[Federal Register Volume 89, Number 85 (Wednesday, May 1, 2024)]
[Rules and Regulations]
[Pages 34991-35004]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-09368]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 23 and 37
RIN 3038-AF34
Swap Confirmation Requirements for Swap Execution Facilities
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is amending its swap execution facility (SEF) regulations related to
uncleared swap confirmations, and making associated technical and
conforming changes.
DATES: This rule is effective May 31, 2024.
FOR FURTHER INFORMATION CONTACT: Roger Smith, Associate Chief Counsel,
(202) 418-5344, [email protected], Division of Market Oversight,
Commodity Futures Trading Commission, 77 West Jackson Blvd., Suite 800,
Chicago, Illinois 60604.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Regulatory History: The Part 37 Rules
B. Summary of Amendments to Sec. 37.6
C. Consultation With Other U.S. Financial Regulators
II. Final Regulations
A. Sec. 37.6--Enforceability
1. Regulation Sec. 37.6(b)(1)--Uncleared Swap Confirmations:
Incorporation by Reference of Underlying Previously Negotiated
Agreements
2. Amendment to Sec. 37.6(b)--Timing of Swap Transaction
Confirmation
3. Amendment to Sec. 37.6(b)--Conflicting Terms
4. Clarification of Sec. 37.6(b)
5. Clarification of Sec. 37.6(a)
B. Amendments to Sec. 23.501(a)(4)(i)
III. Effective Date
IV. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
D. Antitrust Considerations
[[Page 34992]]
I. Background
A. Regulatory History: The Part 37 Rules
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 SEFs.\1\ The Commission implemented CEA section 5h by
adopting part 37 of its regulations, which, among other things, sets
forth operational requirements for SEFs and establishes various
requirements for the trading of swaps on SEFs.\2\ As part of the
implementing SEF regulations, the Commission adopted Sec. 37.6(b),
which requires a SEF to provide each counterparty to a swap transaction
that is entered into on or pursuant to the rules of the SEF--whether
cleared or uncleared--with a written record of all of the terms of the
transaction, ``which shall legally supersede any previous agreement and
serve as a confirmation of the transaction.'' \3\ Pursuant to Sec.
37.6(b), the confirmation of all terms of the transaction must take
place at the same time as execution, subject to a limited exception for
certain information related to accounts included in bunched orders.\4\
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\1\ 7 U.S.C. 7b-3.
\2\ Core Principles and Other Requirements for Swap Execution
Facilities, 78 FR 33476 (June 4, 2013) (SEF Core Principles Final
Rule). The SEF Core Principles Final Rule also articulates, where
appropriate, guidance and acceptable practices for complying with
the SEF core principles set forth in CEA section 5h.
\3\ 17 CFR 37.6(b).
\4\ 17 CFR 37.6(b). Specific customer identifiers for accounts
included in bunched orders involving swaps need not be included in
confirmations provided by a SEF if the applicable requirements of 17
CFR 1.35(b)(5) are met.
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In November 2018, the Commission issued a comprehensive proposal to
amend the SEF regulatory framework.\5\ In the 2018 SEF Proposal, the
Commission proposed to amend Sec. 37.6(b) to establish separate swap
transaction documentation requirements for cleared and uncleared
swaps.\6\ For uncleared swap transactions, the Commission proposed to
amend Sec. 37.6(b) to require a SEF to provide the counterparties to
the transaction with a ``trade evidence record'' that would memorialize
the terms of the transaction agreed upon between the counterparties on
the SEF.\7\ Under the 2018 SEF Proposal, a ``trade evidence record''
was defined as a legally binding written documentation (electronic or
otherwise) that memorializes the terms of a swap transaction agreed
upon by the counterparties and legally supersedes any conflicting term
in any previous agreement (electronic or otherwise) that relates to the
swap transaction between the counterparties.\8\ In 2021, the Commission
withdrew the unadopted portions of the 2018 SEF Proposal,\9\ including
the proposed amendments to Sec. 37.6, from further consideration.\10\
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\5\ Swap Execution Facilities and Trade Execution Requirement,
83 FR 61946 (Nov. 30, 2018) (2018 SEF Proposal).
\6\ Id.
\7\ Id. at 62096.
\8\ Id. at 61973; 62067.
\9\ The following final rulemakings of the Commission adopted
certain portions of the 2018 SEF Proposal: (i) Exemptions From Swap
Trade Execution Requirement, 86 FR 8993 (Feb. 11, 2021); and (ii)
Swap Execution Facilities, 86 FR 9224 (Feb. 11, 2021).
\10\ See Swap Execution Facilities and Trade Execution
Requirement, 86 FR 9304 (Feb. 12, 2021).
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Pursuant to section 731 of the Dodd-Frank Act, which added section
4s(i) to the CEA,\11\ the Commission has adopted regulations to
prescribe documentation standards for swap dealers (SDs) and major swap
participants (MSPs) related to the timely and accurate confirmation,
processing, netting, documentation, and valuation of swaps. The
Commission adopted Sec. 23.501 to specifically address swap
confirmation requirements for SDs and MSPs, including for those swaps
executed on a SEF or designated contract market (DCM).\12\ Among other
things, Sec. 23.501 provides that any swap transaction executed on a
SEF or DCM shall be deemed to satisfy the swap confirmation
requirements set forth in Sec. 23.501, provided that the rules of the
SEF or DCM establish that confirmation of all terms of the transaction
shall take place at the same time as execution.\13\
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\11\ 7 U.S.C. 6s(i).
\12\ 17 CFR 23.501(a)(4)(i).
\13\ Id.
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B. Summary of Amendments to Sec. 37.6
During the implementation of part 37, SEFs informed the Commission
that the confirmation requirement for uncleared swaps under Sec.
37.6(b) was operationally and technologically difficult and impractical
to implement. As discussed more fully below, Commission staff from the
Division of Market Oversight (DMO) acknowledged these technological and
operational challenges and provided no-action positions for SEFs with
respect to certain provisions of the Commission's regulations related
to uncleared swap confirmations.\14\ In particular, DMO most recently
issued CFTC No-Action Letter No. 17-17 (NAL No. 17-17), which provides
a no-action position with respect to the obligation to obtain copies of
underlying, previously negotiated agreements between the
counterparties, as discussed in greater detail below, for a SEF that
seeks for uncleared swaps to satisfy the confirmation requirement in
Sec. 37.6(b) by incorporating by reference terms of such underlying
agreements.\15\
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\14\ NAL No. 17-17, Re: Extension of No-Action Relief for Swap
Execution Facility Confirmation and Recordkeeping Requirements under
Commodity Futures Trading Commission Regulations 37.6(b), 37.1000,
37.1001, 45.2, and 45.3(a) (Mar. 24, 2017). NAL No. 17-17 extended
the no-action position previously provided by Commission staff. See
CFTC Letter No. 16-25, Re: Extension of No-Action Relief for Swap
Execution Facility Confirmation and Recordkeeping Requirements under
Commodity Futures Trading Commission Regulations 37.6(b), 37.1000,
37.1001, 45.2, and 45.3(a) (Mar. 14, 2016) (NAL No. 16-25); CFTC
Letter 15-25, Re: Extension of No-Action Relief for SEF Confirmation
and Recordkeeping Requirements under Commission Regulations 37.6(b),
37.1000, 37.1001, and 45.2, and Additional Relief for Confirmation
Data Reporting Requirements under Commission Regulation 45.3(a)
(Apr. 22, 2015) (NAL No. 15-25); and CFTC Letter No. 14-108, Staff
No-Action Position Regarding SEF Confirmations and Recordkeeping
Requirements under Certain Provisions Included in Regulations
37.6(b) and 45.2 (Aug. 18, 2014) (NAL No. 14-108). See also CFTC
Letter No. 13-58, Time-Limited No-Action Relief to Temporarily
Registered Swap Execution Facilities from Commission Regulation
37.6(b) for Non-Cleared Swaps in All Asset Classes (Sept. 30, 2013)
(NAL No. 13-58).
\15\ See NAL No. 17-17. Upon the effective date of the
amendments set forth herein, NAL No. 17-17 will expire pursuant its
terms. In particular, NAL No. 17-17 states that the no-action
position ``shall expire on the effective date of any changes [to
Sec. 37.6(b)].'' See Id. at 5.
