) Is the proposed timeframe adequate for the submission of a 
correcting trade to resolve an error trade rejected from clearing for 
non-credit reasons? If not, please provide an alternative timeframe and 
explain why such an alternative would be more appropriate.
    (29) Is the proposed timeframe adequate for submitting an 
offsetting trade and correcting trade to resolve an error trade 
accepted for clearing? If not, please provide an alternative timeframe 
and explain why such an alternative would be more appropriate.
    (30) Under proposed Sec.  37.9(e)(2)(i), SEFs must have rules which 
require market participants to provide prompt notice to the SEF that an 
error trade has occurred. Is it clear what is meant by ``prompt 
notice'' in Sec.  37.9(e)(2)(i)? If not, please explain how the 
Commission should clarify this provision.
    (31) Should the Commission require that notification to a SEF of an 
error trade occur within a specified timeframe? If so, what is the 
appropriate time frame for that notification to occur?
    (32) If a SEF adopts error trade rules and procedures that allow 
market participants to sua sponte correct an error trade with an ex 
post facto review by the SEF, should the Commission allow the SEF to 
have rules permitting market participants to withhold notice of the 
error trade until the market participant notifies the SEF of the 
correcting trade and, as applicable, the offsetting trade?
    (33) Should the Commission require SEFs to affirmatively determine, 
or determine after an ex post facto review, that an error trade has 
occurred? Why or why not?
    (34) If a SEF should affirmatively determine that an error trade 
had occurred, what is the appropriate time frame for that declaration 
to occur?
    (35) If a SEF should determine that an error trade has occurred 
after an ex post facto review, what is the appropriate time frame for 
that review and determination to occur?
    (36) If a SEF should affirmatively determine that an error trade 
had occurred, should the SEF's review consider whether a transaction 
cancellation or price adjustment will adversely impact market 
integrity, facilitate market manipulation or other illegitimate 
activity, or otherwise violate the CEA, Commission regulations, or the 
SEF's rules?
    (37) If a SEF should determine that an error trade has occurred 
after an ex post facto review, should the SEF's review consider whether 
a transaction cancellation or price adjustment will adversely impact 
market integrity, facilitate market manipulation or other illegitimate 
activity, or otherwise violate the CEA, Commission regulations, or the 
SEF's rules?
    (38) Does Sec.  37.9(e) sufficiently address potential situations 
in which a component of a package transaction is rejected from clearing 
by the relevant registered DCO or exempt DCO because of the sequencing 
of the components of the package transaction submitted for clearing at 
the registered DCO or exempt DCO? With respect to proposed Sec.  
37.9(e), are there any other issues that should be addressed regarding 
package transactions?
    (39) Should the same error trade policy also be available to 
correct any errors contained in a correcting trade or an offsetting 
trade, or should the number of corrections be limited? If an initial 
correcting trade or offsetting trade that is executed to correct an 
error trade contains an operational or clerical error, should the 
counterparties be allowed to submit another correcting trade or 
offsetting trade?
    (40) Should the Commission require SEFs to notify its market when 
it receives notice from a market participant that an error trade has 
occurred?
    (41) Should the Commission prescribe different error trade rules 
and procedures depending on the status (i.e., Required Transactions or 
Permitted Transactions) of the original swap transaction? Please 
explain why or why not.
    (42) Are there any conditions in NAL No. 17-27 or supplemental NAL 
No. 20-01 not contained within this proposal that the Commission should 
require SEFs to adopt in their error trade rules and procedures? If so, 
please explain in detail why such conditions are necessary and 
appropriate to be required in SEF error trade rules and procedures.

C. Real-Time Public Reporting: Block Trade Definition

1. Existing Sec.  43.2
    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 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.\76\ In specifying

[[Page 9419]]

these elements, the Commission considered the treatment of block trades 
in various swap and non-swap markets.\77\ In particular, the Commission 
looked to the futures markets, where futures block trades are 
permissible, privately-negotiated transactions 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.\78\ Accordingly, the Commission's regulatory definition of a 
``block trade'' for swaps closely tracks this futures market concept of 
a block trade.
---------------------------------------------------------------------------

    \76\ 17 CFR 43.2.
    \77\ Real-Time Public Reporting of Swap Transaction Data, 75 FR 
76140, 76159 (proposed Dec. 7, 2010) (discussion of block trades 
with respect to futures).
    \78\ 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.\79\ 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. . . .'' \80\ 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.\81\
---------------------------------------------------------------------------

    \79\ 17 CFR 43.2.
    \80\ 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).
    \81\ 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).
---------------------------------------------------------------------------

2. Proposed Amendment to Sec.  43.2
    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 ``occur away'' 
from a SEF's trading system or platform creates an issue with carrying 
out pre-execution credit screening.\82\ These market participants noted 
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.\83\ Accordingly, SEFs were unable to 
facilitate pre-execution credit checks for block trades.
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    \82\ For the avoidance of doubt, the Commission believes that if 
the parties purport to execute a block trade away from the SEF 
without first obtaining a credit check, an FCM clearing member that 
clears such trade and does not have knowledge of such purported 
execution is not in violation of the pre-execution credit check 
requirement under Commission regulation 1.73. NAL No. 17-60 n.9. The 
Commission understands that currently no mechanism exists to enable 
a pre-execution credit check where blocks are executed away from a 
SEF; however, this proposal does not preclude participants from 
developing and using such a mechanism in the future.
    \83\ NAL No. 17-60 at 2.
---------------------------------------------------------------------------

    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.\84\ Based on Commission staff no-
action relief provided in NAL No. 17-60, a SEF may allow market 
participants to execute swap block trades that are ITBC \85\ on a SEF's 
non-Order Book trading system or platform.\86\ As a result, FCMs and 
SEFs have been able to comply with their respective pre-execution 
credit screening obligations.
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    \84\ NAL No. 17-60; NAL No. 16-74; NAL No. 15-60; NAL No. 14-
118.
    \85\ As used herein, swaps that are ITBC are swaps (i) of a type 
accepted for clearing by a DCO, and (ii) intended to be submitted 
for clearing contemporaneously with execution. NAL No. 17-60 n.2.
    \86\ NAL No. 17-60 at 2-3.
---------------------------------------------------------------------------

    The Commission proposes to revise the ``block trade'' definition 
under Sec.  43.2 in order to allow market participants to utilize a 
SEF's non-Order Book trading system or platform while still allowing 
swap block trades to ``occur away'' from a SEF.\87\ The proposed 
revision to the ``block trade'' definition not only allows swap block 
trades that are ITBC to be executed on a SEF's non-Order Book trading 
system or platform--as is currently provided for in NAL No. 17-60--but 
the proposed definition would also permit swap block trades that are 
not ITBC to be executed on SEF.\88\ The Commission believes that having 
a single set of block trade rules for both ITBC and non-ITBC swap block 
trades will help to reduce operational complexity for both SEFs and 
market participants. Further, the Commission believes that permitting 
execution of block trades on a SEF's non-Order Book trading systems or 
platforms furthers the statutory SEF goal of promoting the trading of 
swaps on SEFs.\89\ Moreover, for swap block trades that are ITBC and 
executed on a SEF's non-Order Book trading system or platform, 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).\90\
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    \87\ The Commission notes that it has proposed to address the 
issue of block trades on SEFs in the 2018 SEF Proposal. As noted 
above, this proposal is independent of the 2018 SEF Proposal.
    \88\ The Commission notes that in the 2018 SEF Proposal, it 
proposed for all SEF swap block trades to be executed on the SEF. 
The Commission continues to evaluate this proposal. See supra note 
15.
    \89\ See 7 U.S.C. 7b-3(e).
    \90\ 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.
---------------------------------------------------------------------------

    Further, 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 and to establish 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. In addition, the Commission believes that allowing 
participants to use a SEF's non-Order Book functionalities to execute 
swap block trades is consistent with the Commission's regulatory 
approach to mitigate risks of information leakage (i.e., a ``winner's 
curse'') as market participants can use the functionality of the SEF to 
execute a block trade in a manner that will not disclose the order to 
the entire market.\91\ SEFs currently provide various modes of 
execution to enable market participants to execute a block trade on the 
SEF without providing disclosure of the block trade to the market or to 
multiple market participants.\92\
---------------------------------------------------------------------------

