[Federal Register Volume 86, Number 27 (Thursday, February 11, 2021)]
[Rules and Regulations]
[Pages 8993-9003]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28943]



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 Rules and Regulations
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 This section of the FEDERAL REGISTER contains regulatory documents 
 having general applicability and legal effect, most of which are keyed 
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  Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / 
Rules and Regulations  

[[Page 8993]]



COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 36

RIN 3038-AE25


Exemptions From Swap Trade Execution Requirement

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is adopting a final rule (``Final Rule'') that establishes 
two exemptions from the statutory requirement to execute certain types 
of swaps on a swap execution facility (``SEF'') or a designated 
contract market (``DCM'') (this requirement, the ``trade execution 
requirement'').

DATES: The Final Rule is effective on March 15, 2021.

FOR FURTHER INFORMATION CONTACT: Roger Smith, Associate Chief Counsel, 
Division of Market Oversight, (202) 418-5344, [email protected], 
Commodity Futures Trading Commission, 525 West Monroe Street, Suite 
1100, Chicago, IL 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 and Introduction
    A. Statutory and Regulatory History
    B. Summary of the Final Rule
II. Part 36--Trade Execution Exemptions Linked to Swap Clearing 
Requirement Exceptions and Exemptions
    A. Background and Proposed Rule
    B. Trade Execution Requirement Exemption for Swaps Eligible for 
a Clearing Requirement Exception or Exemption Under Part 50
    1. Summary of Comments
    2. Final Rule: CEA Section 4(c) Authority and Standards
    C. Trade Execution Exemption for Swaps Between Eligible 
Affiliate Counterparties
    1. Proposed Rule
    2. Summary of Comments
    3. Final Rule: CEA Section 4(c) Authority and Standard
III. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost-Benefit Considerations
    1. Introduction
    D. Antitrust Considerations

I. Background and Introduction

A. Statutory and Regulatory History

    Title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act \1\ amended the Commodity Exchange Act (``CEA'' or 
``Act'') \2\ to establish a comprehensive new swaps regulatory 
framework that addresses, inter alia, the trading of swaps and the 
registration and oversight of SEFs.\3\ CEA section 2(h)(8) provides 
that swap transactions that are subject to the swap clearing 
requirement under CEA section 2(h)(1)(A) \4\ must be executed on a DCM, 
a registered SEF, or a SEF that is exempt from registration pursuant to 
CEA section 5h(g) (``Exempt SEF''),\5\ unless (i) no DCM or SEF \6\ 
``makes the swap available to trade'' or (ii) the related transaction 
is subject to the exception from the swap clearing requirement under 
CEA section 2(h)(7). The swap clearing requirement exception under CEA 
section 2(h)(7) applies to non-financial entities that are using swaps 
to hedge or mitigate commercial risk and notify the Commission how they 
generally meet their financial obligations related to uncleared swaps, 
and has been implemented under Commission regulation 50.50.\7\
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    \1\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, tit. VII, 124 Stat. 1376 (2010) (codified as 
amended in various sections of 7 U.S.C.), https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/file/2013-12242a.pdf (``Dodd-Frank Act'').
    \2\ 7 U.S.C. 1 et seq.
    \3\ 7 U.S.C. 2(h)(8), 7b-3. As amended, CEA section 1a(50) 
defines a SEF as a trading system or platform that allows multiple 
participants to execute or trade swaps with multiple participants 
through any means of interstate commerce.'' 7 U.S.C. 1a(50). CEA 
section 5h(a)(1) requires an entity to register as a SEF or a DCM 
prior to operating a facility for the trading or processing of 
swaps. 7 U.S.C. 7b-3(a)(1). CEA section 5h(f) requires registered 
SEFs to comply with fifteen core principles. 7 U.S.C. 7b-3(f).
    \4\ Section 723(a)(3) of the Dodd-Frank Act added a new CEA 
section 2(h) to establish the clearing requirement for swaps. 7 
U.S.C. 2(h). CEA section 2(h)(1)(A) provides that it is unlawful for 
any person to engage in a swap unless that person submits such swap 
for clearing to a derivatives clearing organization that is 
registered under the Act or a derivatives clearing organization that 
is exempt from registration under the Act if the swap is required to 
be cleared. 7 U.S.C. 2(h)(1)(A). CEA section 2(h)(2) specifies the 
process for the Commission to review and determine whether a swap, 
or a group, category, type or class of swap should be subject to the 
clearing requirement. 7 U.S.C. 2(h)(2). The Commission further 
implemented the clearing requirement determination process under 
regulation 39.5 and part 50. Part 50 specifies the interest rate and 
credit default swaps that are currently subject to the Commission's 
clearing requirement. 17 CFR part 50.
    \5\ The Commission notes that CEA section 2(h)(8)(A)(ii) 
contains a typographical error that specifies CEA section 5h(f), 
rather than CEA section 5h(g), as the provision that allows the 
Commission to exempt a SEF from registration. Where appropriate, the 
Commission corrects this reference in the discussion herein.
    \6\ CEA sections 2(h)(8)(A)(i)-(ii) provide that with respect to 
transactions involving swaps subject to the clearing requirement, 
counterparties shall execute the transaction on a board of trade 
designated as a contract market under section 5; or execute the 
transaction on a swap execution facility registered under 5h or a 
swap execution facility that is exempt from registration under 
section 5h(g) of the Act. Given this reference in CEA section 
2(h)(8)(A)(ii), the Commission accordingly interprets ``swap 
execution facility'' in CEA section 2(h)(8)(B) to include a swap 
execution facility that is exempt from registration pursuant to CEA 
section 5h(g).
    \7\ This regulation codifies the statutory exception to the swap 
clearing requirement set forth in 7 U.S.C. 2(h)(7)(A). See infra 
notes 19-20 and accompanying text. Recently, the Commission 
renumbered Commission regulation 50.50(d) as a new numbered section 
and heading, namely, Commission regulation 50.53. A stand-alone 
exemption from the clearing requirement for certain banks, savings 
associations, farm credit system institutions, and credit unions 
separated this exemption from the non-financial entities' exception 
provided for under CEA section 2(h)(7) and codified in regulation 
50.50(a)-(c). See Swap Clearing Requirement Exemptions, 85 FR 76428 
(Nov. 30, 2020).
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    In 2013, pursuant to its discretionary rulemaking authority in CEA 
sections 5h(f)(1) and 8a(5), the Commission issued an initial set of 
rules implementing this statutory framework for swap trading and the 
registration and oversight of SEFs (``2013 SEF Rules'').\8\
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    \8\ Core Principles and Other Requirements for Swap Execution 
Facilities, 78 FR 33476 (Jun. 4, 2013) (``SEF Core Principles Final 
Rule''); Process for a Designated Contract Market or Swap Execution 
Facility to Make a Swap Available to Trade, Swap Transaction 
Compliance and Implementation Schedule, and Trade Execution 
Requirement Under the Commodity Exchange Act, 78 FR 33606 (Jun. 4, 
2013) (``MAT Final Rule'').
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    In November 2018, the Commission issued a proposed rule (``Proposed

[[Page 8994]]