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On August 25, 2023, the Commission released a proposal \16\ to
amend its SEF regulations related to uncleared swap confirmations to
address issues which have been addressed in staff no-action letters,
including most recently NAL No. 17-17. In particular, the Commission
proposed to amend Sec. 37.6(b) to enable SEFs to incorporate terms of
underlying, previously negotiated agreements between the counterparties
by reference in an uncleared swap confirmation without being required
to obtain such underlying, previously negotiated agreements. Further,
the Commission proposed to amend Sec. 37.6(b), which currently
requires confirmation of all terms of a swap transaction to ``take
place at the same time as execution,'' to require such confirmation to
take place ``as soon as technologically practicable'' after the
execution of the swap transaction on the SEF for both cleared and
uncleared swap transactions. The Commission also proposed to amend
Sec. 37.6(b) to make clear that the SEF-provided confirmation under
Sec. 37.6(b) shall legally supersede any conflicting terms in a
previous agreement, rather than the entire agreement. In addition, the
Commission proposed to make conforming amendments to
[[Page 34993]]
Sec. 23.501(a)(4)(i) to correspond with the proposed amendments to
Sec. 37.6(b). Finally, the Commission proposed to make certain non-
substantive amendments to Sec. 37.6(a) and (b) to enhance clarity.
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\16\ Swap Confirmation Requirements for Swap Execution
Facilities, 88 FR 58145 (Aug. 25, 2023) (the Proposal).
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The Commission received four relevant comment letters regarding the
Proposal.\17\ After considering the comments, the Commission is
adopting the rule amendments described herein as proposed. The
Commission believes the amendments will reduce administrative burdens
for SEFs and market participants, address technological and operational
challenges, reduce the cost of SEFs' compliance with the confirmation
requirement in Sec. 37.6(b), and lead to a more effective regulatory
framework for SEF swap confirmations.
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\17\ The following entities submitted relevant comment letters:
Bloomberg SEF LLC (BSEF); Cboe SEF, LLC (Cboe SEF); the
International Swaps and Derivatives Association (ISDA); and the
Wholesale Markets Brokers' Association, America (WMBAA).
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C. Consultation With Other U.S. Financial Regulators
In developing these rule amendments, the Commission has consulted
with the Securities and Exchange Commission (SEC), pursuant to section
712(a)(1) of the Dodd-Frank Act.\18\
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\18\ Dodd-Frank Act, Public Law 111-203, tit. VII, section
712(a)(1), 124 Stat. 1376 (2010). On November 2, 2023, the SEC
adopted final rules for security-based swap execution facilities (SB
SEFs). See Security-Based Swap Execution and Registration and
Regulation of Security-Based Swap Execution Facilities, 88 FR 87156
(December 15, 2023) (SEC SB SEF Final Rules). As part of the SEC SB
SEF Final Rules, the SEC adopted SEC rule 242.812 (SB SEF Rule 812),
which was modelled after existing Sec. 37.6 with some
modifications. In particular, SB SEF Rule 812 will require an SB SEF
to as soon as technologically practicable after the time of
execution of a transaction entered into on or pursuant to the rules
of the facility, provide a written record to each counterparty of
all of the terms of the transaction that were agreed to on the
facility, which shall legally supersede any previous agreement
regarding such terms. Id. at 87294. WMBAA in its comment letter on
the Proposal encouraged the SEC to adopt the changes the Commission
had proposed in the Proposal. WMBAA at 3. The Commission notes that
the SEC SB SEF rules are outside of the scope of this rulemaking. As
such, WMBAA's comment is not addressed further in this rulemaking.
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II. Amended Regulations
A. Sec. 37.6--Enforceability
1. Sec. 37.6(b)(1)--Uncleared Swap Confirmations: Incorporation by
Reference of Underlying Previously Negotiated Agreements
a. Proposed Regulations
Section 37.6(b) requires a SEF to provide each counterparty to a
swap transaction that is entered into on or pursuant to the rules of
the SEF, whether cleared or uncleared, with a ``confirmation''--a
written record that contains all of the terms of the transaction--at
the time of execution.\19\ The terms of a swap transaction include
economic terms that are specific to the transaction, e.g., swap
product, price, and notional amount, and can also include non-specific
``relationship terms'' that generally govern all transactions between
two counterparties--including, for example, relationship-level default,
margin, or governing law provisions.
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\19\ 17 CFR 37.6(b). See also 17 CFR 23.500(c) (providing a
similar definition of ``confirmation'' that is applicable to SDs and
MSPs).
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For uncleared swap transactions,\20\ the Commission is aware that
many relationship terms that may govern certain aspects of the
transaction are often negotiated and agreed upon in written
documentation between the counterparties prior to execution.\21\ The
Commission previously stated that, for purposes of satisfying the
requirements of Sec. 37.6(b), a SEF's confirmation terms for uncleared
swap transactions may incorporate by reference relevant terms set forth
in such underlying agreements, as long as those agreements have been
submitted to the SEF prior to execution.\22\ As applied, Sec. 37.6(b)
requires that the SEF incorporate this documentation by reference into
the issued confirmation, which is intended in part to provide SEF
participants with legal certainty with respect to the terms of
uncleared swap transactions.\23\
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\20\ The Commission notes that swap trading relationship
documentation is not required for swaps cleared by a derivatives
clearing organization. See 17 CFR 23.504(a)(1).
\21\ SEF Core Principles Final Rule at 33491, n.195. See
Confirmation, Portfolio Reconciliation, Portfolio Compression, and
Swap Trading Relationship Documentation Requirements for Swap
Dealers and Major Swap Participants, 77 FR 55904, 55906 (Sept. 11,
2012) (noting that swap counterparties have typically relied on the
use of industry-standard legal documentation to document their swap
trading relationships. This documentation, such as the ISDA Master
Agreement and related Schedule and Credit Support Annex (ISDA
Agreement), as well as related documentation specific to particular
asset classes, offers a framework for documenting uncleared swap
transactions between counterparties); see also 17 CFR 23.504(b) (for
uncleared swap transactions, Sec. 23.504(b) requires written swap
trading relationship documentation that includes all terms governing
the trading relationship between an SD or MSP and its counterparty).
\22\ SEF Core Principles Final Rule at 33491, n.195. While the
Commission's statement specifically referenced the incorporation by
reference of previously negotiated terms from ``a freestanding
master agreement,'' the Commission recognizes that other previously
negotiated freestanding agreements similarly may contain terms that
are relevant to an uncleared swap confirmation. Id.
\23\ To ensure that the SEF confirmation provides legal
certainty, the Commission has stated that counterparties choosing to
execute a swap transaction on or pursuant to the rules of a SEF must
have all terms, including possible long-term credit support
arrangements, agreed to no later than execution, such that the SEF
can provide a written confirmation inclusive of those terms. See SEF
Core Principles Final Rule at 33491.
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The requirement that the underlying agreements be submitted to the
SEF prior to execution has, however, created impractical burdens for
SEFs. Based upon feedback from SEFs, the Commission understands that
SEFs have encountered many issues in trying to comply with the
requirement, including high financial, administrative, and logistical
burdens in order to collect and maintain bilateral transaction
agreements from many individual counterparties. SEFs have stated that
they are unable to develop a cost-effective method to request, accept,
and maintain a library of every relevant previous agreement between
counterparties.\24\ SEFs have also noted that the potential number of
previous agreements is considerable, given that SEF counterparties
often enter into agreements with many other parties and may have
multiple agreements for different asset classes.\25\
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\24\ Many of these agreements are maintained in paper form or as
scanned PDF files that are difficult to quickly digitize in a cost-
effective manner. See WMBAA, Request for Extended Relief from
Certain Requirements under Parts 37 and 45 Related to Confirmations
and Recordkeeping for Swaps Not Required or Intended to be Cleared
at 3 (Mar. 1, 2016). Further, some SEFs have cited the considerable
resource cost of obtaining the number of different agreements that
exist to accommodate different types of counterparties and asset
classes. Id.
\25\ Id.
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Commission staff from DMO has acknowledged these technological and
operational challenges and has accordingly granted no-action positions,
most recently in NAL No. 17-17.\26\ Based on these no-action positions,
many SEFs have incorporated by reference applicable relationship terms
from previously negotiated underlying agreements between counterparties
in confirmations for uncleared swaps, without obtaining copies of these
agreements prior to the execution of a swap and without maintaining
copies of such underlying agreements on an ongoing basis.\27\
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\26\ See supra note 14.