    \91\ SEF Core Principles Final Rule, 78 FR 33498, 33562, and 
33563.
    \92\ For example, the Commission has observed that some SEFs 
offer a ``RFQ-to-one'' functionality that allows counterparties to 
bilaterally negotiate a block trade between two potential 
counterparties, without requiring disclosure of the potential trade 
to other market participants on a pre-trade basis.
---------------------------------------------------------------------------

    Finally, the Commission believes that permitting swap block trades 
to be executed on a SEF's non-Order Book trading platforms while also 
allowing them to ``occur away'' from a SEF provides SEFs increased 
flexibility. In particular, SEFs will be able to provide execution 
methods for swap block

[[Page 9420]]

trades that are most suitable, efficient, and cost-effective for the 
product being traded, the SEF's market, and its market participants.
3. Request for Comment
    The Commission requests comment on all aspects of the proposed 
revision to the definition of ``block trade'' in Sec.  43.2. The 2018 
SEF Proposal also proposed revisions to this definition. Comments made 
on the 2018 SEF Proposal that are relevant to this rulemaking must be 
resubmitted to be considered. The Commission also invites comments 
specifically on the following:
    (43) Is the Commission's proposed revision to the definition of 
``block trade'' appropriate? If not, how should the Commission amend 
the proposed definition?
    (44) Should the Commission continue to permit market participants 
to execute ITBC swap block trades away from but pursuant to the rules 
of a SEF? Please explain why or why not.
    (45) Should the Commission continue to permit market participants 
to execute non-ITBC swap block trades away from but pursuant to the 
rules of a SEF? Please explain why or why not.
    (46) Should the Commission prohibit swap block trades that are 
subject to the trade execution requirement from ``occurring away'' from 
a SEF but pursuant to its rules?
    (47) Should the Commission further limit or prohibit the execution 
of swap block trades through an RFQ system, as defined in Sec.  
37.9(a)(3)? For example, should the Commission limit the number of 
market participants that may receive a RFQ for a swap block trade that 
is intended to be executed on the SEF? Please explain why or why not.
    (48) Should the Commission allow swap block trades to be executed 
through an Order Book, as defined in Sec.  37.3(a)(3)? Please explain 
why or why not.

III. Effective Date and Transition Period

    The Commission proposes that the effective date for the proposed 
regulations be 60 days after publication of final regulations in the 
Federal Register. The Commission preliminarily believes that such an 
effective date would allow SEFs and market participants sufficient time 
to adapt to the amended and additional rules in an efficient and 
orderly manner.

Request for Comment

    The Commission requests comment on whether the proposed effective 
date is appropriate and, if not, the Commission further requests 
comment on possible alternative effective dates and the basis for any 
such alternative dates.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \93\ requires Federal 
agencies, in promulgating regulations, to consider the impact of those 
regulations on small businesses. The regulations adopted herein will 
affect SEFs and their market participants. 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 RFA.\94\ The Commission 
previously concluded that SEFs are not small entities for the purpose 
of the RFA.\95\ The Commission has also previously stated its belief in 
the context of relevant rulemakings that SEFs' market participants, 
which are all required to be eligible contract participants (``ECPs'') 
\96\ as defined in section 1a(18) of the CEA,\97\ are not small 
entities for purposes of the RFA.\98\ Therefore, the Chairman, on 
behalf of the Commission, hereby preliminarily certifies, pursuant to 5 
U.S.C. 605(b), that the regulations will not have a significant 
economic impact on a substantial number of small entities. The 
Commission invites the public to comment on whether SEFs and SEF market 
participants covered by these proposed rules should be considered small 
entities for the purpose of the RFA.
---------------------------------------------------------------------------

    \93\ 5 U.S.C. 601 et seq.
    \94\ 47 FR 18618--18621 (Apr. 30, 1982).
    \95\ SEF Core Principles Final Rule, 78 FR 33476, 33548 (June 4, 
2013) (citing 47 FR 18618, 18621 (Apr. 30, 1982) (discussing DCMs); 
66 FR 42256, 42268 (Aug. 10, 2001) (discussing DTFs, ECMs, and 
EBOTs); and 66 FR 45604, 45609 (Aug. 29, 2001) (discussing 
registered DCOs)).
    \96\ 17 CFR 37.703.
    \97\ 7 U.S.C. 1(a)(18).
    \98\ 66 FR 20740, 20743 (Apr. 25, 2001) (stating that ECPs by 
the nature of their definition in the CEA should not be considered 
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,'' \99\ 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.\100\
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    \99\ See 44 U.S.C. 3502(3)(A).
    \100\ See 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.\101\ The PRA requirements have been determined to include 
not only mandatory, but also voluntary information collections, and 
include both written and oral communications.\102\ The Commission may 
not conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid Office 
of Management and Budget (``OMB'') control number.
---------------------------------------------------------------------------

    \101\ See 44 U.S.C. 3502(3).
    \102\ See 5 CFR 1320.3(c)(1).
---------------------------------------------------------------------------

    This proposed rulemaking contains collections of information for 
which the Commission has previously received control numbers from OMB. 
The titles for these collections of information are ``Real-Time Public 
Reporting and Block Trades, OMB control number 3038-0070'' and ``Core 
Principles and Other Requirements for Swap Execution Facilities, OMB 
control number 3038-0074.'' This proposed rulemaking would not impose 
any new information collection requirements from any persons or 
entities that require approval of OMB under the PRA.

C. Cost-Benefit Considerations

    Section 15(a) of the CEA \103\ requires the Commission to consider 
the costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders. Section 15(a) further 
specifies that the costs and benefits shall be evaluated in light of 
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.
---------------------------------------------------------------------------

    \103\ 7 U.S.C. 19(a).

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[[Page 9421]]

1. Background
    The Commission is proposing to amend certain rules in parts 36, 37, 
and 43 of its regulations relating to the execution of certain package 
transactions on SEFs; the resolution of error trades on SEFs; and the 
execution of block trades on SEFs.
    The baseline against which the Commission considers the costs and 
benefits of these proposed rules is the statutory and regulatory 
requirements of the CEA and Commission regulations now in effect, in 
particular CEA section 5h and certain rules in parts 37 and 43 of the 
Commission's regulations. The Commission, however, notes that as a 
practical matter SEFs and market participants have adopted some current 
practices based upon no-action relief provided by Commission staff that 
is time-limited in nature.\104\ As such, to the extent that SEFs and 
market participants have relied on relevant staff no-action letters, 
the actual costs and benefits of the proposed rules as realized in the 
market may not be as significant.
---------------------------------------------------------------------------

    \104\ In its discussion of alternatives, the Commission believes 
it is also relevant to consider the costs and benefits of the 
proposed regulations in comparison to circumstances in which such 
no-action relief has expired and is no longer available. The 
Commission further notes that in connection with NAL No. 16-58 and 
its extension NAL No. 17-27 (relief related to clerical or 
operational error trade resolution), market participants 
specifically requested that the Commission undertake rulemakings to 
establish a permanent solution for addressing these clerical and 
operational errors, rather than merely extending the previous NAL 
relief. See NAL No. 16-58 and NAL No. 17-27. In contrast, previous 
requests for no-action relief from market participants for the NALs 
which preceded NAL No.16-58 and NAL No. 17-27 were merely for 
temporary relief.
---------------------------------------------------------------------------

    In some instances, it is not reasonably feasible to quantify the 
costs and benefits to SEFs and certain market participants with respect 
to certain factors, for example, market integrity. Notwithstanding 
these types of limitations, however, the Commission otherwise 
identifies and considers the costs and benefits of these rules in 
qualitative terms.
    The following consideration of costs and benefits is organized 
according to the rules and rule amendments proposed in this release. 
For each rule, the Commission summarizes the proposed amendments and 
identifies and discusses the costs and benefits attributable to such 
rule. The Commission, where applicable, then considers the costs and 
benefits of the proposed rules in light of the five public interest 
considerations set out in section 15(a) of the CEA.
    The Commission notes that this consideration of costs and benefits 
is based on the understanding that the swaps market functions 
internationally, with many transactions involving U.S. firms taking 
place across international boundaries, with some Commission registrants 
being organized outside of the United States, with leading industry 
members typically conducting operations both within and outside the 
United States, and with industry members commonly following 
substantially similar business practices wherever located. Where the 
Commission does not specifically refer to matters of location, the 
discussion of costs and benefits below refers to the effects of the 
proposed rules on all swaps activity subject to the proposed and 
amended regulations, whether by virtue of the activity's physical 
location in the United States or by virtue of the activity's connection 
with or effect on U.S. commerce under CEA section 2(i).\105\
---------------------------------------------------------------------------