Rule''), again under CEA sections 5h(f)(1) and 8a(5), that set forth 
comprehensive structural reforms to the SEF regulatory regime.\9\ For 
example, the Proposed Rule would have removed existing limitations on 
swap execution methods on SEFs,\10\ while expanding the categories of 
swaps that are subject to the trade execution requirement as well as 
the types of entities that must register as SEFs. In addition to these 
broad reforms, the Proposed Rule also contained, among other things, 
more targeted regulatory proposals to codify exemptions from the trade 
execution requirement, including two such exemptions linked to 
exceptions to, or exemptions from, the swap clearing requirement.\11\
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    \9\ Swap Execution Facilities and Trade Execution Requirement, 
83 FR 61946 (Nov. 30, 2018).
    \10\ Under the CFTC's current regulations, swaps subject to the 
trade execution requirement must be executed via a central limit 
order book (``Order Book'') or a request for quote to no fewer than 
three unaffiliated market participants in conjunction with an Order 
Book (``RFQ''). 17 CFR 37.9(a).
    \11\ 83 FR at 62036-62040. The Proposed Rule also included a 
trade execution exemption for swap components of package 
transactions that includes both a swap that is otherwise subject to 
the trade execution requirement and a new bond issuance (``New 
Issuance Bonds package transactions''). The Commission in a separate 
proposal, that sought to codify the majority of relief currently 
provided to package transactions, also proposed an exemption from 
the trade execution requirement for swap components of New Issuance 
Bond package transactions. See Swap Execution Facility Requirements 
and Real-Time Reporting Requirements, 85 FR 9407 (Feb. 19, 2020). On 
November 18, 2020, the Commission adopted that exemption in a 
separate rulemaking, as Sec.  36.1(a) of its regulations. See Swap 
Execution Facility Requirements, 85 FR 82313 (Dec. 18, 2020).
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    Commenters provided limited and generally positive feedback 
regarding these two proposed exemptions from the trade execution 
requirement.\12\ By contrast, the Proposed Rule's broader market 
reforms elicited a number of public comments expressing concerns with 
the expansive scope of the changes and recommending that the Commission 
focus on more targeted improvements to the swap trading regulatory 
regime.\13\ In light of available resources and current priorities, the 
Commission agrees that it is appropriate to proceed with incremental 
improvements rather than a wholesale reform package at this time.\14\ 
Accordingly, this Final Rule addresses only the two proposed exemptions 
from the trade execution requirement linked to the swap clearing 
requirement's exemptions and exceptions under part 50, such as the end-
user exception under Commission regulation 50.50, the exemption for co-
operatives under Commission regulation 50.51, and the inter-affiliate 
exemption under Commission regulation 50.52.\15\ Additional targeted 
improvements to the swap trading regulatory framework have been and 
will continue to be made via discrete rulemakings.\16\
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    \12\ See Comment Letter from Japanese Bankers Association at 4 
(Mar. 13, 2019) (``JBA Letter''); Comment Letter from Citadel and 
Citadel Securities at 40-41 (Mar. 15, 2019) (``Citadel Letter''). As 
discussed below, Citadel recommended certain limitations on the 
applicability of these exemptions. While the Commission received 
numerous comments on the Proposed Rule, only the JBA Letter and 
Citadel Letter commented directly on the two proposed exemptions 
addressed in these Final Rules.
    \13\ See, e.g., Comment Letter from the Alternative Investment 
Management Association at 1-2 (Feb. 25, 2019) (urging the CFTC ``to 
approach any change to swap execution facilities and trade execution 
in a phased and targeted manner, rather than adopt a wholesale 
package of changes in a single rulemaking''); Comment Letter from 
Managed Funds Association at 2-3 (Mar. 15, 2019) (expressing concern 
with the breadth of the Proposed Rule and recommending targeted 
rather than comprehensive changes to the swap trading framework); 
Comment Letter from IATP at 3-4 (Mar. 15, 2019) (same); Comment 
Letter from Securities Industry and Financial Markets Association at 
1 (Mar. 15, 2019) (``SIFMA Letter'') (same); Comment Letter from 
SIFMA Asset Management Group at 1 (Mar. 15, 2019) (same); Comment 
Letter from Tradeweb Markets LLC at 1-2 (Mar. 14, 2019) (``Tradeweb 
Letter'') (same); Comment Letter from Wellington Management Company 
LLP at 1 (Mar. 15, 2019) (same); see also Comment Letter from 
Futures Industry Association at 7-9 (Mar. 15, 2019) (``FIA Letter'') 
(stating that proposed market reforms ``would present tall 
operational challenges and impose substantial costs on all market 
participants''); Comment Letter from Commodity Markets Council at 2 
(Mar. 15, 2019) (same).
    \14\ In addition, the Proposed Rule addressed a number of SEF 
operational challenges arising from incongruities between the 2013 
SEF Rules and existing technology and market practice. Proposed 
solutions to these operational challenges also received broad 
support from commenters. The Commission finalized certain of these 
proposals in a parallel rulemaking.
    \15\ See infra note 23.
    \16\ For example, the Commission recently codified staff no-
action relief related to block trades, error trades, and package 
transactions. See Real-Time Public Reporting Requirements, 85 FR 
75422 (Nov. 25, 2020) (codifying stat no-action relief related to 
block trades). The adopting release codifying staff no-action relief 
related to package transactions and error trades is available on the 
Commission's website at https://www.cftc.gov/media/5276/votingdraft111820b/download.
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B. Summary of the Final Rule

    The Final Rule establishes two exemptions from the trade execution 
requirement for swaps, both of which are linked to the Commission's 
exemptions from, and exceptions to, the swap clearing requirement. The 
first such trade execution requirement exemption applies to a swap that 
qualifies for, and meets the associated requirements of, any exception 
or exemption under part 50 of the Commission's regulations. The second 
codifies relief provided under CFTC Letter No. 17-67, and prior staff 
letters,\17\ and applies to a swap that is entered into by eligible 
affiliate counterparties and cleared, regardless of the affiliates' 
ability to claim the inter-affiliate clearing exemption under Sec.  
50.52 of the Commission's regulations.
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    \17\ CFTC Letter No. 17-67, Re: Extension of No-Action Relief 
from Commodity Exchange Act Section 2(h)(8) for Swaps Executed 
Between Certain Affiliated Entities that Are Not Exempt from 
Clearing Under Commission Regulation 50.52 (Dec. 14, 2017) (``NAL 
No. 17-67''); CFTC Letter No. 16-80, Re: Extension of No-Action 
Relief from Commodity Exchange Act Section 2(h)(8) for Swaps 
Executed Between Certain Affiliated Entities that Are Not Exempt 
from Clearing Under Commission Regulation 50.52 (Nov. 28, 2016); 
CFTC Letter No. 15-62, Re: Extension of No-Action Relief from 
Commodity Exchange Act Section 2(h)(8) for Swaps Executed Between 
Certain Affiliated Entities that Are Not Exempt from Clearing Under 
Commission Regulation 50.52 (Nov. 17, 2015); CFTC Letter No. 14-136, 
Re: Extension of No-Action Relief from Commodity Exchange Act 
Section 2(h)(8) for Swaps Executed Between Certain Affiliated 
Entities that Are Not Exempt from Clearing Under Commission 
Regulation 50.52 (Nov. 7, 2014); CFTC Letter No. 14-26, Time-Limited 
No-Action Relief from the Commodity Exchange Act Section 2(h)(8) for 
Swaps Executed Between Certain Affiliated Entities Not Electing 
Commission Regulation Sec.  50.52 (Mar. 6, 2014).
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II. Part 36--Trade Execution Exemptions Linked to Swap Clearing 
Requirement Exceptions and Exemptions

A. Background and Proposed Rule

    CEA section 2(h)(8) specifies that swap transactions that are 
excepted from the clearing requirement pursuant to CEA section 2(h)(7) 
are not subject to the trade execution requirement.\18\ CEA section 
2(h)(7)(C)(i), which is codified in Commission regulation 50.50, is 
known as the ``end-user exception'' and provides an exception from the 
swap clearing requirement if one of the counterparties to the 
transaction (i) is not a financial entity; (ii) is using the swap to 
hedge or mitigate commercial risk; and (iii) notifies the Commission as 
to how it generally meets its financial obligations associated with 
entering into uncleared swaps.\19\ The Commission adopted requirements 
under Sec.  50.50 to implement this exception.\20\ CEA section 
2(h)(7)(C)(ii) provided the Commission with the authority to consider 
whether to exempt from the definition of ``financial entity'' small 
banks, savings associations, farm credit system institutions and credit 
unions. The Commission exercised this authority at the same time it

[[Page 8995]]