\27\ Id. As a condition of staff's no-action positions, a SEF
has been required to have a rule in its rulebook that requires its
participants to provide copies of the underlying agreements to the
SEF on request, as well as a rule in its rulebook that requires the
SEF to (i) request from a participant an underlying agreement upon
request from the Commission, and (ii) to furnish such agreement to
the Commission as soon as it is available.
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Based on its experience with the part 37 implementation, in the
Proposal the Commission acknowledged that cleared and uncleared swap
transactions raise different issues with respect to
[[Page 34994]]
confirmation requirements \28\ and that the current Sec. 37.6(b)
requirements create difficulties for the latter type of swap
transaction. As such, the Commission proposed to amend Sec. 37.6(b) by
adding Sec. 37.6(b)(1) to permit SEFs to incorporate relevant terms
from underlying, previously negotiated agreements by reference in a
confirmation for an uncleared swap transaction without obtaining such
incorporated agreements.\29\
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\28\ See supra note 20.
\29\ In addition to stating that DMO will not recommend
enforcement action if a SEF incorporates by reference relevant terms
from underlying, previously negotiated agreements in confirmations
for uncleared swap transactions, without obtaining copies of such
agreements, which the Commission codifies in this release, NAL No.
17-17 also provides no-action positions with respect to the
requirement to maintain copies of such agreements in order to comply
with SEF recordkeeping obligations under Sec. Sec. 37.1000,
37.1001, and 45.2. Among other things, these requirements obligate a
SEF to maintain ``records of all activities relating to the business
of'' the SEF. The Commission believes that allowing a SEF to
incorporate by reference relevant terms from the underlying,
previously negotiated agreements without obtaining such agreements
will rectify the compliance issues posed with respect to Sec. Sec.
37.1000, 37.1001, and 45.2. As a SEF would no longer be required to
obtain the underlying, previously negotiated agreements, the
Commission believes that these agreements would not, as a general
category, constitute records relating to the SEF's business for
purposes of Sec. Sec. 37.1000, 37.1001, and 45.2. The Commission
notes, however, that if a SEF did obtain such an underlying,
previously negotiated agreement, including at the request of the
Commission or its staff or in connection with the fulfillment of the
SEF's regulatory obligations, the SEF would, with respect to such
agreement, need to comply with its recordkeeping obligations under
Sec. Sec. 37.1000, 37.1001, and 45.2. NAL No. 17-17 also provides a
no-action position with respect to the swap data reporting
requirements that apply to a SEF under Sec. 45.3(a). In November
2020, the Commission amended its swap data reporting regulations,
which amendments included the removal of the terms ``primary
economic terms'' and ``confirmation data'' from Sec. 45.3(a). See
Swap Data Recordkeeping and Reporting Requirements, 85 FR 75503
(Nov. 25, 2020) (Amended Part 45 Rules). Currently, SEFs are
required to report as specified in the technical specification
published on the Commission's website, available at https://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_18_RealTimeReporting/index.htm. As relevant in this context, the
technical specification sets out the required validations and
message types, including when, for swap data reporting purposes,
specific data fields are mandatory, conditional, or optional. For
example, the technical specification distinguishes between
transaction, collateral, and valuation reporting. In general, SEFs
will report transaction message types and not valuation and
collateral message types. Those data elements in the technical
specification relevant to on-SEF transactions that are contained in
the transaction message type are readily available for a SEF to
fulfil its reporting obligations under Commission regulations in
part 45. As further evidence of this, the defined term
``confirmation data'' no longer exists in Sec. 45.3(a). Therefore,
the no-action position stated in NAL No. 17-17 that ``the Division
will not recommend that the Commission take enforcement action
against a SEF for failure to report certain confirmation data
pursuant to Commission Regulation 45.3(a) . . .'', see NAL No. 17-17
at 3-4, has not been in effect since the implementation of the
Commission's Amended Part 45 Rules. Commission staff have not
received a related, updated request for a no-action position with
respect to SEF reporting requirements. The Commission believes the
Amended Part 45 Rules and the associated technical specification
requirements eliminate the need for the no-action position related
to Sec. 45.3(a) in NAL No. 17-17. Finally, in the Proposal the
Commission did not propose to codify certain conditions from NAL No.
17-17, including conditions that require a SEF to have rules in its
rulebook that (i) require a SEF confirmation to state, where
applicable, that it incorporates by reference the terms of the
underlying previously negotiated freestanding agreements between the
counterparties, and (ii) state that in the event of any
inconsistency between a SEF confirmation and the underlying
previously negotiated freestanding agreements, the terms of the SEF
confirmation legally supersede any contradictory terms and that
require the SEF's confirmations to state the same. The Commission
believes that the amendments adopted herein clarify the requirements
for uncleared swap confirmations issued by SEFs in a manner that
obviates the need to codify these conditions. See also the
discussion, infra, of those conditions in NAL No. 17-17 that address
the SEF's ability to obtain, upon request, copies of the underlying
previously negotiated freestanding agreements that have been
incorporated by reference into an uncleared swap confirmation.
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b. Public Comments
All of the relevant comments the Commission received supported the
proposal to permit SEFs to incorporate relevant terms from underlying,
previously negotiated agreements by reference in a confirmation for an
uncleared swap transaction without obtaining such incorporated
agreements.\30\
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\30\ BSEF at 1, Cboe SEF at 1, ISDA at 1, and WMBAA at 2, 4.
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WMBAA commended the Commission for ``recognizing the practical
complexities faced by market participants with respect to complying
with'' the requirement that the underlying agreements be submitted to
the SEF prior to execution.\31\ WMBAA stated that it believes that
codifying the relevant no-action position in NAL No. 17-17 ``into the
regulatory framework through the [Proposal] is a prudent and necessary
step forward.'' \32\ Further, WMBAA stated that the Proposal ``will not
only provide legal clarity but also maintain the integrity and
efficiency of the uncleared swap market.'' \33\ WMBAA also stated that
``codifying the no-action relief will align the regulatory framework
with the industry's current practices, promoting consistency and
reducing compliance burdens.'' \34\
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\31\ WMBAA at 2.
\32\ Id.
\33\ Id.
\34\ Id.
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ISDA stated that it ``strongly support[s] the Commission's proposal
to codify its current no-action position that relieves [SEFs] of the
obligation to obtain copies of underlying, previously negotiated
agreements between trade counterparties, and that enables SEFs to
incorporate such terms by reference when issuing swap confirmations.''
\35\
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\35\ ISDA at 1.
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In support of the Proposal, Cboe SEF noted that ``[c]ollecting
underlying, previously negotiated agreements is operationally and
technologically difficult and impractical--nor is there any benefit to
doing so when a SEF and the Commission may request those documents from
SEF participants at any time.'' \36\
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\36\ Cboe SEF at 1.
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WMBAA specifically expressed support for not incorporating certain
conditions of NAL No. 17-17 into Sec. 37.6(b), in particular the
conditions requiring ``(1) participants to provide copies of the
underlying previously negotiated freestanding agreements to the SEF on
request; and (2) the SEF to request from participants the underlying
previously negotiated freestanding agreements on request from the CFTC
and requiring the SEF to furnish such documents to the CFTC as soon as
they are available.'' \37\
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\37\ WMBAA at 2-3.
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Question 1 of the Proposal asked whether the Commission should
``allow a SEF to issue a confirmation for an uncleared swap transaction
that does not . . . include all the terms of the transaction, for
example by only including in the confirmation the terms agreed to on
the SEF?'' \38\ In response to this question, Cboe SEF stated its
belief ``that the Commission's current practice (as codified in the
Proposal) is the best manner for providing confirmations for an
uncleared swap transaction.'' \39\ In particular, Cboe SEF explained
that it lists foreign-exchange non-deliverable forwards \40\ and that
``[g]iven the over-the-counter nature of the FX NDF market, it is
critical to be able to incorporate by reference such industry
definitions, templates, etc. as well as the
[[Page 34995]]
counterparties' separately negotiated underlying agreements.'' \41\
Therefore, Cboe SEF stated its belief that ``it is best for the
Commission to not permit uncleared swap confirmations to exclude terms
from underlying, previously-negotiated freestanding agreements.'' \42\
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\38\ The Proposal at 58149.