    \105\ Section 2(i)(1) applies the swaps provisions of both the 
Dodd-Frank Act and Commission regulations promulgated under those 
provisions to activities outside the United States that ``have a 
direct and significant connection with activities in, or effect on, 
commerce of the United States[.]'' 7 U.S.C. 2(i). Section 2(i)(2) 
makes them applicable to activities outside the United States that 
contravene Commission rules promulgated to prevent evasion of Dodd-
Frank.
---------------------------------------------------------------------------

2. Package Transactions
    The Commission proposes to add Sec.  37.9(d) and amend Sec.  
37.9(a)(2) to permit the swap components of certain package 
transactions to be executed via flexible methods of execution pursuant 
to Sec.  37.9(c)(2). The Commission proposes to define a ``package 
transaction'' for the purpose of the proposed rule as a transaction 
consisting of two or more component transactions executed between two 
or more counterparties where (i) at least one component transaction is 
subject to the trade execution requirement in section 2(h)(8) of the 
Act; (ii) execution of each component transaction is contingent upon 
the execution of all other component transactions; and (iii) the 
component transactions are priced or quoted together as one economic 
transaction with simultaneous or near-simultaneous execution of all 
components. Based on this proposed definition and consistent with 
existing no-action relief, the Commission proposes to allow the swap 
component of the following three categories of package transactions to 
be executed via flexible means of execution pursuant to Sec.  
37.9(c)(2): (1) MAT/Non-MAT Uncleared package transactions; (2) MAT/
Non-Swap Instrument package transactions; \106\ and (3) MAT/Non-
Exclusive CFTC Swap package transactions.
---------------------------------------------------------------------------

    \106\ Under proposed Sec.  37.9(d)(3), consistent with the no-
action relief, this category specifically excludes U.S. Dollar 
Spreadover package transactions; MAT/Futures package transactions, 
MAT/Agency MBS package transactions; and New Issuance Bond package 
transactions.
---------------------------------------------------------------------------

    In addition, the Commission is proposing to exempt the swap 
components of these three types of package transactions from the 
requirement in Sec.  37.3 that the SEF offer an Order Book for every 
swap listed for trading on the SEF, while continuing to require that 
SEFs offer an Order Book for outright transactions in every swap listed 
for trading on the SEF. Finally, the Commission is proposing to use its 
exemptive authority pursuant to CEA section 4(c) to exempt swap 
transactions that are executed as a component of a package transaction 
that includes a component that is a new issuance bond from the trade 
execution requirement under section 2(h)(8) of the Act.
    Benefits: The proposed rule would allow market participants to 
choose the most suitable execution method for each package transaction 
and will allow SEFs to continue to offer flexible execution methods for 
these package transactions rather than only offer the required methods 
of execution for swaps subject to the trade execution requirement. The 
Commission expects this would reduce execution risks, improve 
efficiency, and decrease transaction costs as market participants would 
be able to avoid legging into transactions, that is, entering into each 
part of the package separately. The Commission notes that these 
benefits are currently available to market participants through 
existing no-action relief. The Commission further believes that the 
proposed rule would provide the liquidity and transparency benefits of 
increased trading of component swaps on SEFs, as without the proposed 
flexibility market participants would be unable or unwilling to trade 
such swap components through SEFs' required methods of execution.\107\
---------------------------------------------------------------------------

    \107\ Further, while the proposed rules also provide flexibility 
from the required methods of execution that are otherwise intended 
to help promote pre-trade transparency on SEFs, the Commission notes 
that permitting market participants to use flexible methods of 
execution is consistent with how package transactions are treated 
within other jurisdictions. For example, in the European Union 
(``EU'') certain package transactions (including package 
transactions for which the Commission currently requires the swap 
component to be executed through the required methods of execution, 
such as U.S. Dollar Spreadover package transactions) are eligible to 
be waived from the EU's transparency regime. The Commission believes 
that this proposal strikes an appropriate balance between promoting 
pre-trade transparency and ensuring that U.S. markets and their 
participants are not unnecessarily burdened. See Regulation (EU) 
2016/1033 of the European Parliament and of the Council of 23 June 
2016 amending Regulation (EU) No 600/2014 on markets in financial 
instruments, Regulation (EU) No 596/2014 on market abuse and 
Regulation (EU) No 909/2014 on improving securities settlement in 
the European Union and on central securities depositories.

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

[[Page 9422]]

    The Commission believes that not requiring SEFs to offer an Order 
Book for the swap components of the three types of relevant package 
transactions would benefit SEFs by helping them to reduce operating 
costs, as they would no longer be required to operate and maintain an 
Order Book for trading those swaps that are components of those package 
transactions. However, SEFs would need to retain the availability of 
Order Books for those swaps executed as outright transactions.
    Further, as discussed above, given the illiquid and bespoke nature 
of various components within the relevant package transactions, the 
Commission acknowledges that the Order Book is not the ideal method of 
execution for many such transactions. Therefore, the Commission 
anticipates that if SEFs are not required to provide an Order Book for 
relevant package transactions that are not suitable for Order Book 
trading, SEFs will be able to more effectively employ their resources, 
and no longer face the prospect of being required to provide Order 
Books that will not be utilized given the complex, illiquid, and 
bespoke nature of various components of the relevant package 
transactions.
    The Commission believes that the proposal to exempt swap 
transactions that are executed as a component of a package transaction 
that includes a component that is a new issuance bond from the trade 
execution requirement will ensure that market participants such as bond 
underwriters and issuers can continue to execute these packages (where 
the new-issuance bond is hedged by an interest rate swap with tenor and 
payment terms that typically match the terms of the bond issuance) off-
SEF. As discussed above, this proposed exemption may facilitate new 
bond issuances, which may benefit capital formation by helping market 
participants to raise capital and fund origination loans for businesses 
and homeowners. Moreover, 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. SEFs have not been able to 
design an execution method suitable for this particular type of 
package, rendering it impracticable to execute these packages on-SEF. 
While the swap components of many swap/new-issuance bond packages 
executed today are not currently subject to the trade execution 
requirement,\108\ the proposed rule would ensure that those 
transactions would remain exempt in the event the trade execution 
requirement is expanded to include more types of swaps.
---------------------------------------------------------------------------

    \108\ For example, the swap component may be a forwarding-
starting swap whose start date corresponds to the issuance date of 
the bond. Forward starting swaps are not currently subject to the 
trade execution requirement.
---------------------------------------------------------------------------

    Costs: The proposed amendments to allow flexible execution methods 
for certain package transactions and the proposed exemption for package 
transactions that include a new issuance bond should not impose costs 
on market participants since they only provide flexibility to market 
participants and do not require them to change their current trade 
practices. Moreover, to the extent that market participants are relying 
on existing no-action relief, they could continue to implement existing 
industry practice. The Commission believes that current SEF rules 
typically allow participants to utilize flexible execution methods 
pursuant to the existing no-action relief, but to the extent that SEFs 
need to modify their rules to incorporate the proposed amendments, they 
may incur modest costs.
    As noted, not requiring SEFs to offer an Order Book for the swap 
components of the relevant package transactions may enable SEFs to 
reduce operating costs. Since any existing Order Books for swap 
components of the relevant package transactions are not actively used 
and are not practicable for market participants to use, removing these 
Order Books (and not requiring SEFs to create such Order Books) should 
not impose significant costs on market participants.