promulgated the end-user exception final rule.\21\
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    \18\ 7 U.S.C. 2(h)(8)(B).
    \19\ 7 U.S.C. 2(h)(7).
    \20\ 17 CFR 50.50. Among other things, Sec.  50.50 establishes 
when a swap transaction is considered to hedge or mitigate 
commercial risk; specifies how to satisfy the reporting requirement; 
and exempts small financial institutions from the definition of 
``financial entity.'' 17 CFR 50.50.
    \21\ On May 12, 2020, the Commission proposed a non-substantive 
change to Sec.  50.50(d). The Commission proposed to move the 
exception from the clearing requirement for small banks, loan 
associations, farm credit system institutions, and credit unions 
under Sec.  50.50(d) to a stand-alone regulation, namely Sec.  
50.53. Swap Clearing Requirement Exemptions, 85 FR 27955, 27962-63 
(May 12, 2020). The Commission adopted this proposal on November 2, 
2020. See Swap Clearing Requirement Exemptions, 85 FR 76428 (Nov. 
30, 2020). Those regulations are now codified in Commission 
regulation 50.53.
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    In contrast to swaps that are eligible for the end-user exception, 
the Commission's regulations do not specifically exempt from the trade 
execution requirement swaps that are not subject to the swap clearing 
requirement based on other statutory authority provisions. Pursuant to 
its exemptive authority under CEA section 4(c), the Commission 
promulgated additional exemptions from the clearing requirement for 
swaps between certain types of entities. Commission regulation 50.51 
allows an ``exempt cooperative'' to elect a clearing exemption for 
swaps entered into in connection with loans to the cooperative's 
members.\22\ Commission regulation 50.52 provides a clearing exemption 
for swaps between eligible affiliate counterparties.\23\
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    \22\ 17 CFR 50.51. The exemption permits a qualifying exempt 
cooperative to elect not to clear swaps that are executed in 
connection with originating a loan or loans for the members of the 
cooperative, or hedging or mitigating commercial risk related to 
member loans or arising from swaps related to originating loans for 
members. 17 CFR 50.51(b)(1)-(2).
    \23\ 17 CFR 50.52. Counterparties have ``eligible affiliate 
counterparty'' status if: (i) One counterparty, directly or 
indirectly, holds a majority ownership interest in the other 
counterparty, and the counterparty that holds the majority interest 
in the other counterparty reports its financial statements on a 
consolidated basis under Generally Accepted Accounting Principles or 
International Financial Reporting Standards, and such consolidated 
financial statements include the financial results of the majority-
owned counterparty; or (ii) a third party, directly or indirectly, 
holds a majority ownership interest in both counterparties, and the 
third party reports its financial statements on a consolidated basis 
under Generally Accepted Accounting Principles or International 
Financial Reporting Standards, and such consolidated financial 
statements include the financial results of both of the swap 
counterparties. 17 CFR 50.52(a)(1)(i)-(ii). To elect the exemption, 
such counterparties must also meet additional conditions, including 
documentation requirements; centralized risk management 
requirements; reporting requirements; and a requirement to clear 
outward-facing swaps that are of a type identified in the 
Commission's clearing requirement (subject to applicable exceptions, 
exemptions, and alternative compliance frameworks). 17 CFR 50.52(b)-
(c).
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    At the time of the drafting of the Proposed Rule, the Commission 
was in the process of considering a proposal to codify certain 
exemptions from the clearing requirement.\24\ The Proposed Rule applied 
the Commission's section 4(c) exemptive authority to create an explicit 
exemption from the trade execution requirement for any future 
exceptions to, or exemptions from, the clearing requirement under part 
50.\25\
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    \24\ E.g., Swap Clearing Requirement Exemptions, 85 FR 27955 
(May 12, 2020) (proposing to exempt from the clearing requirement 
swaps entered into by central banks, sovereign entities, 
international financial institutions (``IFIs), bank holding 
companies, savings and loan holding companies, and community 
development financial institutions); Amendments to the Clearing 
Exemption for Swaps Entered into by Certain Bank Holding Companies, 
Savings and Loan Holding Companies, and Community Development 
Financial Institutions, 83 FR 44001 (Aug. 29, 2018). As noted above, 
the Commission adopted the May 12, 2020 proposal on November 2, 
2020. Swap Clearing Requirement Exemptions, 85 FR 76428 (Nov. 30, 
2020). See also Proposed Rule at 62038 (discussing the proposed 
exemption from the clearing requirement for swaps entered by 
eligible bank holding companies, savings and loan holding companies, 
and community development financial institutions).
    \25\ Proposed Rule at 62038.
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    Proposed Sec.  36.1(c) established an exemption to the trade 
execution requirement for swap transactions for which an exception or 
exemption has been elected pursuant to part 50. The Proposed Rule also 
indicated that the trade execution requirement would not apply to swap 
transactions for which a future exemption has been adopted by the 
Commission under part 50.
    Proposed Sec.  36.1(e) established a separate exemption from the 
trade execution requirement that may be elected by eligible affiliate 
counterparties to a swap submitted for clearing, notwithstanding the 
eligible affiliate counterparties' option to elect a clearing exemption 
pursuant to Sec.  50.52. Eligible affiliate counterparties may rely on 
this exemption from the trade execution requirement regardless of their 
decision not to elect the inter-affiliate clearing exemption and 
instead clear the swap.
    The Commission has determined that these two exemptions are 
consistent with the objectives of CEA section 4(c). The following 
sections address the exemptions in turn.

B. Trade Execution Requirement Exemption for Swaps Eligible for a 
Clearing Requirement Exception or Exemption Under Part 50

1. Summary of Comments
    The Commission received several comments on the proposed 
regulations to codify exemptions to the trade execution requirement for 
swaps that are not subject to the clearing requirement under part 50. 
JBA expressed support for the proposed exemption.\26\ Citadel also 
expressed support for the exemption for swap transactions that are 
currently subject to a clearing exception or exemption. However, 
Citadel stated that the Commission should not preemptively grant a 
trade execution requirement exemption for swaps falling under future 
clearing exceptions or exemptions, but rather should consider 
additional future trade execution requirement exemptions on a case-by-
case basis.\27\ In addition, Citadel recommended that participants be 
required to actually elect the clearing exemption in order to be 
eligible for the corresponding exemption from the trade execution 
requirement.
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    \26\ JBA Letter at 4.
    \27\ Citadel Letter at 40-41.
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    In addition to the proposed exemptions for swaps not subject to the 
clearing requirement, Blackrock, ISDA, SIFMA, and GFXD requested an 
exemption from the trade execution requirement that would apply in 
instances where a SEF outage or system disruption or limited hours of 
operation prevent participants from complying with the requirement.\28\ 
Some commenters also requested additional exemptions from the trade 
execution requirement for block trades and package transactions, such 
as package transactions that include a futures component.\29\ Mercaris 
separately requested exemptions from the trade execution requirement 
for swaps that are based on new agricultural assets or have a notional 
value not exceeding $5 billion, on the grounds that the Proposed Rule 
would have an adverse impact on small swaps broking entities due to its 
expansion of the types of swaps that are subject to the trade execution 
requirement (to include all swaps that are required to be cleared) as 
well as the types of entities that are required to register as SEFs (to 
include trading platforms operated by swaps broking entities).\30\
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    \28\ See Comment Letter from Blackrock at 2 (Mar. 15, 2019) 
(``Blackrock Letter''); Comment Letter from International Swaps and 
Derivatives Association, Inc. at 11 (Mar. 15, 2019) (``ISDA 
Letter''); SIFMA Letter at 14; Comment Letter from the Global 
Foreign Exchange Division of the Global Financial Markets 
Association at 5 (Mar. 15, 2019) (``GFXD Letter'').
    \29\ See ISDA Letter at 11, Appendix at 5; SIFMA Letter at 13-
14; GFXD Letter at 5-6; Tradeweb Letter at 6; FIA Letter at 15, 
Comment Letter from Vanguard at 2 (Mar. 15, 2019).
    \30\ Comment Letter from Mercaris at 1-2 (Mar. 4, 2019) 
(``Mercaris Letter'').
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2. Final Rule: CEA Section 4(c) Authority and Standards
    For the purposes of promoting responsible economic or financial

[[Page 8996]]