\39\ Cboe SEF at 1.
\40\ Cboe SEF explained that it issues confirmations that
``incorporate by reference the terms of the underlying previously-
negotiated freestanding agreements (including, without limitation,
master agreement, master confirmation agreement and incorporated
industry definitions) between the parties governing the Transaction
(Master Agreement).'' Further, Cboe SEF explained that the
confirmations it issues ``incorporate by reference the terms set
forth on the Template Terms for Non-Deliverable FX Transactions in
respect of the relevant CCY Pair as recommended by the Emerging
Markets Traders Association and in effect as of the Trade Date of
the Transaction (NDF Template Terms).'' Finally, Cboe SE noted that
its rulebook ``provides that in the event of any inconsistency
between the NDF Template Terms and the terms of the Master
Agreement, the terms of the Master Agreement will prevail.'' Cboe
SEF at 1-2.
\41\ Id. at 2.
\42\ Id.
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c. Commission Determination
The Commission is adopting, as proposed and as supported by
commenters, new Sec. 37.6(b)(1) to permit SEFs to incorporate relevant
terms from underlying, previously negotiated agreements by reference in
a confirmation for an uncleared swap transaction without obtaining such
incorporated agreements.\43\ The Commission believes, following staff's
observation of SEFs and market participants operating under the
existing no-action position in NAL No. 17-17 and precursor no-action
letters, that new Sec. 37.6(b)(1) would not compromise the legal
certainty of confirmations issued by SEFs for uncleared swap
transactions, as the previously negotiated agreements that are referred
to in the confirmation are in effect at the time of the trade.
Therefore, Sec. 37.6(b)(1) is an appropriate alternative for SEFs to
comply with the confirmation requirement under Sec. 37.6(b), as it
applies to uncleared swaps.
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\43\ BSEF at 1, Cboe SEF at 1, ISDA at 1, and WMBAA at 2, 4.
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The Commission believes that Sec. 37.6(b)(1) will address
technological and operational challenges that have prevented SEFs from
fully complying with Sec. 37.6(b), as it will permit SEFs to
incorporate relevant terms from underlying, previously negotiated
agreements by reference in a confirmation for an uncleared swap
transaction without obtaining such incorporated agreements before
execution. The Commission believes that Sec. 37.6(b)(1) will reduce
logistical, administrative, and financial burdens for SEFs, who will
not be required to obtain and maintain a library of every relevant
previously negotiated agreement between counterparties, and will also
reduce such burdens for market participants themselves, who will not be
required to submit to a SEF all of their relevant underlying
documentation with other potential counterparties on the SEF.
The Commission agrees with WMBAA that adopting Sec. 37.6(b)(1),
which codifies the existing no-action position in NAL No. 17-17, will
align the regulatory framework for swap confirmations with the market's
current practices, promoting consistency and reducing compliance
burdens.\44\ As more fully discussed below, the Commission expects that
Sec. 37.6(b)(1) will reduce the cost of SEFs' compliance with the
confirmation requirement in Sec. 37.6(b).
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\44\ WMBAA at 2.
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The Commission agrees with Cboe SEF that uncleared swap
confirmations should not exclude terms from underlying, previously-
negotiated agreements.\45\ As such, the Commission is not changing the
existing standard in Sec. 37.6(b) that the confirmation include all of
the terms of the transaction, including the terms from underlying,
previously-negotiated agreements that are incorporated by reference
into the confirmation.
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\45\ Cboe SEF at 2.
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In order to avail themselves of the no-action position under NAL
No. 17-17, SEFs must have rules in their rulebooks that, among other
things, require: \46\ (1) participants to provide copies of the
underlying previously negotiated freestanding agreements to the SEF on
request; and (2) the SEF to request from participants the underlying
previously negotiated freestanding agreements on request from the
Commission and the SEF to furnish such documents to the Commission as
soon as they are available.\47\ The Commission believes that the
existing requirements for SEFs under the CEA and the Commission's part
37 regulations sufficiently account for these conditions of NAL No. 17-
17, such that these conditions do not need to be incorporated as
specific conditions of new Sec. 37.6(b)(1).
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\46\ See also note 29, supra.
\47\ See NAL No. 17-17 at 4.
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In particular, SEF Core Principle 5 and the implementing part 37
regulations require, among other things, that a SEF establish and
enforce rules that will allow the SEF to obtain any necessary
information to perform any of the functions described in section 5h of
the Act; establish and enforce rules that will allow the SEF to have
the ability and authority to obtain sufficient information to allow it
to fully perform its operational, risk management, governance, and
regulatory functions and any requirements under part 37; have rules
that allow for its examination of books and records kept by the market
participants on its facility; and provide information to the Commission
on request.\48\ The Commission believes that, pursuant to these
requirements and as necessary to carry out its statutory and regulatory
functions, a SEF has the ability and authority to request copies of the
underlying agreements that are incorporated by reference into a
confirmation for an uncleared swap transaction and to provide such
agreements to the Commission upon request.\49\ The Commission notes
that this position is supported by public comment.\50\
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\48\ 7 U.S.C. 7b-3(f)(5); 17 CFR 37.500-503.
\49\ Further the Commission also has the ability to request
information from the SEF under 17 CFR 37.5(a), which requires a SEF
to file with the Commission information related to its business as a
SEF upon the Commission's request. See 17 CFR 37.5.
\50\ See WMBAA at 2-3 and Cboe SEF at 1. For example, Cboe SEF
notes that ``[c]ollecting underlying, previously negotiated
agreements is operationally and technologically difficult and
impractical--nor is there any benefit to doing so when a SEF and the
Commission may request those documents from SEF participants at any
time.''
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Therefore, for the reasons stated above, the Commission is adopting
as proposed new Sec. 37.6(b)(1) to permit SEFs to incorporate
underlying, previously negotiated agreements between counterparties by
reference in a confirmation for an uncleared swap transaction without
obtaining such incorporated agreements.\51\
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\51\ As noted above, upon the effective date of the rules
contained herein, NAL No. 17-17 will expire per its terms. See supra
note 15.
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2. Amendment to Sec. 37.6(b)--Timing of Swap Transaction Confirmation
a. Proposed Regulations
Section 37.6(b) requires that confirmation of all the terms of a
swap transaction entered into on or pursuant to the rules of a SEF must
take place at the same time as execution, except for a limited
exception for certain information related to accounts included in
bunched orders.\52\ The Commission proposed to amend this timing
requirement and instead require confirmation of all the terms of a swap
transaction ``as soon as technologically practicable'' after the
execution of the swap transaction on the SEF.
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\52\ 17 CFR 37.6(b). Specific customer identifiers for accounts
included in bunched orders involving swaps need not be included in
confirmations provided by a SEF if the applicable requirements of
Sec. 1.35(b)(5) are met. See 17 CFR 1.35(b)(5), which provides that
specific customer identifiers for accounts included in bunched
orders executed on DCMs or SEFs need not be recorded at time of
order placement or upon report of execution if the requirements set
forth in Sec. 1.35(b)(5)(i)-(v) are met.
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b. Public Comments
Commenters supported amending Sec. 37.6(b) to require confirmation
of all the terms of a swap a transaction ``as soon as technologically
practicable'' after the execution of the swap transaction on the
SEF.\53\ WMBAA
[[Page 34996]]
stated that it believed that this amendment ``acknowledges the need for
flexibility in the uncleared swap confirmation process, while
accommodating technological constraints.'' \54\
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\53\ ISDA at 2 and WMBAA at 2.
\54\ WMBAA at 2.
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Similarly, ISDA noted that this amendment, as ``correctly pointed
out by the Commission,'' is ``necessary to account for block trades
that are executed outside of the SEF's trading system or platform, but
pursuant to the rules of the SEF--and the SEF is therefore unaware of
the execution until the counterparties report the trade of the SEF.''
\55\
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\55\ ISDA at 2.
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BSEF stated that it supports the Commission clarifying the timing
for confirmations of block trades.\56\
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\56\ BSEF at 1.