Section 15(a) Factors

a. Protection of Market Participants and the Public
    The Commission believes that the proposed amendments and exemption 
will protect market participants from the risks associated with legging 
into the relevant packages by enabling market participants to enter 
into package transactions using appropriate execution methods. 
Permitting SEFs to eliminate the Order Book for use when swaps are 
components of package transactions should not impact protection of 
market participants. While protecting market participants also benefits 
the public, the Commission has not identified any further effect of the 
proposal on protection of the public.
b. Efficiency, Competitiveness, and Financial Integrity of the Markets
    The proposed amendments would enhance efficiency by enabling market 
participants to continue to execute the relevant packages in a single 
transaction with an appropriate execution method, rather than via the 
inefficient process of legging into the package one component at a 
time. The proposed amendments would also enhance financial integrity by 
enabling market participants to continue to avoid the execution risk 
associated with potential adverse price movements while attempting to 
leg a transaction. The Commission has not identified any likely effects 
of the proposed amendments on competition in the swap markets. The 
Commission expects that, since there are few, if any, active Order 
Books for swaps as components of the relevant package transactions, 
SEFs will not use proposed Sec.  37.3(a)(4) to remove active Order 
Books that are providing competitive markets.
c. Price Discovery
    Package transactions are typically executed at a single price for 
the entire package, rather than at the prices of the individual 
components. The proposed amendments would continue to allow the 
relevant package transactions to be executed using the execution 
methods that are designed to facilitate price discovery in these 
packages. For packages that include new issuance bonds, the proposed 
exemption will permit price discovery to occur at the appropriate 
venue. The Commission believes that the proposed Sec.  37.3(a)(4), 
which would exempt swaps that are part of the relevant package 
transactions from the Order Book requirement, would not materially 
inhibit price discovery since the Commission anticipates that SEFs 
would retain Order Books where price discovery is occurring and that 
currently price discovery is not occurring in Order Books for swap 
components of the package transactions addressed within this proposal.
d. Sound Risk Management Practices
    The Commission believes that the proposal will continue to promote 
sound risk management by facilitating the execution of package 
transactions as market participants consider package transactions to 
often be useful and appropriate instruments for

[[Page 9423]]

management and transfer of risk and to avoid the execution risks 
associated with legging of transactions.
e. Other Public Interest Considerations
    The proposed exemption from the trade execution requirement for the 
swap components of packages involving new issuance bonds may help 
promote capital formation by facilitating the issuance of bonds to 
raise capital. The Commission has not identified any other effect of 
the proposed rules and proposed exemption regarding package 
transactions on other public interest considerations.

Request for Comment

    The Commission requests comment on the costs and benefits of all 
aspects of the proposed amendments related to certain package 
transactions, including the discussion of the section 15(a) factors. 
Comments made on the 2018 SEF Proposal that are relevant to this 
rulemaking should be resubmitted to be considered. The Commission 
requests comment on the alternatives discussed above as well as any 
other alternatives that commenters believe present a superior cost-
benefit profile to the proposed amendments. Commenters are requested to 
provide data and any other information or statistics to support their 
position. In particular, to the extent commenters believe that the 
costs or benefits of any aspect of the proposed rules are reasonably 
quantifiable, the Commission requests that they provide data and any 
other information or statistics to assist the Commission in 
quantification.
3. Error Trades
    The Commission proposes to add subsection (e) to Sec.  37.9 to 
establish a flexible SEF error trade policy standard that would, among 
other things, incorporate the intent of the existing no-action relief 
in NAL No. 17-27 for resolving errors in Required Transactions. 
Proposed Sec.  37.9(e)(2)(i) would specify that a SEF must maintain 
rules and procedures that are ``fair, transparent, consistent'' and 
``allow for timely resolution'' of an ``error trade,'' as defined under 
proposed Sec.  37.9(e)(1)(ii). This proposed standard would apply to 
any error trade that occurs on a SEF, regardless of whether or not the 
swap is submitted for clearing. Further, under proposed Sec.  
37.9(e)(2)(i), SEFs must have error trade rules and procedures that 
require that market participants provide prompt notice to the SEF of an 
error trade and, as applicable, correcting and offsetting trades.
    Proposed Sec.  37.9(e) would also require a SEF to adopt rules to 
resolve error trades that involve swaps submitted for clearing. For an 
error trade rejected from clearing and therefore deemed void ab initio, 
proposed Sec.  37.9(e)(2)(i)(A) would require a SEF to permit the 
counterparties to subsequently execute a correcting trade, as defined 
in proposed Sec.  37.9(e)(1)(i), through any method of execution 
offered by the SEF. For an error trade that has been accepted for 
clearing, proposed Sec.  37.9(e)(2)(i)(B) would require a SEF to permit 
the counterparties to subsequently execute both an offsetting trade, as 
defined in proposed Sec.  37.9(e)(1)(iii), and a correcting trade 
through any method of execution offered by the SEF.
    The proposed rule includes some limitations that are similar to the 
existing no-action relief, including specified timeframes for executing 
and submitting these trades for clearing. For correcting trades 
associated with an error trade that has been rejected from clearing, 
proposed Sec.  37.9(e)(2)(i)(A) would require the SEF to submit the 
correcting trade for clearing to the registered DCO or exempt DCO as 
soon as technologically practicable, but no later than one hour after 
notice of the rejection to the relevant clearing members. For an 
offsetting trade and a correcting trade associated with an error trade 
that already has been accepted for clearing, proposed Sec.  
37.9(e)(2)(i)(B) would require the SEF to submit both types of trades 
to the registered DCO or exempt DCO as soon as technologically 
practicable, but no later than three days after the registered DCO or 
exempt DCO accepted the error trade for clearing. In addition to these 
proposed timeframes, proposed Sec.  37.9(e)(2)(ii) would prohibit 
counterparties from executing a second correcting trade to fix an error 
trade if the initial correcting trade is rejected from clearing.
    However, the proposed rule does not include certain additional 
conditions applicable to SEFs and counterparties that are contained in 
the no-action relief under NAL No. 17-27 or NAL No. 20-01. For example, 
the no-action relief in NAL No. 17-27 requires that a SEF must make an 
affirmative finding that an alleged error trade has occurred and must 
have rules setting forth the procedures for making such a finding.
    Benefits: Absent an adoption of these proposed rules, both SEFs and 
market participants would need to comply with the existing Commission 
regulations, notwithstanding the significant procedural and logistical 
difficulties of doing so. In particular, market participants would have 
to resolve error trades in Required Transactions using the Order Book 
or RFQ System, which would likely make it impossible to recreate the 
trade as originally intended. These difficulties could dissuade SEFs 
from being actively involved in the error trade resolution process and 
market participants from executing swaps on a SEF. The Commission 
believes that the proposal would avoid these potential difficulties.
    The Commission preliminarily believes that, given that the proposed 
amendments are largely consistent with current industry practice, SEFs 
and market participants may likely have already realized much of the 
benefit of proposed Sec.  37.9(e). The Commission preliminarily 
believes, however, that the proposed rules additionally would provide a 
tangible benefit to market participants on a longer-term basis by 
allowing market participants to continue utilizing policies and 
protocols which the Commission understands most SEFs adopted in 
reliance upon the relief provided in existing no-action letters to 
resolve error trades.
    The proposed rule does not require that a SEF affirmatively 
determine that an error trade has occurred, either before resolution or 
via an ex post facto review. The Commission preliminarily believes that 
such a requirement, which is in the existing no-action relief, would 
impose unnecessary costs on SEFs and market participants, and 
potentially impair the efficiency of the error trade resolution 
process. To the extent that SEFs and market participants are currently 
availing themselves of current no-action relief, they may realize 
reduced costs under the proposed rule.
    The proposed requirement under Sec.  37.9(e)(2)(i) that market 
participants provide prompt notice to a SEF of an error trade and, as 
applicable, the corresponding correcting trade and offsetting trade 
would benefit SEFs in carrying out their self-regulatory obligations. 
In particular, the Commission believes that providing SEFs prompt 
notice that an error trade has occurred on their trading system(s) or 
platform(s) would enhance their ability to carry real-time market 
monitoring of all trading activity on their system(s) or platform(s) to 
identify disorderly trading and any market or system anomalies or 
violations of SEF rules.
    The Commission also believes that the proposed amendments will 
facilitate the goal of promoting consistency in the swaps market with 
respect to how errors are evaluated and resolved. First, the proposed 
amendments would require all SEFs to adopt such policies. To the extent 
SEFs have not yet implemented such policies, the proposed

[[Page 9424]]

amendments will benefit market participants who will now be able to 
correct error trades and avoid related economic losses. Further, market 
participants can obtain the benefit of executing a swap transaction 
that corrects an error trade with the terms originally intended.
    Finally, some SEFs have already implemented robust error trade 
resolution policies pursuant to existing no-action relief, while other 
SEFs have not implemented robust error trade policies. This 
inconsistency among SEFs otherwise causes a ``race to the bottom'' for 
SEFs' compliance and market oversight, as certain market participants 
may prefer SEFs with less stringent error trade policies. As a result, 
SEFs that have implemented robust error trade policies--and the swaps 
market in general--will benefit by eliminating this potential ``race to 
the bottom,'' and the Commission will underscore the importance of SEF 
market oversight by adopting such requirements in Commission 
regulations.\109\
---------------------------------------------------------------------------