innovation and fair competition,\31\ CEA section 4(c) provides the 
Commission with the authority to exempt any agreement, contract, or 
transaction from any CEA provision, subject to specified factors. 
Specifically, the Commission must first determine that (i) the 
requirement should not be applied to the agreement, contract, or 
transaction for which the exemption is sought; (ii) the exemption would 
be consistent with the public interest and the purposes of [the Act]; 
(iii) the agreement, contract, or transaction at issue will be entered 
into solely between appropriate persons; \32\ and (iv) the agreement, 
contract, or transaction at issue will not have a material adverse 
effect on the ability of the Commission or exchange to discharge its 
regulatory or self-regulatory duties under the Act.\33\
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    \31\ 7 U.S.C. 6(c)(1). CEA section 4(c)(1) is intended to allow 
the Commission to ``provid[e] certainty and stability to existing 
and emerging markets so that financial innovation and market 
development can proceed in an effective and competitive manner.'' 
House Conf. Report No. 102-978, 102d Cong. 2d Sess. at 81 (Oct. 2, 
1992), reprinted in 1992 U.S.C.C.A.N. 3179, 3213.
    \32\ 7 U.S.C. 6(c)(3). CEA section 4(c)(3) includes a number of 
specified categories of persons within ``appropriate persons'' that 
are deemed as appropriate to enter into swaps exempted pursuant to 
CEA section 4(c). This includes persons the Commission determines to 
be appropriate in light of their financial profile or other 
qualifications, or the applicability of appropriate regulatory 
protections. As noted below, for purposes of the Final Rule's 
section 4(c) exemptions, the Commission has determined that eligible 
contract participants as defined in CEA section 1a are ``appropriate 
persons.''
    \33\ 7 U.S.C. 6(c)(2). Notwithstanding the adoption of 
exemptions from the Act, the Commission emphasizes that their use is 
subject to the Commission's anti-fraud and anti-manipulation 
enforcement authority. In this connection, Sec.  50.10(a) prohibits 
any person from knowingly or recklessly evading or participating in, 
or facilitating, an evasion of CEA section 2(h) or any Commission 
rule or regulation adopted thereunder. 17 CFR 50.10(a). Further, 
Sec.  50.10(c) prohibits any person from abusing any exemption or 
exception to CEA section 2(h), including any associated exemption or 
exception provided by rule, regulation, or order. 17 CFR 50.10(c).
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    For the reasons stated below, the Commission believes that the 
trade execution requirement should not be applied to a swap transaction 
that is eligible for a clearing requirement exception or exemption 
under part 50, and that the exemption from the trade execution 
requirement is in the public interest and consistent with the CEA in 
such circumstances.
    The Commission has determined to finalize the exemption largely as 
proposed, renumbered as Sec.  36.1(b).\34\ As modified in this adopting 
release for additional clarity and consistency, Sec.  36.1(b) will 
apply to any swap transaction that qualifies for the exception under 
section 2(h)(7) of the Act or an exception or exemption under part 50 
of this chapter, and for which the associated requirements are met.\35\ 
As discussed below, applying the trade execution requirement to swaps 
that are eligible for an exception to or exemption from the clearing 
requirement, or are otherwise not subject to the clearing requirement, 
is not consistent with section 2(h)(8) of the CEA and would impose 
additional burdens on market participants that would be required to 
incur the costs and burdens of SEF or DCM onboarding and execution. For 
example, a counterparty that determines not to clear a swap pursuant to 
a part 50 exemption, but otherwise remains subject to the trade 
execution requirement, may be limited in where it may trade or execute 
that swap and subsequently incur costs and operational burdens related 
to SEF or DCM onboarding and trading. Therefore, the Commission 
believes swaps that are excepted or exempted from the clearing 
requirement should also be exempted from the trade execution 
requirement.
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    \34\ The Commission recently adopted a final rule which adopted 
an exemption from the trade execution requirement under Sec.  
36.1(a) of the Commission's regulations to establish an exemption to 
the trade execution requirement for swap transactions that are 
components of a ``New Issuance Bond'' package transaction. See supra 
note 11.
    \35\ For avoidance of doubt, the Commission makes clear that 
swap transactions that qualify for a swap clearing requirement 
exception or exemption under subparts C and D of part 50, and for 
which the associated requirements are met, are eligible for the 
exemption from the trade execution requirement under renumbered 
Sec.  36.1(b).
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    In response to Citadel's comment that swaps subject to future 
exemptions from the clearing requirement should not automatically be 
eligible for an exemption from the trade execution requirement, the 
Commission notes that Congress expressly chose to link the statutory 
exemption from the trade execution requirement under CEA section 
2(h)(8) to the 2(h)(7) exemption from the clearing requirement. 
Therefore, as explained elsewhere, the Commission considers it 
appropriate to follow this statutory intent with respect to the trade 
execution requirement and recognize that any swaps eligible for an 
exemption from the clearing requirement should qualify for an exemption 
from the trade execution requirement. The Commission notes that, 
consistent with the statutory restrictions on the use of its CEA 
section 4(c) authority, it has been judicious in issuing clearing 
exceptions and exemptions, and will continue to be so particularly in 
light of this linking of clearing exceptions and exemptions with the 
trade execution exemption.
    Additionally, while the Final Rule automatically makes swaps that 
are eligible for future exemptions from, and exceptions to, the 
clearing requirement eligible for this exemption from the trade 
execution requirement, nothing in the Final Rule limits a future 
Commission's ability to issue new clearing exemptions or exceptions but 
still require compliance with CEA section 2(h)(8) by amending this 
exemption. Given the limited nature of these part 50 exceptions and 
exemptions, the Commission does not believe that this approach with 
regard to the trade execution requirement will diminish swaps market 
transparency or liquidity in a manner likely to implicate systemic risk 
concerns.
    Commenters' requests for additional exemptions from the trade 
execution requirement are outside the scope of the current rulemaking. 
However, the Commission will take these requests under advisement for 
future rulemakings.\36\
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    \36\ In addition, the Commission notes that Mercaris grounded 
its exemption requests on a concern that the Proposed Rule's 
expansion of the trade execution and SEF registration requirements 
would adversely affect small swaps broking entities. Because the 
Final Rule would not enact either of the changes that Mercaris cited 
as likely to adversely affect small swaps broking entities, the 
Commission assumes that Mercaris' exemption requests are 
inapplicable to the Final Rule.
---------------------------------------------------------------------------

    In its comments, Citadel also recommended that participants be 
required to elect the clearing exemption in order to be eligible for 
this exemption from the trade execution requirement. The Commission 
notes that as proposed, renumbered Sec.  36.1(b) required that the 
appropriate swap clearing requirement exception or exemption be elected 
in order to be eligible for this exemption. However, since the Proposed 
Rule, the Commission has adopted exemptions from the swap clearing 
requirement under part 50 that do not to need be elected, but rather 
apply by virtue of the status of a counterparty to the transaction.\37\ 
In particular, the swap clearing requirement exemptions for swaps 
entered into by central banks, sovereign entities, and IFIs apply by 
virtue of a counterparty's status as such an entity.
---------------------------------------------------------------------------

    \37\ See supra note 24.
---------------------------------------------------------------------------

    Therefore, the Commission is amending Sec.  36.1(b) to state that 
section 2(h)(8) of the Act does not apply to a swap transaction that 
qualifies for an exception under section 2(h)(7) of the Act or one or 
more of the exceptions or exemptions under part 50 of chapter I of 
title 17, and for which the associated requirements are met. This 
amendment will still require, as recommended by Citadel, that, where 
applicable, the

[[Page 8997]]

relevant swap clearing requirement exception or exemption be elected in 
order to be eligible for this exemption. In addition, the amendment 
also reflects, as discussed above, that there are certain swap clearing 
requirement exemptions that are not required to be elected. However, 
the Commission notes that consistent with Citadel's comment, this 
amendment would still require that all associated requirements of the 
relevant swap clearing requirement exception or exemption be met in 
order to be eligible for this exemption.
    Under Sec.  36.1(b), swap transactions would still be entered into 
solely between eligible contract participants (``ECPs''),\38\ whom the 
Commission believes, for purposes of this Final Rule, to be appropriate 
persons. The scope of this exemption is limited and applies to 
transactions that are already excepted or exempted from the swap 
clearing requirement. Further, transactions subject to this exemption 
are still subject to the Commission's reporting requirements under 
parts 43 and 45. Therefore, the Commission will still be able to 
conduct oversight and surveillance of the transactions covered by the 
exemption. For these reasons, the Commission believes that the 
exemption would not have a material adverse effect on the ability of 
the Commission or any SEF or DCM to discharge its regulatory or self-
regulatory responsibilities under the CEA and the Commission's 
regulations.
---------------------------------------------------------------------------

    \38\ 7 U.S.C. 2(e) (providing that it shall be unlawful for any 
person, other than an eligible contract participant, to enter into a 
swap unless the swap is entered into on, or subject to the rules of, 
a board of trade designated as a contract market).
---------------------------------------------------------------------------

C. Trade Execution Exemption for Swaps Between Eligible Affiliate 
Counterparties

1. Proposed Rule
    The Proposed Rule proposed to create a new Sec.  36.1(e) to 
establish an exemption from the trade execution requirement for swaps 
between certain affiliates that are submitted for clearing. 
Counterparties are eligible to elect the exemption if they meet the 
conditions set forth under Sec.  50.52(a) for ``eligible affiliate 
counterparty'' status.\39\
---------------------------------------------------------------------------

    \39\ See supra note 23 (describing requirements for meeting 
``eligible affiliate counterparty'' status).
---------------------------------------------------------------------------

    The Commission has previously stated that transactions subject to 
the inter-affiliate exemption from the swap clearing requirement are 
exempt from the trade execution requirement.\40\ In accordance with 
time-limited no-action relief granted by Commission staff, 
counterparties that meet the ``eligible affiliate counterparty'' 
definition under Sec.  50.52(a), but do not claim the inter-affiliate 
clearing requirement exemption may execute swaps away from a SEF or DCM 
that are otherwise subject to the trade execution requirement.\41\ CFTC 
staff has granted relief to address the difficulty cited by market 
participants in executing inter-affiliate swap transactions through the 
required methods of execution prescribed for swaps subject to the trade 
execution requirement under Sec.  37.9, i.e., Order Book and RFQ, and 
subpart J of part 38 of the Commission's regulations. In particular, 
executing these transactions via competitive means of execution would 
be difficult because inter-affiliate swaps generally are not intended 
to be executed on an arm's-length basis or based on fully competitive 
pricing.\42\ Rather, such swaps are used to manage risk among and 
between affiliates and are subject to internal accounting processes.
---------------------------------------------------------------------------

    \40\ MAT Final Rule, 78 FR 33606, 33606 n. 1 (June 4, 2013).
    \41\ See supra note 17.
    \42\ See NAL No. 17-67 at 2.
---------------------------------------------------------------------------

    In the 2013 rulemaking adopting the inter-affiliate exemption from 
the clearing requirement, commenters explained that corporate groups 
often use a single affiliate to face the swap market on behalf of 
multiple affiliates within the group, which permits the corporate group 
to net affiliates' trades. This netting effectively reduces the overall 
risk of the corporate group and the number of open swap positions with 
external market participants, which in turn reduces operational, 
market, counterparty credit, and settlement risk.\43\ Market 
participants have asserted that requiring these swap transactions to be 
executed through a SEF or DCM would impose unnecessary costs and 
inefficiencies without any of the related benefits associated with 
competitive means of execution.\44\ Accordingly, the Commission sought 
through the Proposed Rule to provide permanent relief from the trade 
execution requirement for eligible affiliate counterparties.
---------------------------------------------------------------------------