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c. Commission Determination
The Commission agrees with commenters and, as proposed, is amending
Sec. 37.6(b) to require confirmation of all the terms of a swap
transaction ``as soon as technologically practicable'' after the
execution of the swap transaction on the SEF.\57\ The Commission
believes that the amended standard--``as soon as technologically
practicable'' after execution--will continue to promote the
Commission's goals of providing swap counterparties with legal
certainty in a prompt manner, while also being consistent with other
Commission requirements related to swap confirmations.\58\
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\57\ The Commission notes that in the context of real-time
public reporting, it has defined ``as soon as technologically
practicable'' to mean as soon as possible, taking into consideration
the prevalence, implementation, and use of technology by comparable
market participants (emphasis added). 17 CFR 43.2. The meaning of
this term, in amended Sec. 37.6(b), would be consistent with this
definition, except applying to comparable SEFs. For example, for
purposes of taking into consideration the prevalence, implementation
and use of technology by comparable SEFs, the Commission would
expect that fully electronic SEFs would be comparable to one
another, while SEFs that utilize more manual processes, such as
voice processes, would be comparable to each other.
\58\ For example, Sec. 23.501(a)(1) and (2) require that an SD
or MSP issue a confirmation or acknowledgement for a swap
transaction (as applicable) to its counterparty ``as soon as
technologically practicable. . . .'' See 17 CFR 23.501(a)(1)-(2).
Further, the Commission notes that the amended standard is
consistent with the SEC's standard for SB SEFs in SB SEF Rule 812.
See SEC SB SEF Final Rules at 87294.
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For a block trade that is executed ``away from'' a SEF,--i.e.,
outside of the SEF's trading system or platform, but still ``pursuant
to the rules'' of the SEF for purposes of the Sec. 37.6(b)
confirmation requirement--a SEF would be unaware of the execution of
the trade until the counterparties report the trade details to the SEF.
From a temporal perspective, the SEF would consequently be unable to
confirm all terms of the block trade at the same time as execution. The
Commission agrees with ISDA that amending the timing standard in Sec.
37.6(b) will account for block trades that are executed outside of the
SEF's trading system or platform, but pursuant to the rules of the
SEF.\59\
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\59\ ISDA at 2.
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The Commission believes that the amended standard reflects existing
SEF capabilities while maintaining the Commission's goal of providing
swap counterparties with legal certainty for transactions. Given the
Commission's understanding that SEFs are complying with the ``at the
same time as execution'' timing standard in existing Sec. 37.6(b) for
non-block swap transactions or block transactions executed on the SEF,
the Commission expects that the impact of the ``as soon as
technologically practicable'' timing standard for confirmations for
such swap transactions will not be substantive.\60\ Rather, the
amendment will take into account practical realities for confirming
block trades executed away from the SEF but pursuant to the rules of
the SEF, while ensuring that confirmation for all SEF-executed trades
takes place in as prompt a manner as possible.
---------------------------------------------------------------------------
\60\ See supra note 57.
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Therefore, the Commission is adopting, as proposed, amendments to
the timing standard in Sec. 37.6 to require a SEF to confirm the terms
of a swap transaction ``as soon as technologically practicable'' after
the execution of the swap transaction on the SEF.
3. Proposed Amendment to Sec. 37.6(b)--Conflicting Terms
a. Proposed Regulations
The Commission proposed to amend Sec. 37.6(b) to make clear that
the terms of a swap confirmation issued by a SEF shall legally
supersede any conflicting terms of a previous agreement (emphasis
added).\61\
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\61\ While this amendment will apply with respect to both
cleared and uncleared swap transactions executed on or pursuant to
the rules of the SEF, the Commission notes that swap trading
relationship documentation is not required for swaps cleared by a
derivatives clearing organization. See 17 CFR 23.504(a)(1).
---------------------------------------------------------------------------
b. Public Comments
Commenters generally supported amending Sec. 37.6(b) to make clear
that the terms of a swap confirmation issued by a SEF shall legally
supersede any conflicting terms of a previous agreement (emphasis
added).\62\
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\62\ BSEF at 1-2, Cboe SEF at 1, ISDA at 2, WMBAA at 2.
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ISDA was ``supportive of the Commission's proposal to make clear
that SEF-provided confirmations shall legally supersede any conflicting
terms in a previous agreement, rather than the entire agreement.'' \63\
ISDA stated that it believes that ``[s]uch an approach strikes the
right balance between ensuring that the terms agreed to on the SEF are
enforceable, while at the same time, also acknowledging the various
documentation and agreements that underlie swap agreements.'' \64\
---------------------------------------------------------------------------
\63\ ISDA at 2.
\64\ Id.
---------------------------------------------------------------------------
WMBAA stated that it ``supports the amendment to regulation 37.6(b)
to clarify that the SEF-provided confirmation shall legally supersede
any conflicting terms in a previous agreement. This clarification
appears essential in maintaining certainty in swap transactions,
reducing legal uncertainties, and streamlining the confirmation
process.'' \65\
---------------------------------------------------------------------------
\65\ WMBAA at 2.
---------------------------------------------------------------------------
While BSEF stated that it believes that ``[t]he proposed amendment
to 37.6(b) is sufficiently clear that the terms of a swap confirmation
issued by a SEF shall legally supersede any conflicting terms of a
previous agreement,'' BSEF stated that ``the Commission should also
clarify that the rules of the SEF shall also legally supersede, with
respect to the transaction, any conflicting terms of a previous
agreement, whether or not specifically addressed in the confirmation.''
\66\
---------------------------------------------------------------------------
\66\ BSEF at 2. BSEF's comment was specifically in response to
Question 8 of the Proposal which asked, ``(1) Does the proposed
amendment provide sufficient legal certainty with respect to any
contradictory terms that may be contained within previous agreements
that are incorporated into an uncleared swap confirmation by
reference?''
---------------------------------------------------------------------------
Specifically, BSEF stated that ``to the extent there is anything in
the rules of the SEF that conflicts with the terms of any previous
agreement, the SEF rulebook would govern the transaction and supersede
the previous agreement.'' \67\ BSEF stated that it believes that such
an approach ``provides additional clarity that both the rules of the
SEF and the specific terms stated in the swap confirmation issued by a
SEF govern the terms of the trade and supersede any conflicting terms
of a previous agreement.'' \68\
---------------------------------------------------------------------------
\67\ Id.
\68\ Id.
---------------------------------------------------------------------------
Finally, in response to Question 9 in the Proposal,\69\ BSEF stated
its belief
[[Page 34997]]
``that the Commission should require that a SEF's confirmation
specifically state that the terms of the confirmation legally supersede
any conflicting terms in underlying previously negotiated agreements
that have been incorporated by reference.'' \70\ BSEF pointed out that
a condition of relying on the no-action position in NAL No. 17-17 is
that a SEF must have rules that require its confirmations to state
that, in the event of any inconsistency between a SEF confirmation and
the underlying previously-negotiated freestanding agreements, the terms
of the SEF confirmation legally supersede any contradictory terms.\71\
BSEFs stated that the Commission should require the specified statement
in the SEF's confirmation.\72\
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\69\ Question 9 of the Proposal asked whether, ``[f]or uncleared
swaps, to avoid any conflict between the terms of the swap and the
SEF's confirmation, . . . the Commission [should] require that the
SEF's confirmation specifically state that the terms of the
confirmation legally supersede any conflicting terms in underlying
previously negotiated agreements that have been incorporated by
reference''.
\70\ BSEF at 2.
\71\ Id.
\72\ Id.
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c. Commission Determination
The Commission is adopting, as proposed, amendments to Sec.
37.6(b), making it clear that the terms of a swap confirmation issued
by a SEF shall legally supersede any conflicting terms of a previous
agreement (emphasis added).
Under the rules adopted in this final rulemaking, SEFs will be able
to incorporate underlying, previously negotiated agreements by
reference into confirmations for uncleared swap transactions. This
amendment will help ensure legal certainty with respect to the terms of
such transactions, and will also clarify the continuing applicability
of those terms in the underlying agreements that do not conflict with
the confirmation and that may, for example, govern the counterparties'
non-SEF transactions.\73\ Taking into account comments received on the
Proposal, the Commission agrees with ISDA that this approach strikes
the right balance between ensuring that the terms agreed to on the SEF
are enforceable, while at the same time, acknowledging the various
documentation and agreements that underlie swap transactions.\74\
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\73\ In the SEF Core Principles Final Rule, the Commission noted
that the counterparties to the uncleared swap transaction would need
to ensure that nothing in the confirmation terms contradicted the
standardized terms intended to be incorporated from the underlying
agreement. SEF Core Principles Final Rule at 33491, n.195.