    \109\ The Commission notes that a robust error trade resolution 
policy is also consistent with an effective compliance and oversight 
program because the ability to resolve error trades (i) helps 
protect market integrity by unwinding certain error trades that 
otherwise would have an adverse effect on the market and (ii) 
promotes legal certainty by ensuring that market participants obtain 
the economic position in the transaction that they intended.
---------------------------------------------------------------------------

    Costs: Similar to the conditions established by Commission staff in 
time-limited no-action relief, the proposed amendments would require 
SEFs to establish rules implementing various policies and procedures 
for resolving error trades. Under the proposal, SEFs would have to 
submit new rules to the Commission pursuant to part 40 of the 
Commission's regulations. However, the Commission understands that 
pursuant to the existing no-action relief, most SEFs currently have 
rules that otherwise would comply with the proposed regulations. SEFs 
may choose to adjust their rules in light of the absence in the 
proposed rules of the requirement in the no-action relief that SEFs 
affirmatively determine that an error trade has occurred.\110\ To the 
extent that SEFs must draft and submit new rules to the Commission, the 
Commission estimates that the costs will be modest.
---------------------------------------------------------------------------

    \110\ In light of the flexibility of the proposed rule, SEFs can 
continue to require such an affirmative declaration if the determine 
that such requirement provides benefits to market participants or 
the SEF.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the proposed amendments 
would not impose significant additional costs on market participants 
and intermediaries, because resolving error trades is inherently costly 
regardless of regulations imposed by the Commission, and market 
participants and intermediaries are currently subject to SEF policies 
and procedures. The proposed requirement that market participants 
provide prompt notice to a SEF of an error trade and, as applicable, 
the correcting trade and offsetting trade would impose modest costs on 
market participants, but, in practice, market participants have likely 
needed to report error trades to SEFs in order to facilitate SEF 
determinations that an error trade has occurred pursuant to NAL No. 17-
27, and would have had to report the correcting trade and offsetting 
trade in order to facilitate the SEF's ex post facto review pursuant to 
NAL No. 20-01. Not requiring that a SEF find that an error trade has 
occurred either before it has been resolved or via an ex post facto 
review should impose only minor costs on market participants associated 
with changes in procedures to no longer request that a SEF make such a 
determination.
    The Commission notes that NAL No. 17-27 and NAL No. 20-01 apply to 
both SEFs and DCMs, but the proposed rule would apply only to SEFs. 
Therefore, the Commission believes that the proposed rule would impose 
no costs on DCMs, and notes that no DCM is currently availing itself of 
the no-action relief.

Section 15(a) Factors

a. Protection of Market Participants and the Public
    The proposed addition of Sec.  37.9(e) regarding error trades will 
protect market participants and the public by providing SEFs with 
greater authority under Commission regulations to resolve error trades. 
Further, by providing SEFs with the authority to permit counterparties 
to execute correcting trades and offsetting trades, the proposed 
amendments would protect market stability and transparency by 
preventing potential losses to market participants in connection with 
error trades and reducing instances in which market participants rely 
on inaccurate pricing information to inform their trading decisions. 
The proposed addition of Sec.  37.9(e) would also promote greater 
transparency of the error trade resolution process to SEFs' market 
participants as SEFs would be required to establish policies and 
procedures for reviewing and determining how to resolve alleged error 
trades. The proposed requirement under Sec.  37.9(e)(2)(i) that market 
participants provide prompt notice to a SEF of an error trade and, as 
applicable, the correcting trade and offsetting trade would promote 
protection of market participants and the public by enhancing a SEF's 
ability to carry out its market oversight and monitoring 
responsibilities. The Commission believes that the absence of a 
requirement in the proposed rule that SEFs must affirmatively 
determine, or determine after an ex post facto review, that an error 
trade has occurred (which are conditions in the existing no-action 
relief under NAL No. 17-27 and NAL No. 20-01) would not materially 
impact the protection of market participants and the public.
b. Efficiency, Competitiveness, and Financial Integrity of the Markets
    The proposed addition of Sec.  37.9(e) may improve the efficiency 
and financial integrity of markets by enabling counterparties to 
correct operational or clerical errors in a swap transaction. In 
particular, the proposed rules would help promote greater trading 
accuracy in the market by allowing counterparties to ultimately carry 
out transactions as originally intended, and would avoid unexpected 
trading losses caused by error trades. The proposed requirement under 
Sec.  37.9(e)(2)(i) that market participants provide prompt notice to a 
SEF of an error trade and, as applicable, the correcting trade and 
offsetting trade would enhance a SEF's ability to carry out its market 
oversight and monitoring responsibilities which helps promote the 
financial integrity of its markets. The Commission believes that the 
absence of the no-action provision that SEFs must affirmatively 
determine that an error trade has occurred could enhance the efficiency 
of the error trade resolution process and would not materially impact 
the competitiveness or financial integrity of the swap market on SEFs.
    Absent these proposed rules, counterparties would be required in 
certain circumstances to correct or re-execute swap transactions in a 
less efficient and effective manner on a SEF, such as through the 
required methods of execution under Sec.  37.9(a). The proposed rules, 
which also require SEFs to adopt certain policies and procedures for 
addressing error trades, should further promote efficiency in the 
resolution process by providing market participants that transact on 
multiple SEFs with a more consistent approach across different 
platforms for correcting error trades.
c. Price Discovery
    The proposed addition of Sec.  37.9(e) regarding error trades would 
enable

[[Page 9425]]

SEFs to correct error trades containing a clerical or operational error 
while maintaining the price discovery benefits associated with the pre-
trade transparency requirements of Sec.  37.9. In particular, the 
proposed rules would help promote price discovery by allowing 
counterparties, whose original trade has been cancelled upon rejection 
from clearing due to a clerical or operational error, to re-execute the 
trade with the terms as originally intended. For error trades that have 
been accepted by a registered DCO or exempt DCO for clearing, the 
proposed rules promote greater accuracy in the price discovery process 
by allowing the counterparties to correct the error trade by executing 
an offsetting swap transaction and a subsequent swap transaction with 
the terms as originally intended.
d. Sound Risk Management Practices
    The proposed addition of Sec.  37.9(e) regarding error trades may 
promote sound risk management practices by providing SEFs with greater 
authority under Commission regulations to facilitate error trade 
resolution. The proposed rules will help to mitigate potential losses 
to market participants arising out of trade cancellations, where the 
error trade is rejected from clearing, or arising from maintaining the 
position of an unintended error trade.
e. Other Public Interest Considerations
    The Commission has not identified any effect of proposed Sec.  
37.9(e) on other public interest considerations.

Request for Comment

    The Commission invites public comment on all aspects of its cost 
benefit considerations related to the proposed amendments regarding 
SEFs' error trade policies, including the discussion of the section 
15(a) factors. Comments made on the 2018 SEF Proposal that are relevant 
to this rulemaking should be resubmitted to be considered. Commenters 
are requested to provide data and any other information or statistics 
to support their position. In particular, to the extent commenters 
believe that the costs or benefits of any aspect of the proposed rules 
are reasonably quantifiable, the Commission requests that they provide 
data and any other information or statistics to assist the Commission 
in quantification.
    The Commission requests comment on the impact of the proposed rule 
on market participants who may need to adjust their error trade rules 
and policies to comply with SEFs' error trade rules implemented to 
comply with proposed Sec.  37.9(e). The Commission also requests 
comment on any alternatives that commenters believe present a superior 
cost-benefit profile to the proposed amendments.
4. Block Trades
    The Commission proposes amendments to the definition of block 
trade, set forth in Sec.  43.2, to allow SEFs to permit market 
participants to execute swap block trades using a SEF's trading system 
or platform, with the exception of the Order Book.\111\ Market 
participants could continue to execute a block trade away from the 
SEF's trading system or platform, but pursuant to the SEF's rules.\112\ 
This rule is similar to existing relief set out in NAL No. 17-60, but 
the proposed rule would apply to uncleared swaps as well ITBC swaps, 
while the existing no-action relief only applies to ITBC swaps.
---------------------------------------------------------------------------