    \43\ Clearing Exemption for Swaps Between Certain Affiliated 
Entities, 78 FR 21750, 21753-54 (Apr. 11, 2013).
    \44\ NAL No. 17-67 at 2.
---------------------------------------------------------------------------

2. Summary of Comments
    JBA expressed support for the proposed exemption on the grounds 
that inter-affiliate transactions ``do not necessarily seek competitive 
pricing, but are generally based on intra-group risk management and 
trading strategies.'' \45\ Citadel generally supported the proposed 
exemption but recommended that participants be required to actually 
elect the clearing exemption in order to be eligible for the 
corresponding exemption from the trade execution requirement.\46\
---------------------------------------------------------------------------

    \45\ JBA Letter at 4.
    \46\ Citadel Letter at 41.
---------------------------------------------------------------------------

3. Final Rule: CEA Section 4(c) Authority and Standard
    The Commission believes that exempting an inter-affiliate swap from 
the trade execution requirement is consistent with the objectives of 
CEA section 4(c) regardless of whether or not it has been submitted for 
clearing. For the reasons discussed below, the Commission has 
determined to finalize this exemption as proposed, renumbered as Sec.  
36.1(c).
    As noted above, these transactions are not intended to be arm's-
length, market-facing, or competitively executed under any 
circumstance, irrespective of the type of swap involved. Therefore, 
these transactions would not contribute to the price discovery process 
if executed on a SEF or a DCM. The statutory purposes of the swaps 
trading regulatory regime are ``to promote the trading of swaps on swap 
execution facilities and to promote pre-trade price transparency in the 
swaps market.'' \47\ The Commission does not believe that these dual 
purposes are served by requiring on-SEF trading of swaps that will not 
contribute to the price discovery process. The Commission therefore 
agrees with commenters that subjecting these types of transactions to 
the trade execution requirement confers little if any benefit to the 
overall swaps market.
---------------------------------------------------------------------------

    \47\ 7 U.S.C. 7b-3(e) (emphasis added).
---------------------------------------------------------------------------

    The Commission recognizes the efficiency benefits associated with 
entering into inter-affiliate swaps via internal processes and 
acknowledges that applying the trade execution requirement to such 
transactions could inhibit affiliated counterparties from efficiently 
executing these types of transactions for risk management, operational, 
and accounting purposes. The Commission therefore believes this trade 
execution requirement exemption would promote economic and financial 
innovation by allowing affiliated counterparties to efficiently utilize 
the risk management approach that best suits their specific needs, 
including with respect to decisions regarding whether to clear inter-
affiliate swaps, without being unduly influenced by whether that choice 
would require them to execute swaps on a SEF or DCM.
    In response to Citadel's comment, the Commission has determined not 
to require affiliate counterparties to elect the inter-affiliate 
exemption under Sec.  50.52 in order to claim the

[[Page 8998]]

concomitant trade execution exemption.\48\ Promoting central clearing 
of standardized swaps is a key objective of the G-20 commitments set 
out at the 2009 Pittsburgh Summit, as implemented by Section 2(h) of 
the CEA.\49\ A rule requiring counterparties to elect not to clear a 
swap in order to claim a trade execution requirement exemption would 
frustrate this purpose. Moreover, the Commission finds this exemption 
appropriate for counterparties that meet the definition of ``eligible 
affiliate counterparty'' but decide to clear the swap perhaps because 
they recognize a benefit from clearing or they do not want to satisfy 
the other conditions of Sec.  50.52 that are required to elect that 
exemption from the clearing requirement.
---------------------------------------------------------------------------

    \48\ As noted above, the Commission previously determined that 
swaps for which the counterparties claim the inter-affiliate 
clearing exemption are not subject to the trade execution 
requirement. Supra note 37 and accompanying text.
    \49\ See Leaders' Statement at the Pittsburgh Summit (Sept. 24-
25, 2009), available at https://www.treasury.gov/resource-center/international/g7-g20/Documents/pittsburgh_summit_leaders_statement_250909.pdf (stating that 
standardized derivatives should be centrally cleared and should be 
traded on exchanges or electronic trading platforms where 
appropriate).
---------------------------------------------------------------------------

    As explained previously, the Commission recognizes the benefits of 
inter-affiliate swap transactions, including their contributions to 
efficient risk management within corporate groups. Given that inter-
affiliate trades are not executed on a competitive basis and therefore 
do not contribute to meaningful price discovery, the Commission does 
not believe that subjecting such transactions to the trade execution 
requirement would provide any benefit to the swaps markets that would 
justify the costs and burdens of such a requirement, which may 
discourage corporate groups from using these transactions as part of an 
effective risk-management strategy.
    For these reasons, the exemption from the trade execution 
requirement for affiliated counterparties is appropriate and consistent 
with the public interest and purposes of the CEA. This exemption is 
limited to transactions between eligible affiliate counterparties. The 
transactions subject to this exemption are still required to be 
reported under the Commission's regulatory reporting requirements under 
part 45. Therefore, the Commission will still be able to conduct 
oversight and surveillance of the transactions covered by the 
exemption. For these reasons, the Commission does not believe that it 
would have a materially adverse effect on the ability of the Commission 
or any SEF or DCM to discharge its regulatory or self-regulatory duties 
under the CEA. Finally, under the exemption, swap transactions would 
still be entered into solely between ECPs, whom the Commission 
believes, for purposes of this Final Rule, to be appropriate persons.

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \50\ requires Federal 
agencies, in promulgating regulations, to consider the impact of those 
regulations on small businesses. The regulations adopted herein will 
affect SEFs, DCMs, and ECPs. The Commission has previously established 
certain definitions of ``small entities'' to be used by the Commission 
in evaluating the impact of its regulations on small entities in 
accordance with the RFA.\51\ The Commission previously concluded that 
SEFs and DCMs are not small entities for the purpose of the RFA.\52\ 
The Commission has also previously stated its belief that ECPs \53\ as 
defined in section 1a(18) of the CEA,\54\ are not small entities for 
purposes of the RFA.\55\
---------------------------------------------------------------------------

    \50\ 5 U.S.C. 601 et seq.
    \51\ 47 FR 18618-18621 (Apr. 30, 1982).
    \52\ 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 derivatives 
transaction execution facilities, exempt commercial markets, and 
exempt boards of trade); and 66 FR 45604, 45609 (Aug. 29, 2001) 
(discussing registered derivatives clearing organizations 
(``DCOs''))).
    \53\ 17 CFR 37.703.
    \54\ 7 U.S.C. 1(a)(18).
    \55\ 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).
---------------------------------------------------------------------------

    As noted above, one commenter, Mercaris, stated that the Proposed 
Rule would have an adverse impact on small swaps broking entities due 
to its expansion of the types of swaps that are subject to the trade 
execution requirement (to include all swaps that are required to be 
cleared) as well as the types of entities that are required to register 
as SEFs (to include trading platforms operated by swaps broking 
entities). Mercaris accordingly requested exemptions from the trade 
execution requirement for swaps that are based on new agricultural 
assets or have a notional value not exceeding $5 billion, and stated 
that a failure to provide such exemptions would violate the RFA.\56\ 
Because the Final Rule would not adopt either of the changes that 
Mercaris cited as having an adverse impact on small swaps broking 
entities, Mercaris's exemption requests and statements regarding the 
RFA are inapplicable to the Final Rule.
---------------------------------------------------------------------------

    \56\ Mercaris Letter at 1-2.
---------------------------------------------------------------------------

    Therefore, the Chairman, on behalf of the Commission, hereby 
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.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \57\ imposes certain 
requirements on Federal agencies (including the Commission) in 
connection with conducting or sponsoring any ``collection of 
information,'' \58\ 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 use, and to minimize duplicative information 
collections across the government.\59\
---------------------------------------------------------------------------

    \57\ 44 U.S.C. 3501 et seq.
    \58\ For purposes of this PRA discussion, the terms 
``information collection'' and ``collection of information'' have 
the same meaning, and this section will use the terms 
interchangeably.
    \59\ 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.\60\ The PRA requirements have been determined to include 
not only mandatory, but also voluntary information collections, and 
include both written and oral communications.\61\
---------------------------------------------------------------------------

    \60\ 44 U.S.C. 3502.
    \61\ 5 CFR 1320.3(c)(1).
---------------------------------------------------------------------------

    The Final Rule establishes two exemptions from the trade execution 
requirement. The Final Rule will not create any new, or revise any 
existing, collections of information under the PRA. Therefore, no 
information collection request has been submitted to the Office of 
Management and Budget for review.