\74\ ISDA at 2.
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As a condition of relying on the no-action position in NAL No. 17-
17, SEFs must have rules which require its confirmations to state that,
in the event of any inconsistency between a SEF confirmation and the
underlying previously negotiated freestanding agreements, the terms of
the SEF confirmation legally supersede any contradictory terms.\75\ The
amendment to Sec. 37.6(b) reflects the substance of this condition,
providing the benefit of continuing to allow SEFs that relied on NAL
No. 17-17 to maintain market practices previously established under the
no-action position in complying with amended Sec. 37.6(b).\76\ To this
end, BSEF recommended that the Commission codify the condition of NAL
No. 17-17.\77\ The Commission notes that SEFs have reasonable
discretion, subject to their obligations under the Act and Commission
regulations, to establish rules and procedures for their markets. The
Commission believes, and BSEF concedes, that the amendment to Sec.
37.6(b) makes clear that in the event of any inconsistency between a
SEF confirmation and underlying previously negotiated agreements, the
terms of the SEF confirmation legally supersede any contradictory
terms. Accordingly, the Commission does not believe that it needs to
require the SEF's confirmation to state as such; however, the
Commission believes that there is nothing that would preclude a SEF
from having rules or procedures that include such a statement in the
confirmations it issues.
---------------------------------------------------------------------------
\75\ See NAL No. 17-17 at 4. Further, as a condition of relying
on NAL No. 17-17 the SEF must also have a rule that requires the
SEF's confirmations to state ``that in the event of any
inconsistency between a SEF confirmation and the underlying
previously-negotiated freestanding agreements, the terms of the SEF
confirmation legally supersede any contradictory terms''.
\76\ As noted above, upon the effective date of the rules
contained herein, NAL No. 17-17 will expire per its terms. See supra
note 15.
\77\ BSEF at 2.
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The Commission acknowledges BSEF's comment recommending that the
Commission also clarify that, to the extent that rules of the SEF
conflict with the terms of a previous agreement, the rules of the SEF
would govern the swap transaction and supersede the terms of the
previous agreement.\78\ This comment addresses matters that were not
addressed in the Proposal. Therefore, the Commission declines to
address BSEF's comment in the context of this rulemaking at this time.
---------------------------------------------------------------------------
\78\ Id.
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For the reasons stated above, the Commission is adopting, as
proposed, amendments to Sec. 37.6(b), making it clear that the terms
of a swap confirmation issued by a SEF shall legally supersede any
conflicting terms of a previous agreement (emphasis added).
4. Clarification of Sec. 37.6(b)
a. Proposed Regulations
Section 37.6(b) provides that a SEF shall provide each counterparty
to a transaction that is entered into on or pursuant to the rules of
the SEF with a written record of all of the terms of the transaction.
The Commission proposed a non-substantive amendment to Sec.
37.6(b) to change the phrase ``entered into'' to ``executed'' in order
to provide greater consistency within Sec. 37.6(b). Existing Sec.
37.6(b) uses ``entered into'' and ``executed'' interchangeably.
b. Public Comments
The Commission received no comments regarding the proposed non-
substantive amendment to Sec. 37.6(b) to change the phrase ``entered
into'' to ``executed''.
c. Commission Determination
The Commission received no comments regarding the proposed non-
substantive amendment to change the phrase ``entered into'' to
``executed,'' and is adopting this amendment to Sec. 37.6(b) as
proposed. This non-substantive amendment will, in conjunction with the
non-substantive amendment to Sec. 37.6(a) discussed below, ensure
consistent use of ``executed'' throughout Sec. 37.6.
5. Clarification of Sec. 37.6(a)
a. Proposed Regulations
Section 37.6(a) is intended to provide market participants with
legal certainty with respect to swap transactions on a SEF and
generally clarifies that a swap transaction entered into on or pursuant
to the rules of the SEF cannot be void, voidable, subject to
rescission, otherwise invalidated, or rendered unenforceable due to a
violation by the SEF of section 5h of the Act or part 37 of the
Commission's regulations or any proceeding that alters or supplements a
rule, term or condition that governs such swap or swap transaction.\79\
---------------------------------------------------------------------------
\79\ 17 CFR 37.6(a).
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The Commission proposed a non-substantive amendment to Sec.
37.6(a) to change the phrase ``entered into'' to ``executed'' in order
to provide greater consistency within Sec. 37.6. Currently Sec. 37.6
uses ``entered into'' and ``executed'' interchangeably.
b. Public Comments
The Commission received no comments regarding the proposed non-
[[Page 34998]]
substantive amendment to Sec. 37.6(a) to change the phrase ``entered
into'' to ``executed''.
c. Commission Determination
The Commission received no comments regarding the proposed non-
substantive amendment to change the phrase ``entered into'' to
``executed,'' and is adopting this amendment to Sec. 37.6(a) as
proposed. This non-substantive amendment will, in conjunction with the
proposed non-substantive amendment to Sec. 37.6(b) discussed above,
ensure consistent use of ``executed'' throughout Sec. 37.6.
B. Amendments to Sec. 23.501(a)(4)(i)
a. Proposed Regulations
The Commission proposed two amendments to Sec. 23.501(a)(4)(i) to
conform to the proposed amendments to Sec. 37.6(b). Section
23.501(a)(4)(i) provides that a swap transaction executed on a SEF or
DCM will be deemed to satisfy the swap confirmation requirements set
forth for SDs and MSPs in Sec. 23.501(a), provided that the rules of
the SEF or DCM establish that confirmation of all terms of the
transaction shall take place at the same time as execution. The
Commission proposed to clarify that the safe harbor for SDs and MSPs in
Sec. 23.501(a)(4)(i) also applies to swap transactions executed
``pursuant to the rules'' of a SEF or DCM, i.e., block trades executed
away from the SEF's or DCM's trading system or platform, but pursuant
to the SEF's or DCM's rules. This clarification is consistent with the
definition of ``block trade'' under Sec. 43.2.\80\ To further conform
to the proposed amendments to Sec. 37.6(b), the Commission also
proposed to amend Sec. 23.501(a)(4)(i) to require confirmation of all
terms of a swap transaction as soon as technologically practicable
following execution.\81\
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\80\ Sec. 43.2 defines a block trade as the following: Block
trade means a publicly reportable swap transaction that: (1)
Involves a swap that is listed on a swap execution facility or
designated contract market; (2) Is executed on a swap execution
facility's trading system or platform that is not an order book as
defined in Sec. 37.3(a)(3) of this chapter, or occurs away from the
swap execution facility's or designated contract market's trading
system or platform and is executed pursuant to the swap execution
facility's or designated contract market's rules and procedures; (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 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. 17 CFR 43.2.
\81\ The Commission notes that while DCMs may provide
confirmations for swap block trades executed away from but pursuant
to the rules of the DCM, DCMs do not have a regulatory obligation
analogous to the current regulatory obligation under Sec. 37.6(b)
for SEFs to provide confirmations.
---------------------------------------------------------------------------
b. Public Comments
The Commission received no comments regarding the two proposed
amendments to Sec. 23.501(a)(4)(i).
c. Commission Determination
The Commission received no comments regarding the two proposed
amendments to Sec. 23.501(a)(4)(i) to conform to Sec. 37.6(b).
Therefore, the Commission is adopting these amendments to Sec.
23.501(a)(4)(i) as proposed.
III. Effective Date
The Commission proposed as an effective date, for the rule
amendments in the Proposal, the date that is 30 days after publication
of final regulations in the Federal Register. The Commission received
no comments regarding the proposed effective date. Therefore, the
Commission is adopting an effective date for these rule amendments that
is 30 days after publication of final regulations in the Federal
Register. The Commission believes that such an effective date will
allow SEFs and market participants sufficient time to adapt to the
amended confirmation rules in an efficient and orderly manner.\82\
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\82\ As noted above, upon the effective date of the rules
contained herein, NAL No. 17-17 will expire per its terms. See supra
note 15.