    \111\ The Commission notes that a swap transaction with a 
notional size above the appropriate minimum block trade size could 
still be executed on an Order Book, but would not qualify as a block 
trade, and therefore, would not receive a time delay from public 
dissemination requirements set forth in Sec.  43.5(d).
    \112\ The Commission notes that Sec.  43.6(g)(1)--required 
notification of block trade election--would still apply to block 
trade transactions executed on the SEF via the SEF's non-Order Book 
trading systems and platforms. For example, pursuant to Sec.  
43.6(g)(1)(i), SEFs would need to implement a mechanism by which the 
counterparties notify the SEF of the counterparties' intention to 
have an on-SEF executed block trade treated as a block trade for 
reporting purposes. Additionally, pursuant to Sec.  43.6(i)(2), a 
person transacting a cleared swap block trade on behalf of a 
customer would still need to receive prior written instruction or 
consent from the customer to transact the trade as a cleared swap 
block trade on the SEF. See 17 CFR 43.6(i)(2).
---------------------------------------------------------------------------

    Benefits: The Commission believes that permitting swap block trades 
to be executed on SEFs pursuant to Commission regulation would provide 
tangible benefits to market participants by allowing them to further 
utilize a SEF's trading systems and platforms with the exception of the 
Order Book. To the extent that a SEF provides the most operationally- 
and cost-efficient method of executing swap block trades, the proposed 
amendment would help market participants to continue realizing such 
benefits. Additionally, allowing market participants to execute swap 
block trades on a SEF helps to facilitate the pre-execution screening 
of transactions against risk-based limits in an efficient manner 
through SEF-based mechanisms. The Commission also recognizes that many 
SEFs and market participants have already expended resources to 
implement technological and operational changes needed to avail 
themselves of the no-action relief under NAL No. 17-60. The proposed 
amendments would preclude the need to expend additional resources to 
negate those changes. Further, incorporating the current no-action 
relief in the Commission's regulations would promote the statutory goal 
in CEA section 5h(e) of promoting swaps trading on SEFs. Finally, the 
proposed amendment would permit SEFs to extend the benefits of executed 
swap block trades on-SEF to uncleared swaps as well as ITBC swaps.
    Costs: The Commission notes that the majority of SEFs have 
implemented the existing no-action relief. To the extent that SEFs have 
implemented such relief, they may incur modest costs in adjusting their 
rulebooks to, for example, include uncleared swaps in their block 
trading provisions. Any SEF that has not implemented the existing no-
action relief but wishes to implement block trading rules consistent 
with the proposed amendment will incur somewhat higher, but still 
modest costs.

Section 15(a) Factors

a. Protection of Market Participants and the Public
    The proposed amendment to the definition of a swap block trade in 
Sec.  43.2, which would allow for both ITBC and non-ITBC swap block 
trades to be executed on a SEF's non-Order Book trading system or 
platform will provide more options to market participants for executing 
swap block trades without impeding the protection of market 
participants and the public provided under existing Commission 
regulations.
b. Efficiency, Competitiveness, and Financial Integrity of the Markets
    The proposed amendment to the definition of block trade under Sec.  
43.2 to allow cleared and uncleared swap block trades to be executed on 
a SEF's non-Order Book trading system or platform may improve the 
efficiency and financial integrity of the swaps markets. The proposed 
amendments would provide market participants with the ability to 
execute block trades either on a SEF or away from, but pursuant to the 
rules of, a SEF. From an efficiency perspective, such choice should 
allow participants to choose the most operationally efficient and cost-
efficient method of executing block trades. With respect to the 
financial integrity of the swaps market, this proposed amendment would 
also facilitate the use of pre-trade credit screening functionalities 
or protocols offered by the SEF to fulfill its obligations under SEF 
Core Principle 7--Financial Integrity of Transactions.\113\
---------------------------------------------------------------------------

    \113\ 17 CFR 37.700.

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

[[Page 9426]]

c. Price Discovery
    The Commission is not aware of significant effects on the price 
discovery process of the proposed amendment to the definition of block 
trade under Sec.  43.2 to allow block trades to be executed on a SEF's 
non-Order Book trading system or platform. The Commission notes that 
block trades are currently not subject to the execution methods for 
required transactions under Sec.  37.9, which are intended to promote 
pre-trade price transparency pursuant to section 5h of the CEA.\114\ 
Based on the previous recognition that market participants are likely 
to execute large-sized trades, i.e., block trades, in a manner that 
would mitigate pre-trade information leakage concerns, the Commission 
does not anticipate that the proposed amendment would diminish the 
price discovery process for block trades executed on a SEF.
---------------------------------------------------------------------------

    \114\ The Commission stated its belief in the part 37 final rule 
release that an order book, as defined in Sec.  37.3(a)(3), and the 
RFQ System, as defined in Sec.  37.9(a)(3), are intended to promote 
the goals articulated in section 733 of the Dodd-Frank Act, which 
include promoting pre-trade price transparency. 78 FR 33484, 33497.
---------------------------------------------------------------------------

d. Sound Risk Management Practices
    The proposed amendment to allow block trades to occur on the SEF 
(but not on the SEF's order book) may promote sound risk management 
practices by providing more options for the execution of block trades. 
In this regard, the Commission notes that block trading can facilitate 
risk management by providing a means for commercial firms to transact 
large orders without the need for significant price concessions and 
resulting price uncertainty for parties to the transaction that would 
occur if transacted on the centralized market.
e. Other Public Interest Considerations
    The proposed amendments should help promote SEF trading and pre-
trade price transparency, i.e., the statutory goals set forth under 
section 5h(f)(2) of the CEA with respect to SEFs.\115\
---------------------------------------------------------------------------

    \115\ 7 U.S.C. 7b-3(e).
---------------------------------------------------------------------------

Request for Comment

    The Commission requests comment on the costs and benefits of all 
aspects of the proposed amendments to permit block trades to be 
executed on a SEF, including the discussion of the section 15(a) 
factors. Comments made on the 2018 SEF Proposal that are relevant to 
this rulemaking should be resubmitted to be considered. The Commission 
requests comment on the alternatives discussed above as well as any 
other alternatives that commenters believe present a superior cost-
benefit profile to the proposed amendments. Commenters are requested to 
provide data and any other information or statistics to support their 
position. In particular, to the extent commenters believe that the 
costs or benefits of any aspect of the proposed rules are reasonably 
quantifiable, the Commission requests that they provide data and any 
other information or statistics to assist the Commission in 
quantification.

D. Antitrust Considerations

    Section 15(b) of the CEA 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 
objectives of the CEA, in issuing any order or adopting any Commission 
rule or regulation. The Commission does not anticipate that the 
proposed amendments to parts 36, 37, and 43 would promote or result in 
anti-competitive consequences or behavior. However, the Commission 
encourages comments from the public with respect to any aspect of the 
proposal that maybe perceived as potentially inconsistent with the 
antitrust laws or anti-competitive in nature.

List of Subjects

17 CFR Part 36

    Package transactions, Trade execution requirement.

17 CFR Part 37

    Block trades, Error trades, Package transactions, Required methods 
of execution, Swap execution facilities, Swaps, Trade execution 
requirement.

17 CFR Part 43

    Block trades, Large notional off-facility swaps, Real-time public 
reporting, Reporting and recordkeeping requirements.
    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR chapter I as follows:

0
1. Revise part 36 to read as follows:

PART 36--TRADE EXECUTION REQUIREMENT

Sec.
36.1 Exemptions to trade execution requirement.

    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, Pub. L. 111-203, 124 Stat. 1376 
(2010).


Sec.  36.1  Exemptions to trade execution requirement.

    (a) A swap transaction that is executed as a component of a package 
transaction that also includes a component transaction that is the 
issuance of a bond in a primary market is exempt from the trade 
execution requirement in section 2(h)(8) of the Act.
    (1) For purposes of paragraph (a) of this section, a package 
transaction consists of two or more component transactions executed 
between two or more counterparties where:
    (i) At least one component transaction is subject to the trade 
execution requirement in section 2(h)(8) of the Act;
    (ii) Execution of each component transaction is contingent upon the 
execution of all other component transactions; and
    (iii) The component transactions are priced or quoted together as 
one economic transaction with simultaneous or near-simultaneous 
execution of all components.
    (2) [Reserved]
    (b) [Reserved]

PART 37--SWAP EXECUTION FACILITIES

0
2. The authority citation for part 37 continues to read as follows:

    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, Pub. L. 111-203, 124 Stat. 1376.