C. Cost-Benefit Considerations

1. Introduction
    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders.\62\ Section 15(a) further 
specifies that the costs and

[[Page 8999]]

benefits shall be evaluated in light of the following five broad areas 
of market and public concern: (1) Protection of market participants and 
the public; (2) efficiency, competitiveness, and financial integrity of 
futures markets; (3) price discovery; (4) sound risk management 
practices; and (5) other public interest considerations.
---------------------------------------------------------------------------

    \62\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

2. Background
    The Commission is amending Sec.  36.1 to codify two exemptions from 
the trade execution requirement for swaps. As noted, the trade 
execution requirement applies to any swap that is subject to the swap 
clearing requirement and has been ``made available to trade'' by a SEF 
or DCM pursuant to Sec.  37.10 or Sec.  38.12. The first trade 
execution requirement exemption applies to a swap transaction that 
qualifies for an exception to, or exemption from, the clearing 
requirement under part 50 of the Commission's regulations, and for 
which the associated requirements are met. The second applies to a swap 
that is entered into by eligible affiliate counterparties and cleared, 
regardless of the affiliates' decision not to claim the inter-affiliate 
clearing exemption under Sec.  50.52 of the Commission's regulations 
and instead clear the swap.
    The baseline against which the Commission considers the costs and 
benefits of this Final Rule is the statutory and regulatory 
requirements of the CEA and Commission regulations now in effect, in 
particular CEA section 2(h)(8) and certain rules in part 37 of the 
Commission's regulations. The Commission, however, notes that as a 
practical matter certain market participants, such as eligible 
affiliates and non-financial end-users, have adopted trade execution 
practices consistent with this Final Rule based upon statutory 
provisions or no-action relief provided by Commission staff that is 
time-limited in nature.\63\ As such, to the extent that market 
participants have relied on statutory provisions to provide an 
exception from the trade execution requirement or relevant staff no-
action relief, the actual costs and benefits of the Final Rule may not 
be as significant.
---------------------------------------------------------------------------

    \63\ See NAL No. 17-67.
---------------------------------------------------------------------------

    In some instances, it is not reasonably feasible to quantify the 
costs and benefits with respect to certain factors, for example, price 
discovery or 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 
Commission did not receive any comments from commenters which 
quantified or attempted to quantify the costs and benefits of the 
Proposed Rule.
    The following consideration of costs and benefits is organized 
according to the rules and rule amendments adopted in this release. For 
each rule, the Commission summarizes the 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 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 
Final Rule on all swaps activity subject to the new 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 
activities in, or effect on, U.S. commerce under CEA section 2(i).\64\
---------------------------------------------------------------------------

    \64\ 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 the 
Dodd-Frank Act.
---------------------------------------------------------------------------

    CEA section 2(h)(8) specifies that swap transactions that are 
excepted from the clearing requirement pursuant to CEA section 2(h)(7) 
(described in more detail above) are not subject to the trade execution 
requirement.\65\ The Commission adopted requirements under Sec.  50.50 
to implement the end-user exception under CEA section 2(h)(7).\66\
---------------------------------------------------------------------------

    \65\ 7 U.S.C. 2(h)(8)(B).
    \66\ 17 CFR 50.50. Among other things, Sec.  50.50 establishes 
when a swap is being used to hedge or mitigate commercial risk and 
specifies how to satisfy the reporting requirement to elect such an 
exception from the clearing requirement. 17 CFR 50.50.
---------------------------------------------------------------------------

    The Commission is adopting Sec.  36.1(b) to expressly exempt from 
the trade execution requirement swaps that are exempt from the clearing 
requirement pursuant to part 50 of the Commission's regulations. Part 
50 exempts from the clearing requirement swaps that have at least one 
counterparty that is a certain type of entity, including ``exempt 
cooperatives'', entities that qualify for the statutory end-user 
exception,\67\ and eligible affiliate counterparties.\68\ In addition, 
the Commission recently adopted amendments to part 50 codifying 
additional clearing exemptions for swaps entered into with certain 
central banks, sovereign entities, IFIs, bank holding companies, 
savings and loan holding companies, and community development financial 
institutions.\69\
---------------------------------------------------------------------------

    \67\ This includes the exemption for qualifying banks, savings 
associations, farm credit system institutions, and credit unions in 
Commission regulation 50.53.
    \68\ See supra note 23 (describing requirements for meeting 
``eligible affiliate counterparty'' status).
    \69\ See Swap Clearing Requirement Exemptions, 85 FR 76428 (Nov. 
30, 2020).
---------------------------------------------------------------------------

3. Benefits and Costs
    The Final Rule exempts from the trade execution requirement swap 
transactions between eligible affiliate counterparties that elect to 
clear such transactions, notwithstanding their ability to elect the 
clearing exemption under Sec.  50.52. Under the current rules, inter-
affiliate transactions are only exempt from the trade execution 
requirement if the eligible affiliate counterparties elect not to clear 
the transaction. However, eligible affiliate counterparties that elect 
to clear their inter-affiliate transactions are not exempted from the 
trade execution requirement despite these transactions also not being 
intended to be price forming or arm's length and therefore may not be 
suitable for trading on SEFs or DCMs.
    Therefore, the Final Rule treats cleared and uncleared inter-
affiliate swap transactions the same with respect to the trade 
execution requirement. The Commission believes that this approach will 
be beneficial because inter-affiliate swap transactions do not change 
the ultimate ownership and control of swap positions (or result in 
netting), and permitting them to be executed internally (provided that 
they qualify for the clearing exemption under existing Sec.  50.52) may 
reduce costs relative to requiring that they be executed on a SEF or a 
DCM. Finally, the Commission believes that this exemption may help 
ensure that eligible affiliate counterparties are not discouraged from 
clearing their inter-affiliate swap transactions in order not to have 
to trade them on SEFs or DCMs subject to the trade execution 
requirement, which may

[[Page 9000]]

have systemic risk benefits.\70\ Market participants are currently 
realizing these benefits pursuant to no-action relief and as discussed 
below, inter-affiliate volume in cleared swaps executed off-exchange 
appears to be a significant proportion of the overall swap volume that 
would be subject to the trade execution requirement in fixed-to-
floating interest rate swaps (``IRS'').
---------------------------------------------------------------------------

    \70\ The Commission notes that the Division of Market Oversight 
previously provided no-action relief that mirrors this Final Rule so 
these benefits may have already been realized. See NAL No. 17-67.
---------------------------------------------------------------------------

    In an effort to estimate the scope of the Final Rule, Commission 
staff reviewed swap transaction data for fixed-to-floating IRS for the 
week ending September 18, 2020. Staff found that approximately $496 
billion notional amount was traded in fixed-to-floating IRS subject to 
the trade execution requirement (``TER IRS'') during that week.\71\ A 
significant proportion of this volume (approximately $176 billion 
notional or 35% of the total) was in swap transactions between eligible 
affiliate counterparties. Of these inter-affiliate trades, 
approximately $96 billion notional was uncleared and approximately $80 
billion notional was cleared. About $3 billion in swap transactions 
between eligible affiliate counterparties was cleared and executed on-
SEF while the remaining $77 billion in cleared inter-affiliate 
transactions in TER IRS was cleared and traded off-exchange pursuant to 
no-action relief.
---------------------------------------------------------------------------

    \71\ Total volume in fixed-to-floating IRS that week was about 
$1.37 trillion notional.
---------------------------------------------------------------------------

    The Final Rule also exempts swap transactions that are excepted or 
exempted from the clearing requirement under part 50 from the trade 
execution requirement. The Commission believes that swap transactions 
which are excepted or exempted from the clearing requirement also 
benefit from exemption from the trade execution requirement, and that 
the same reasoning that supports the clearing exemptions supports an 
explicit exemption from the trade execution requirement. The Commission 
also believes that exempting these transactions from the trade 
execution requirement is consistent with CEA section 2(h)(8) and 
adoption of the Final Rule may reduce transaction costs and may permit 
some entities to avoid incurring the costs associated with onboarding 
on a SEF or DCM.
    The Commission's staff analysis identified relatively little volume 
in TER IRS that was marked as being executed by end-users, $760 million 
notional of which $10 million was traded on-SEF and the rest traded 
off-exchange. However, it is unclear whether the data captures all the 
TER IRS trades executed by entities that are trading TER IRS off-
exchange pursuant to the no-action relief. In a separate analysis for 
the recently adopted amendments to part 50, adopting additional 
clearing exemptions, the Commission found that that final rule exempted 
only a small fraction of IRS transactions from the clearing 
requirement.\72\ Since only a fraction of IRS transactions are subject 
to the trade execution requirement, the Commission believes that the 
scope of swaps subject to this Final Rule is significantly smaller than 
the scope of swaps subject to the recent amendments to part 50.
---------------------------------------------------------------------------