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IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires Federal agencies to
consider whether the regulations they promulgate will have a
significant economic impact on a substantial number of small entities
and, if so, to provide a regulatory flexibility analysis with respect
to such impact.\83\ The regulations finalized 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.\84\ The Commission previously
concluded that SEFs are not small entities for the purpose of the
RFA.\85\ 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) \86\ as
defined in section 1a(18) of the CEA,\87\ are not small entities for
purposes of the RFA.\88\ Therefore, the Chairman, on behalf of the
Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that these
final regulations will not have a significant economic impact on a
substantial number of small entities.
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\83\ 5 U.S.C. 601 et seq.
\84\ 47 FR at 18618-21 (Apr. 30, 1982).
\85\ SEF Core Principles Final Rule at 33548 (citing, among
others, 47 FR 18618, 18621) (Apr. 30, 1982) (discussing DCMs).
\86\ 17 CFR 37.703.
\87\ 7 U.S.C. 1(a)(18).
\88\ 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).
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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,'' \89\ as defined by the PRA. Under the
PRA, an agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a
currently valid control number from the Office of Management and Budget
(OMB). The PRA is intended, in part, to minimize the paperwork burden
created for individuals, businesses, and other persons as a result of
the collection of information by federal agencies, and to ensure the
greatest possible benefit and utility of information created,
collected, maintained, used, shared, and disseminated by or for the
federal government. 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.'' \90\
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\89\ See 44 U.S.C. 3502(3)(A).
\90\ See 44 U.S.C. 3502(3).
---------------------------------------------------------------------------
This final rulemaking affects regulations that contain collections
of information for which the Commission has previously received control
numbers from OMB. The titles for these collections of information are
``Swap Documentation, OMB control number 3038-0088'' and ``Core
Principles and Other Requirements for Swap Execution Facilities, OMB
control number 3038-0074.'' This final rulemaking will modify the
information collection requirements associated with OMB control number
3038-0074, as discussed below. The Commission therefore is submitting
this final rulemaking to OMB for its review in accordance with the
[[Page 34999]]
PRA.\91\ The Commission did not receive any comments regarding the PRA
burden analysis contained in the Proposal.
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\91\ See 44 U.S.C. 3507(d) and 5 CFR 1320.11.
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1. OMB Collection 3038-0088--Swap Documentation
The Commission is adopting two amendments to Sec. 23.501(a)(4)(i)
to conform to Sec. 37.6(b), as amended. Section 23.501(a)(4)(i)
provides that a swap transaction executed on a SEF or DCM will be
deemed to satisfy the swap confirmation requirements set forth for SDs
and MSPs in Sec. 23.501(a), provided that the rules of the SEF or DCM
establish that confirmation of all terms of the transaction shall take
place at the same time as execution. The Commission is amending Sec.
23.501(a)(4)(i) to clarify that the safe harbor for SDs and MSPs in
that provision also applies to swap transactions executed ``pursuant to
the rules'' of a SEF or DCM, i.e., block trades executed away from the
SEF's or DCM's trading system or platform, but pursuant to the SEF's or
DCM's rules. The Commission also is amending Sec. 23.501(a)(4)(i) to
conform to the amendments to Sec. 37.6(b), which will require
confirmation of all terms of a swap transaction as soon as
technologically practicable following execution.
As explained in the Proposal, the Commission does not believe that
these amendments will substantively or materially modify any existing
information collection burdens. Accordingly, the Commission is
retaining its existing estimates for the burden associated with the
information collections under OMB Collection 3038-0088.\92\
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\92\ For the previously approved estimates, see ICR Reference
No: 202204-3038-005, available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202210-3038-007.
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2. OMB Collection 3038-0074--Core Principles and Other Requirements for
Swap Execution Facilities
Under existing Sec. 37.6(b), a SEF is required to provide each
counterparty to a swap transaction, whether cleared or uncleared, that
is entered into on or pursuant to the rules of the SEF, with a written
confirmation that contains all of the terms of the transaction. With
respect to an uncleared swap transaction, a SEF may comply with the
requirement to include in the confirmation all of the terms of the
transaction, by incorporating by reference relevant terms set forth in
underlying, previously negotiated agreements between the
counterparties, as long as the SEF has obtained these agreements prior
to execution of the transaction.\93\
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\93\ SEF Core Principles Final Rule at 33491, n.195.
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This final rulemaking adds new Sec. 37.6(b)(1), which will permit
SEFs to incorporate by reference in a confirmation relevant terms set
forth in underlying, previously negotiated agreements without being
required to obtain these agreements.
The Commission believes that the final rulemaking will reduce
administrative burdens for SEFs, who will not be required to request,
accept, and maintain a library of every relevant previously negotiated
agreement between counterparties.
As a result, the Commission believes that the final rulemaking will
reduce a SEF's annual recurring information collection burden for
uncleared swap transactions. In the Proposal, the Commission estimated
that Sec. 37.6(b)(1) would reduce annual recurring information
collection burdens by one-third from 563 hours per SEF to 375 hours per
SEF.\94\ The Commission received no comments related to the PRA
analysis or this determination.
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\94\ The Commission previously estimated that the information
collections related to Sec. 37.6 would take SEFs approximately 1.5
hours per SEF participant and that on average, a SEF has about 375
participants. For purposes of estimating the number of burden hours
that the final regulations would eliminate, however, the Commission
is revising its previous estimate and will assume the relevant
process would take SEFs approximately 1.0 hours per SEF participant.
Accordingly, 375 participants x 1.0 hour per participant = 375
estimated burden hours. For information about the Commission's
previous estimate, see ICR Reference No. 202104-3038-001, available
at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202104-3038-001.
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The aggregate annual estimates for the reporting burden associated
with Sec. 37.6(b), as amended, is as follows:
Estimated number of respondents: 21.
Estimated average burden hours per respondent: 375 hours.
Estimated total annual burden on Respondents: 7,875 hours.
Frequency of collection: On occasion.
There are no capital costs or operating and maintenance costs
associated with this collection.
C. Cost-Benefit Considerations
1. Background
Section 15(a) of the CEA \95\ requires the Commission to ``consider
the costs and benefits'' of its actions before promulgating a
regulation under the CEA or issuing certain orders. CEA 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 CEA
section 15(a) factors.
---------------------------------------------------------------------------
\95\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
The Commission is amending certain rules in parts 23 and 37 of its
regulations relating to the confirmation by CFTC-regulated exchanges,
in particular SEFs, of the terms of swap transactions.
The baseline against which the Commission considers the costs and
benefits of these rule amendments 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 23 and 37 of the
Commission's regulations. The Commission, however, notes that as a
practical matter many SEFs and market participants have adopted some
current practices based upon a no-action position provided by
Commission staff that the rule amendments generally will codify. As
such, to the extent that SEFs and market participants have relied on
this no-action position, the actual costs and benefits of the rule
amendments as realized in the market may not be as significant.
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 rule
amendments in qualitative terms. The Commission did not receive any
comments from commenters which quantified or attempted to quantify the
costs and benefits of the Proposal.
In the following consideration of costs and benefits, the
Commission first identifies and discusses the benefits and costs
attributable to the rule amendments. The Commission, where applicable,
then considers the costs and benefits of the rule amendments 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 its understanding that the swaps market functions
internationally with: (1) transactions that involve U.S. entities
occurring across different international jurisdictions; (2) some
entities organized outside of the United States that are registered
with the Commission; and (3) some entities that
[[Page 35000]]
typically operate both within and outside the United States and that
follow 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
rule amendments on all relevant swaps activity, whether based on its
actual occurrence in the United States or on its connection with
activities in, or effect on, U.S. commerce.\96\
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\96\ See, e.g., 7 U.S.C. 2(i).
---------------------------------------------------------------------------
2. Amendments to Sec. 37.6(b)
a. Benefits
Under existing Sec. 37.6(b), a SEF is required to provide each
counterparty to a swap transaction that is entered into on or pursuant
to the rules of the SEF, with a written confirmation at the time of
execution that contains all of the terms of the transaction. SEFs may
satisfy the requirements under existing Sec. 37.6(b) for uncleared
swap transaction confirmations by incorporating by reference, in the
confirmation, relevant terms set forth in underlying, previously
negotiated agreements between the counterparties, as long as such
agreements have been submitted to the SEF prior to execution.