0
3. In Sec.  37.3, add paragraph (a)(4) to read as follows:


Sec.  37.3  Requirements and procedures for registration.

    (a) * * *
    (4) A swap execution facility is not required to provide an order 
book under this section for transactions defined in Sec.  37.9(d)(2), 
(3), and (4), except that a swap execution facility must provide an 
order book under this section for Required Transactions that are 
components of transactions defined in Sec.  37.9(d)(2), (3), and (4) 
when such Required Transactions are not executed as components of 
transactions defined in Sec.  37.9(d)(2), (3), and (4).
* * * * *
0
4. In Sec.  37.9, revise paragraph (a)(2)(i) introductory text and add 
paragraphs (d) and (e) to read as follows:


Sec.  37.9  Methods of execution for required and permitted 
transactions.

    (a) * * *
    (2) * * *
    (i) Each Required Transaction that is not a block trade as defined 
in Sec.  43.2 of

[[Page 9427]]

this chapter shall be executed on a swap execution facility in 
accordance with one of the following methods of execution except as 
provided in paragraph (d) or (e) of this section:
* * * * *
    (d) Exceptions to required methods of execution for package 
transactions. (1) For purposes of this paragraph, a package transaction 
consists of two or more component transactions executed between two or 
more counterparties where:
    (i) At least one component transaction is a Required Transaction;
    (ii) Execution of each component transaction is contingent upon the 
execution of all other component transactions; and
    (iii) The component transactions are priced or quoted together as 
one economic transaction with simultaneous or near-simultaneous 
execution of all components.
    (2) A Required Transaction that is executed as a component of a 
package transaction that includes a component swap that is subject 
exclusively to the Commission's jurisdiction, but is not subject to the 
clearing requirement under section 2(h)(1)(A) of the Act, may be 
executed on a swap execution facility in accordance with paragraph 
(c)(2) of this section as if it were a Permitted Transaction;
    (3) A Required Transaction that is executed as a component of a 
package transaction that includes a component that is not a swap, as 
defined under section 1a(47) of the Act, may be executed on a swap 
execution facility in accordance with paragraph (c)(2) of this section 
as if it were a Permitted Transaction. This provision shall not apply 
to:
    (i) A Required Transaction that is executed as a component of a 
package transaction in which all other non-swap components are U.S. 
Treasury securities;
    (ii) A Required Transaction that is executed as a component of a 
package transaction in which all other non-swap components are 
contracts for the purchase or sale of a commodity for future delivery;
    (iii) A Required Transaction that is executed as a component of a 
package transaction in which all other non-swap components are agency 
mortgage-backed securities; and
    (iv) A Required 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.
    (4) A Required Transaction that is executed as a component of a 
package transaction that includes a component swap that is not 
exclusively subject to the Commission's jurisdiction may be executed on 
a swap execution facility in accordance with paragraph (c)(2) of this 
section as if it were a Permitted Transaction.
    (e) Resolution of operational and clerical error trades. (1) As 
used in this paragraph:
    (i) Correcting trade means a trade executed and submitted for 
clearing to a registered derivatives clearing organization, or a 
derivatives clearing organization that the Commission has determined is 
exempt from registration, with the same terms and conditions as an 
error trade other than any corrections to any operational or clerical 
error and the time of execution.
    (ii) Error trade means any trade executed on or subject to the 
rules of a swap execution facility that contains an operational or 
clerical error.
    (iii) Offsetting trade means a trade executed and submitted for 
clearing to a registered derivatives clearing organization, or a 
derivatives clearing organization that the Commission has determined is 
exempt from registration, with terms and conditions that economically 
reverse an error trade that was accepted for clearing.
    (2) Execution of correcting trades and offsetting trades. (i) A 
swap execution facility shall maintain rules and procedures that 
facilitate the resolution of error trades. Such rules shall be fair, 
transparent, and consistent; allow for timely resolution; require 
market participants to provide prompt notice of an error trade--and, as 
applicable, offsetting and correcting trades--to the swap execution 
facility; and permit market participants to:
    (A) Execute a correcting trade, in accordance with paragraph (c)(2) 
of this section, regardless of whether it is a Required or Permitted 
Transaction, for an error trade that has been rejected from clearing as 
soon as technologically practicable, but no later than one hour after a 
registered derivatives clearing organization, or a derivatives clearing 
organization that the Commission has determined is exempt from 
registration, provides notice of the rejection; or
    (B) Execute an offsetting trade and a correcting trade, in 
accordance with paragraph (c)(2) of this section, regardless of whether 
it is a Required or Permitted Transaction, for an error trade that was 
accepted for clearing as soon as technologically practicable, but no 
later than three days after the error trade was accepted for clearing 
at a derivatives clearing organization or a derivatives clearing 
organization that the Commission has determined is exempt from 
registration.
    (ii) If a correcting trade is rejected from clearing, then a swap 
execution facility shall not allow the counterparties to execute 
another correcting trade.

PART 43--REAL-TIME PUBLIC REPORTING

0
5. 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
6. 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, 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 trading system or platform of a registered 
swap execution facility that is not an order book as defined in Sec.  
37.3(a)(3) of this chapter, or occurs away from a registered swap 
execution facility's or designated contract market's trading system or 
platform and is executed pursuant to the registered swap execution 
facility's or designated contract market's rules and procedures;

[[Page 9428]]

    (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 means 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 this section.
    Major currencies means 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 means 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 means the currencies of the European 
Monetary Union, Japan, the United Kingdom, and United States.
    Swaps with composite reference prices means 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 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.

[[Page 9429]]

    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.
    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 February 6, 2020, 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 Facility Requirements and Real-Time 
Reporting Requirements--Commission Voting Summary and Commissioners' 
Statements

Appendix 1--Commission Voting Summary

    On this matter, Chairman Tarbert and Commissioners Quintenz, 
Behnam, Stump, and Berkovitz voted in the affirmative. No 
Commissioner voted in the negative.

Appendix 2--Statement of Support of Commissioner Brian D. Quintenz

    I support today's proposal that seeks to resolve through 
rulemaking three issues currently addressed in staff no-action 
letters. I believe this proposal is an important first step to 
provide market participants with much needed regulatory certainty 
while also promoting swap execution facility (SEF) participation, 
though regulatory certainty over additional current market practices 
is necessary as well.
    Staff initially granted these requests for relief in 2013 and 
2014, as SEFs were first coming into compliance with the 
Commission's then-new SEF regulatory framework. With the benefit of 
six-plus years of implementation experience, and multiple extensions 
of each of these no-action letters, it is long overdue for the 
Commission to codify and clarify its policy on each of these 
important issues.
    First, the proposal would amend part 37 regulations to permit 
the swap components of certain categories of package transactions to 
be executed on-SEF through flexible means of execution, rather than 
via the required methods of execution under Rule 37.9.\1\ In 
addition, the proposal would also include an exemption from the 
trade execution requirement for swap transactions that are executed 
as a component of a new issuance bond package transaction. These 
amendments recognize the need to provide flexible means of execution 
for swaps that are negotiated and executed concurrently with other 
components of a larger, integrated transaction.
---------------------------------------------------------------------------

    \1\ These amendments address the relief currently provided by 
CFTC No-Action Letter 17-55 (Oct. 31, 2017).
---------------------------------------------------------------------------

    Second, the proposal adopts a principles-based approach 
regarding SEF policies to correct operational or clerical errors.\2\ 
The proposal directs SEFs to adopt fair, transparent, and consistent 
policies and procedures that allow for the timely resolution of 
error trades. SEFs would be permitted to allow market participants 
to execute offsetting or correcting trades through any method of 
execution offered by the SEF. I believe these amendments will 
facilitate the prompt identification and correction of error trades, 
thereby minimizing market participants' exposure to market, credit, 
and operational risks.
---------------------------------------------------------------------------

    \2\ These amendments address the relief currently provided by 
CFTC No-Action Letters 17-27 (May 30, 2017) and 20-01 (Jan. 8, 
2020).
---------------------------------------------------------------------------

    Thirdly, the proposal recognizes the difficulties associated 
with performing a pre-trade execution credit check on block trades 
occurring away from a SEF's trading system or platforms.\3\ 
Accordingly, it would permit block trades to be executed on a 
trading system of the SEF that is not an order book, thereby 
allowing FCMs to conduct pre-execution credit screenings. The 
proposal also continues to allow block trades to be executed away 
from the SEF.
---------------------------------------------------------------------------

    \3\ These amendments address the relief currently provided by 
CFTC No-Action Letter 17-60 (Nov. 14, 2017).
---------------------------------------------------------------------------

    This proposal should in no way preclude the Commission from 
considering additional SEF no-action letters and policy issues 
through rulemaking. For example, codifying the current no-action 
letter providing relief from the trade execution requirement for 
inter-affiliate swaps, or providing greater clarity about 
permissible methods of execution and minimum SEF trading 
functionality are prime examples. In order to truly foster and 
promote market liquidity, transparency, innovation, and competition 
in the SEF marketplace, I believe these outstanding issues should be 
addressed. I will support today's proposal but remain hopeful that 
these and other important areas can be addressed through rulemaking 
in the near future.