    \72\ Specifically, the Commission found using DCO data that 
during calendar year 2018, 16 IFIs entered an estimated notional 
amount of $220 billion in uncleared interest rate swaps pursuant to 
existing no-action relief. During the same time period, eligible 
bank holding companies and other eligible financial institutions 
entered an estimated notional amount of $235 million in uncleared 
interest rate swaps pursuant to existing no-action relief. See Swap 
Clearing Requirement Exemptions, 85 FR 76428, 76435 (Nov. 30, 2020).
---------------------------------------------------------------------------

    The Commission notes that some swap transactions that are subject 
to the trade execution requirement involving entities that are eligible 
for existing exemptions (or existing no-action relief) are nevertheless 
executed on SEFs (as permitted transactions without restrictions on 
execution method) and all market participants will continue to have the 
option to execute on SEFs if they determine that they obtain benefits 
from trading on a SEF voluntarily.
    The Commission believes that the exemptions for certain swaps from 
the trade execution requirement will not impose new costs on market 
participants or on SEFs and DCMs and, since they are limited in scope 
and in some instances involve affiliates and thus are not arm's-length 
transactions, will not significantly detract from price discovery or 
protection of market participants and the public.
4. Section 15(a) Factors
a. Protection of Market Participants and the Public
    The Commission anticipates that the exemptions for certain swaps 
from the trade execution requirement should not materially affect the 
protection of market participants and the public. The exemptions 
finalized today are intended to establish that a limited set of swap 
transactions which are otherwise subject to the trade execution 
requirement may occur off-exchange (or on-SEF as permitted 
transactions). These transactions include inter-affiliate swap 
transactions and other swap transactions that are exempt under part 50 
from the clearing requirement.
b. Efficiency, Competitiveness, and Financial Integrity of the Markets
    The Commission anticipates that the exemptions from the trade 
execution requirement, as discussed above, will maintain the current 
efficiency of those trades and thus maintain the financial integrity of 
the counterparties consistent with statutory intent. The Commission 
believes that the exemptions under part 50 are appropriately tailored 
and thus, should not materially affect the competitiveness of the swap 
markets. The Commission does not believe that there would be a benefit 
to competition in the swap markets if inter-affiliate trades were 
required to trade on a SEF or on a DCM since these trades merely 
transfer positions between different entities within the same corporate 
group.
c. Price Discovery
    While, as a general matter, the Commission believes that price 
discovery in swaps subject to the trade execution requirement should 
occur on SEFs or DCMs, the Commission nevertheless believes that the 
exemptions from the trade execution requirement should not materially 
impact price discovery in the U.S. swaps markets. Most of the 
transactions eligible for the exemptions, such as inter-affiliate 
trades, are not price forming, while others involve end-users and 
similar entities.
d. Sound Risk Management Practices
    The Commission anticipates that the exemptions from the trade 
execution requirement should not significantly impair the furtherance 
of sound risk management practices because firms using the exemptions 
should continue to be able to move swap positions between affiliates, 
and to take advantage of the statutory end-user exception from the 
clearing requirement as well as the exemptions from the clearing 
requirement set forth in part 50. The Commission observes that eligible 
market participants have been engaging in swaps activity consistent 
with this Final Rule pursuant to statutory provisions or CFTC staff no-
action relief and the practice has not been found to impair risk 
management practices.
e. Other Public Interest Considerations
    The Commission has not identified any effects of the rules and the 
trade execution requirement exemption on other public interest 
considerations.

[[Page 9001]]

5. Consideration of Alternatives
    Commenters were generally supportive of the Proposed Rule and 
section 4(c) exemptions and recommended only one viable 
alternative.\73\ Specifically, Citadel stated that the Commission 
should not preemptively grant a trade execution exemption for swaps 
falling under future clearing exemptions, but rather should consider 
additional future exemptions from the trade execution requirement on a 
case-by-case basis. The Commission is finalizing the rule automatically 
granting such exemptions, and as a consequence will consider the costs 
and benefits in future rulemakings of both any proposed clearing 
exemption and the associated exemption from the trade execution 
requirement. Interested persons will have the opportunity to comment on 
the appropriateness of both exemptions.
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    \73\ As discussed above, commenters did recommend several other 
potential Commission actions that are outside the scope of this 
rulemaking and are therefore not addressed in this consideration of 
costs and benefits.
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D. Antitrust Considerations

    CEA section 15(b) requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of the Act, in issuing any order or adopting any Commission 
rule or regulation (including any exemption under section 4(c) or 
4c(b)), or in requiring or approving any bylaw, rule, or regulation of 
a contract market or registered futures association established 
pursuant to section 17 of the Act.\74\
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    \74\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission believes that the public interest to be protected by 
the antitrust laws is generally to protect competition. The Commission 
requested and did not receive comments on whether the Proposed Rule 
implicates any other specific public interest to be protected by the 
antitrust laws. The Commission has considered the Final Rule to 
determine whether it is anticompetitive and has identified no 
significant anticompetitive effects. Although the Final Rule exempts 
certain swaps from the requirement to trade competitively on a SEF or 
DCM, as noted above, these exemptions are narrowly circumscribed in 
scope, and the Commission has determined the exemptions to be in the 
public interest. The Commission also notes that the inter-affiliate 
transactions exempted under new Sec.  36.1(b) would not be executed on 
a competitive, arm's-length basis even if they were required to occur 
on a SEF or DCM.

List of Subjects in 17 CFR Part 36

    Trade execution requirement.

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission amends 17 CFR part 36 as follows:

PART 36--TRADE EXECUTION REQUIREMENT

0
1. The authority citation for part 36 continues to read as follows:

    Authority:  7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a-2, and 7b-3, 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).


0
2. In Sec.  36.1, add paragraphs (b) and (c) to read as follows:


Sec.  36.1   Exemptions to trade execution requirement.

* * * * *
    (b) Section 2(h)(8) of the Act does not apply to a swap transaction 
that qualifies for the exception under section 2(h)(7) of the Act or an 
exception or exemption under part 50 of this chapter, and for which the 
associated requirements are met.
    (c) Section 2(h)(8) of the Act does not apply to a swap transaction 
that is executed between counterparties that have eligible affiliate 
counterparty status pursuant to Sec.  50.52(a) of this chapter even if 
the eligible affiliate counterparties clear the swap transaction.

    Issued in Washington, DC, on December 23, 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 Exemptions From Swap Trade Execution Requirement--
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 Concurrence of Commissioner Rostin Behnam

    More than two years ago, in November 2018, the Commission voted 
to propose a comprehensive overhaul of the existing framework for 
swap execution facilities (SEFs).\1\ Today, the Commission issues 
two rules finalizing aspects of the SEF Proposal and a withdrawal of 
the SEF Proposal's unadopted provisions. This is the final step in a 
long road. Last month, the Commission finalized rules emanating from 
the SEF Proposal regarding codification of existing no-action 
letters regarding, among other things, package transactions.\2\ 
Today's final rules and withdrawal complete the Commission's 
consideration of the SEF Proposal.
---------------------------------------------------------------------------

    \1\ Swap Execution Facilities and Trade Execution Requirement, 
83 FR 61946 (Nov. 30, 2018) (the ``SEF Proposal'').
    \2\ Swap Execution Facility Requirements (Nov. 18, 2020), 
https://www.cftc.gov/PressRoom/PressReleases/8313-20.
---------------------------------------------------------------------------

    Back in November 2018, I expressed concern that finalization of 
the SEF Proposal would reduce transparency, increase limitations on 
access to SEFs, and add significant costs for market 
participants.\3\ I also noted that, while the existing SEF framework 
could benefit from targeted changes, particularly the codification 
of existing no-action relief, the SEF framework has in many ways 
been a success. I pointed out that the Commission's work to promote 
swaps trading on SEFs has resulted in increased liquidity, while 
adding pre-trade price transparency and competition. Nonetheless, I 
voted to put the SEF Proposal out for public comment, anticipating 
that the notice and comment process would guide the Commission in 
identifying a narrower set of changes that would improve the current 
SEF framework and better align it with the statutory mandate and the 
underling policy objectives shaped after the 2008 financial 
crisis.\4\ More than two years and many comment letters later, that 
is exactly what has happened. The Commission has been precise and 
targeted in its finalization of specific provisions from the SEF 
Proposal that provide needed clarity to market participants and 
promote consistency, competitiveness, and appropriate operational 
flexibility consistent with the core principles.
---------------------------------------------------------------------------

    \3\ Statement of Concurrence of Commissioner Rostin Behnam 
Regarding Swap Execution Facilities and Trade Execution Requirement, 
https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement110518a.
    \4\ Id.
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    In addition to expressing substantive concerns about the 
overbreadth of the SEF Proposal, I also voiced concerns that we were 
rushing by having a comparatively short 75-day comment period.\5\ In 
the end, the comment period was rightly extended, and the Commission 
has taken the time necessary to carefully evaluate the 
appropriateness of the SEF Proposal in consideration of its 
regulatory and oversight responsibilities and the comments received. 
I think that the consideration of the SEF Proposal is an example of 
how the process is supposed to work. When we move too quickly toward 
the finish line and without due consideration of the surrounding 
environment, we risk making a mistake that will impact our markets 
and market participants.
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    \5\ Id.
---------------------------------------------------------------------------

    Finally, I would like to address the Commission's separate vote 
to withdraw the

[[Page 9002]]

unadopted provisions of the SEF Proposal. In the past, I have 
expressed concern with such withdrawals by an agency that has 
historically prided itself on collegiality and working in a 
bipartisan fashion.\6\ In the case of today's withdrawal, the 
Commission has voted on all appropriate aspects of the SEF Proposal 
through three rules finalized during the past month. The Commission 
has voted unanimously on all of these rules, including today's 
decision to withdraw the remainder from further consideration. While 
normally a single proposal results in a single final rule, in this 
instance, multiple final rules have been finalized emanating from 
the SEF Proposal. This could lead to confusion regarding the 
Commission's intentions regarding the many unadopted provisions of 
the SEF Proposal. Under such circumstances, I think it is 
appropriate to provide market participants with clarity regarding 
the SEF Proposal. Accordingly, I will support today's withdrawal of 
the SEF Proposal. But rather than viewing it as a withdrawal of the 
SEF Proposal, I see it as an affirmation of the success of the 
existing SEF framework and the careful process to markedly improve 
the SEF framework in a measured and thoughtful way.
---------------------------------------------------------------------------

    \6\ Rostin Behnam, Commissioner, CFTC, Dissenting Statement of 
Commissioner Rostin Behnam Regarding Electronic Trading Risk 
Principles (June 25, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement062520b.
---------------------------------------------------------------------------

Appendix 3--Statement of Commissioner Dan M. Berkovitz

    I support the Commission's decision to withdraw its 2018 
proposal to overhaul the regulation of swap execution facilities 
(``SEFs'') \1\ (``2018 SEF NPRM'') and proceed instead with targeted 
adjustments to our SEF rules (``Final Rules''). The two Final Rules 
approved today will make minor changes to SEF requirements while 
retaining the progress we have made in moving standardized swaps 
onto electronic trading platforms, which has enhanced the stability, 
transparency, and competitiveness of our swaps markets.\2\
---------------------------------------------------------------------------

    \1\ Swap Execution Facilities and Trade Execution Requirement, 
83 FR 61946 (Nov. 30, 2018).
    \2\ Dissenting Statement of Commissioner Dan M. Berkovitz 
Regarding Proposed Rulemaking on Swap Execution Facilities and Trade 
Execution Requirement (Nov, 5, 2018), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement110518a.
---------------------------------------------------------------------------

    When the Commission issued the 2018 SEF NPRM, I proposed that we 
enhance the existing swaps trading system instead of dismantling it. 
For example, I urged the Commission to clarify the floor trader 
exception to the swap dealer registration requirement and abolish 
the practice of post-trade name give-up for cleared swaps. I am 
pleased that the Commission already has acted favorably on both of 
those matters. Today's rulemaking represents a further positive step 
in this targeted approach.
    Many commenters to the 2018 SEF NPRM supported this incremental 
approach, advocating discrete amendments rather than wholesale 
changes. Today, the Commission is adopting two Final Rules that 
codify tailored amendments that received general support from 
commenters. The first rule--Swap Execution Facilities--amends part 
37 to address certain operational challenges that SEFs face in 
complying with current requirements, some of which are currently the 
subject of no-action relief or other Commission guidance. The second 
rule--Exemptions from Swap Trade Execution Requirement--exempts two 
categories of swaps from the trade execution requirement, both of 
which are linked to exceptions to or exemptions from the swap 
clearing requirement.

Swap Execution Facilities: Audit Trail Data, Financial Resources and 
Reporting, and Requirements for Chief Compliance Officers

    Commission regulations require a SEF to capture and retain all 
audit trail data necessary to detect, investigate, and prevent 
customer and market abuses, which currently includes identification 
of each account to which fills are ultimately allocated.\3\ 
Following the adoption of these regulations, SEFs represented that 
they are unable to capture post-execution allocation data because 
the allocations occur away from the SEF, prompting CFTC staff to 
issue no-action relief. Other parties, including DCOs and account 
managers, must capture and retain post-execution allocation 
information and produce it to the CFTC upon request, and SEFs are 
required to establish rules that allow them obtain this allocation 
information from market participants as necessary to fulfill their 
self-regulatory responsibilities. Given that staff is not aware of 
any regulatory gaps that have resulted from SEFs' reliance on the 
no-action letter, codifying this alternative compliance framework is 
appropriate.
---------------------------------------------------------------------------

    \3\ 17 CFR 37.205(a), b(2)(iv).
---------------------------------------------------------------------------

    This Swap Execution Facility final rule also will amend part 37 
to tie a SEF's financial resource requirements more closely to the 
cost of its operations, whether in complying with core principles 
and Commission regulations or winding down its operations. Based on 
its experience implementing the SEF regulatory regime, the 
Commission believes that these amended resource requirements--some 
of which simply reflect current practice--will be sufficient to 
ensure that a SEF is financially stable while avoiding the 
imposition of unnecessary costs. Additional amendments to part 37, 
including requirements that a SEF must prepare its financial 
statements in accordance with U.S. GAAP standards, identify costs 
that it has excluded in determining its projected operated costs, 
and notify the Commission within 48 hours if it is unable to comply 
with its financial resource requirements, will further enhance the 
Commission's ability to exercise it oversight responsibilities.
    Finally, this rule makes limited changes to the Chief Compliance 
Officer (``CCO'') requirements. As a general matter, I agree that 
the Commission should clarify certain CCO duties and streamline CCO 
reporting requirements where information is duplicative or not 
useful to the Commission. Although the CCO requirements diverge 
somewhat from those for futures commission merchants and swap 
dealers, the role of SEFs is different and therefore, 
standardization is not always necessary or appropriate. I expect 
that the staff will continue to monitor the effects of all of the 
changes adopted today and inform the Commission if it believes 
further changes to our rules are needed.

Exemptions From Swap Trade Execution Requirement

    Commodity Exchange Act (``CEA'') section 2(h)(8) specifies that 
a swap that is excepted from the clearing requirement pursuant to 
CEA section 2(h)(7) is not subject to the requirement to trade the 
swap on a SEF. Accordingly, swaps that fall into the statutory swap 
clearing exceptions (e.g., commercial end-users and small banks) are 
also excepted from the trading mandate. However, the Commission has 
also exempted from mandatory clearing swaps entered into by certain 
entities (e.g., cooperatives, central banks, and swaps between 
affiliates) using different exemptive authorities from section 
2(h)(7).
    The Exemptions from Swap Trade Execution Requirement final rule 
affirms the link between the clearing mandate and the trading 
mandate for swaps that are exempted from the clearing mandate under 
authorities other than CEA section 2(h)(7). The additional clearing 
exemptions are typically provided by the Commission to limited types 
of market participants, such as cooperatives or central banks that 
use swaps for commercial hedging or have financial structures or 
purposes that greatly reduce the need for mandatory clearing and SEF 
trading. In addition, limited data provided in the release indicates 
that, at least up to this point in time, these exempted swaps 
represent a small percentage of the notional amount of swaps traded.
    This final rule also exempts inter-affiliate swaps from the 
trade execution requirement. These swaps are exempted from the 
clearing requirement primarily because the risks on both sides of 
the swap are, at least in some respects, held within the same 
corporate enterprise. As described in the final rule release, these 
swaps may not be traded at arms-length and serve primarily to move 
risk from one affiliate to another within the same enterprise. 
Neither market transparency nor price discovery would be enhanced by 
including these transactions within the trade execution mandate. For 
these reasons, I am approving the Exemptions from Swap Trade 
Execution Requirement final rule as a sensible exemption consistent 
with the relevant sections of the CEA.

Conclusion

    These two Final Rules provide targeted changes to the SEF 
regulations based on experience from several years of implementing 
them. These limited changes, together with the withdrawal of the 
remainder of the 2018 SEF NPRM, effectively leave in place the basic 
framework of the SEF rules as originally adopted by the Commission. 
This framework has enhanced market transparency, improved 
competition, lowered transaction costs, and resulted in better swap 
prices for end users. While it

[[Page 9003]]

may be appropriate to make other incremental changes going forward, 
it is important that we affirm the established regulatory program 
for SEFs to maintain these benefits and facilitate further expansion 
of this framework.
    I thank the staff of the Division of Market Oversight for their 
work on these two rules and their helpful engagement with my office.

[FR Doc. 2020-28943 Filed 2-10-21; 8:45 am]
BILLING CODE 6351-01-P