Appendix 3--Statement of Concurrence of Commissioner Rostin Behnam

    I respectfully concur in the Commission's proposal to amend 
certain swap execution facility (SEF) requirements and real-time 
reporting requirements. A little more than a year ago, the 
Commission issued a proposal that would have constituted a complete 
overhaul of the existing regulatory framework for SEFs.\1\ As I 
stated in my concurrence to the 2018 SEF proposal, I do not believe 
that such an overhaul is necessary.\2\ However, despite my 
opposition to the overhaul, I supported issuing the SEF proposal for 
public comment because it contained several policy changes which 
separately warranted further consideration. Market participants have 
spent a great deal of resources to build systems and businesses that 
comply with our existing SEF rules. Fundamental changes amounting to 
an overhaul of the entire system should only be done in 
circumstances where there is a regulatory concern that necessitates 
action.\3\ Accordingly, in the past I have suggested we should focus 
on targeted reforms, such as codifying existing no-action relief for 
SEFs.\4\ I warned that we should not allow issues with the broader 
vision of the 2018 SEF proposal to distract us from making targeted 
changes.\5\
---------------------------------------------------------------------------

    \1\ Swap Execution Facilities and Trade Execution Requirement, 
83 FR 61946 (proposed Nov. 30, 2018).
    \2\ Rostin Behnam, Statement of Concurrence of Commissioner 
Rostin Behnam Regarding Swap Execution Facilities and Trade 
Execution Requirement (Nov. 5, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement110518a.
    \3\ Rostin Behnam, Sowing the Seeds of Success in 2020, Remarks 
of CFTC Commissioner Rostin Behnam at the 2019 ISDA Annual General 
Meeting, Grand Hyatt Hong Kong, Hong Kong (Apr. 9, 2019), https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam13.
    \4\ Id.
    \5\ Id.
---------------------------------------------------------------------------

    Today, the Commission proposes to limit changes to our existing 
SEF rules, specifically focusing on the codification of long-
standing no-action relief regarding package transactions, error 
trades, and block trades. While I support today's proposal, I do 
have some concerns where I think we deviate from the path of 
targeted codification. The provisions in today's proposal regarding 
package transactions and block trades basically mirror the existing 
no-action relief.\6\ However, the proposal regarding error trades 
does not.\7\
---------------------------------------------------------------------------

    \6\ See CFTC No-Action 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); CFTC No-Action 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).
    \7\ See CFTC No-Action 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); CFTC No-Action Letter No. 20-01 (``NAL No. 20-01''), Re: 
Supplemental 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 (Jan. 8, 2020).
---------------------------------------------------------------------------

    DMO currently provides no-action relief from the required 
methods of execution under Sec.  37.9 for trades intended to resolve 
error trades.\8\ The existing relief provides a number of 
conditions, including a requirement that a SEF determine (either 
prior to execution or within 24 hours after) that an error has 
occurred. Among other things, the no-action relief requires that a 
SEF have error trade rules that account for whether a transaction 
cancellation or price adjustment will adversely impact market 
integrity or facilitate market manipulation or other illegitimate 
activity.\9\ None of these

[[Page 9430]]

conditions appear in the error trade rules proposed today, and under 
the proposal SEFs will no longer have any obligation to determine 
whether a trade is an error trade--the determination can instead be 
left entirely to the parties to the trade. I look forward to 
comments regarding whether this ``principles-based'' approach goes 
too far and fails to give market participants sufficient clarity 
regarding error trades.
---------------------------------------------------------------------------

    \8\ NAL 17-27.
    \9\ Id.
---------------------------------------------------------------------------

    I support targeted, thoughtful reform of our SEF regulations, 
and I particularly applaud staff's efforts to provide market 
participants with greater legal certainty through the codification 
of our existing no-action relief. I look forward to the comments.

Appendix 4--Statement of Commissioner Dan M. Berkovitz

    I am voting in favor of today's proposed rule that would amend 
certain Commission rules in parts 36, 37, and 43 relating to package 
transactions, block trades, and error transactions on swap execution 
facilities (``SEFs'') (``Proposal''). Today's amendments largely 
codify longstanding no-action letters for limited categories of 
swaps transactions regarding the required methods of execution. 
Generally, I support the codification of no-action letters where, 
based on experience, doing so is consistent with our statutory 
mandate, protects customers, provides market participants with a 
greater level of certainty, and promotes market integrity.

Package Transactions

    This Proposal would amend part 37 to allow the swap components 
of certain package transactions--including those that are illiquid 
and bespoke and therefore not suitable for trading on-SEF--to be 
executed on-SEF but through flexible methods of execution. In 
addition, the Proposal amends part 36 to exempt from the trade 
execution requirement a swap in a package transaction involving a 
bond sold in the primary market (``new issuance bond transaction''), 
which also is not conducive to trading on-SEF.
    Beginning in 2014, the Commission issued a series of no-action 
letters specifying permissible methods of execution for certain 
package transactions, which have enabled market participants and the 
agency to apply the trading mandate to these transactions in a 
phased manner. As the market infrastructure for the trading and 
clearing of swaps has improved, the trading mandate has been applied 
to the packages involving more liquid and standardized swap 
components.\1\ The remaining package transactions that would be 
covered by today's Proposal represent a small percentage of swaps 
trading on the most active SEFs.
---------------------------------------------------------------------------

    \1\ For example, U.S. Dollar Spreadover package transactions 
account for nearly seventy percent of interest rate swaps trading in 
the inter-dealer swap market. No-action letters for these package 
transactions have expired and market participants now actively trade 
the swap component of these packages through required methods of 
trading. See Proposed Rule, Sect. II.A.1 and n.33.
---------------------------------------------------------------------------

    I encourage the industry to continue to develop systems that 
allow for increased execution of package trade swap components on-
SEF. I also appreciate the Staff's commitment, if this rule is 
finalized, to continue to evaluate the categories of package 
transactions subject to the rule and revise the rule as necessary in 
the future to reflect developments in trading methodologies.

Error Trades

    The Proposal also would amend part 37 to enable SEFs to permit 
market participants to use flexible methods of execution to correct 
error trades, and would require a SEF to establish error trade 
policies that largely track the conditions set forth in prior no-
action letters. Notably, the Proposal would require market 
participants to provide prompt notice of an error trade to the SEF, 
enabling the SEF to fulfill its self-regulatory obligations. It 
would not alter the requirement that SEFs must adopt rules declaring 
that trades rejected from clearing are deemed void ab initio. The 
Proposal also includes the requirement under CFTC No-Action Letter 
No. 17-27 that after submitting one error trade, market participants 
will not be able to submit a second new trade with the original 
terms. These conditions facilitate a SEF's direct supervision of its 
markets, protect against abuse, and promote fair competition.

Block Trades

    The Proposal would revise the definition of ``block trade'' in 
Commission Regulation 43.2 to permit SEFs to offer non-Order Book 
methods of execution for market participants to execute swap block 
trades on-SEF. Like package transactions, block trades encompassed 
within the Proposal are a small percentage of the number of swaps 
traded. A significant benefit of this Proposal is that it would 
facilitate pre-trade credit checks by SEFs for block trades, in 
accordance with the SEF core principles.
    It is my preliminary view that this Proposal would provide 
certainty to market participants and increase trading efficiencies, 
while not compromising the Congressional goal of moving standardized 
OTC derivative contracts to exchanges or electronic trading 
platforms. I look forward to public comments on the anticipated 
effects of these amendments, and I thank the staff of the Division 
of Market Oversight for their work on this Proposal.

[FR Doc. 2020-02721 Filed 2-18-20; 8:45 am]
BILLING CODE 6351-01-P