Absent adoption of new Sec. 37.6(b)(1), which will allow SEFs to
incorporate relevant terms set forth in such underlying agreements
without being required to obtain the agreements, SEFs would need to
comply with the existing requirements under Sec. 37.6(b) for uncleared
swap confirmations, notwithstanding the significant burdens of doing
so. The Commission understands that the financial, administrative, and
logistical burdens to collect and maintain bilateral transaction
agreements from individual counterparties would be high. SEFs have
stated that they are unable to develop a cost-effective method to
request, accept and maintain a library of every relevant previous
agreement between counterparties.\97\ SEFs have also noted that the
potential number of previous agreements is considerable, given that SEF
counterparties often enter into agreements with many other parties and
may have multiple agreements for different asset classes.\98\
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\97\ See WMBAA, Request for Extended Relief from Certain
Requirements under Parts 37 and 45 Related to Confirmations and
Recordkeeping for Swaps Not Required or Intended to be Cleared, at 3
(Mar. 1, 2016).
\98\ Id.
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The Commission believes that the addition of Sec. 37.6(b)(1)
should benefit both SEFs and market participants by decreasing the
financial, administrative, and logistical burdens to execute an
uncleared swap on a SEF. Not only would a SEF not be required to expend
time and resources to gather and maintain all of the underlying
relationship documentation between all possible counterparties on the
SEF, but market participants would also not be required to expend time
and resources in gathering and submitting this documentation to the
SEF, including any amendments or updates to that documentation.
The Commission notes that these benefits are currently available to
SEFs and market participants through the existing no-action position
provided by Commission staff in NAL No. 17-17. As such, to the extent
that SEFs, and by extension market participants, have relied on the
existing no-action position to avoid the above-described financial,
operational and logistical burdens, they have been availing themselves
of the benefits of these reduced burdens.
The Commission also recognizes that many SEFs have already expended
resources to implement technological and operational changes needed to
avail themselves of the no-action position under NAL No. 17-17. These
rule amendments would preclude the need to expend additional resources
to negate those changes.
Further, the rule amendments do not change the existing requirement
for a SEF to issue a confirmation of all terms of an uncleared swap
transaction that is executed on or pursuant to the rules of the SEF. If
a SEF was not required to issue a confirmation that includes or
incorporates by reference all of the terms of such a transaction, the
counterparties to the swap might be subject to other Commission
regulations that impose such obligations, and therefore, increased
costs. For example, where one of the counterparties to an uncleared
swap transaction is an SD or MSP, Sec. 23.501 requires that the SD or
MSP issue a confirmation for the transaction as soon as technologically
practicable.\99\
---------------------------------------------------------------------------
\99\ See 17 CFR 23.501(a). As discussed above, subject to
specified conditions, Sec. 23.501(a)(4)(i) provides a safe harbor
from this requirement when a SEF issues a confirmation for the
transaction.
---------------------------------------------------------------------------
SEFs should also benefit from the requirement to confirm
transaction terms ``as soon as technologically'' practicable after
execution, rather than at the same time as execution. As noted above,
the Commission believes that this amendment to the timing standard in
Sec. 37.6(b) reflects existing SEF capabilities while continuing to
promote the Commission's goals of providing swap counterparties with
legal certainty in a prompt manner.
b. Costs
With respect to uncleared swaps, the addition of Sec. 37.6(b)(1)
could reduce the financial integrity of transactions on SEFs compared
to the current rule. There could be a greater risk of misunderstanding
between the counterparties to a swap transaction if SEFs do not provide
all the terms of the transaction at the time of execution, instead
incorporating certain terms by reference. Even when underlying
agreements are incorporated by reference, confusion could arise from
issues such as multiple versions of an agreement with the same
labeling, or missing sections. However, the Commission does not expect
that this risk will materially reduce the integrity of the swaps
market. The Commission notes that the relevant underlying agreements
usually establish relationship terms between counterparties that govern
all trading between them in uncleared swaps, and do not generally
concern the terms of specific transactions.
To the extent that SEFs are relying on the existing no-action
position provided by Commission staff in NAL No. 17-17, they could
continue to implement existing industry practice related to
confirmations for uncleared swap transactions which should not impose
costs on the SEFs. But to the extent that SEFs need to modify their
rules or procedures in light of the rule amendments, such as by
removing the SEF rules required as conditions under NAL No. 17-17, they
may incur modest costs.
c. Consideration of Alternatives
The relevant no-action position set forth in NAL No. 17-17, upon
which the rule amendments are based, is subject to withdrawal by
Commission staff. In addressing alternatives to adopting the amendments
to Sec. 37.6(b), the Commission considered the costs and benefits
associated with enforcing the requirements of existing Sec. 37.6(b).
The Commission believes that adopting the amendments to Sec. 37.6(b),
and the conforming amendments set forth in these final rules, would
help to maintain the benefits previously articulated in the SEF Core
Principles Final Rule, but also reduce related costs for SEFs with
respect to confirmation requirements.\100\
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\100\ The Commission recognized the important benefits provided
by the Sec. 37.6(b) confirmation requirements in the cost-benefit
considerations to the SEF Core Principles Final Rule. With respect
to those benefits, the Commission stated that the requirements
would, among other things, (i) provide legal certainty to market
participants; (ii) promote accuracy for counterparties regarding
exposure levels with other counterparties; and (iii) reduce costs
and risks involved with resolving error trade disputes between
counterparties. See SEF Core Principles Final Rule at 33570.
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[[Page 35001]]
d. Section 15(a) Factors
(1) Protection of Market Participants and the Public
The rule amendments should continue to promote the legal certainty
of swap transactions executed on SEFs. The amendments to Sec. 37.6 for
uncleared swaps, and the conforming amendments set forth in these final
rules, will clarify compliance requirements, consistent with the
position taken by Commission staff in NAL No. 17-17, while helping to
maintain the protection of market participants and the public.
(2) Efficiency, Competitiveness, and Financial Integrity of Markets
The amendments to Sec. 37.6 for uncleared swaps, and the
conforming amendments set forth in these final rules, will ease
compliance for SEFs and market participants on a longer-term basis,
i.e., by providing a regulatory solution beyond the corresponding no-
action position provided by Commission staff in NAL No. 17-17. This may
improve the efficiency of the swap markets with respect to issuing and
transmitting swap confirmations to counterparties. In particular, SEFs
would attain greater operational efficiency because they would not be
required to develop an infrastructure for collecting and maintaining
all relevant underlying, previously negotiated agreements between
counterparties transacting on the SEF.
As noted above, with respect to uncleared swaps, the addition of
Sec. 37.6(b)(1) could reduce the financial integrity of transactions
on SEFs compared to the current rule. There could be a greater risk of
misunderstanding between the counterparties to a swap transaction if
SEFs do not provide all the terms of the transaction at the time of
execution, instead incorporating certain terms by reference. Even when
underlying agreements are incorporated by reference, confusion could
arise from issues such as multiple versions of an agreement with the
same labeling, or missing sections. However, the Commission does not
expect that this risk will materially reduce the integrity of the swaps
market. As noted above, the Commission notes that the relevant
underlying agreements usually establish relationship terms between
counterparties that govern all trading between them in uncleared swaps,
and do not generally concern the terms of specific transactions.
Moreover, the rule amendments could encourage financial integrity of
the swap markets by, among other things, providing clarity that the
terms of an uncleared swap confirmation issued by a SEF supersedes any
conflicting terms in underlying agreements between the counterparties.
(3) Price Discovery
The Commission is not aware of significant effects on the price
discovery process from the amendments to Sec. 37.6, and the conforming
amendments set forth in these final rules, regarding confirmations.
(4) Sound Risk Management Practices
The amendments to the confirmation requirements in Sec. 37.6(b),
and the conforming amendments set forth in these final rules, will
maintain the promotion of sound risk management practices with respect
to the requirement for SEFs to issue transaction confirmations, i.e.,
by providing market participants with the certainty that transactions
executed on or pursuant to the rules of a SEF will be legally
enforceable with respect to all counterparties to the transaction.\101\
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\101\ See supra note 100.
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(5) Other Public Interest Considerations
The Commission is identifying a public interest benefit in
codifying the no-action position in NAL No. 17-17, where the efficacy
of that position has been demonstrated. In such a situation, the
Commission believes it serves the public interest to engage in notice-
and-comment rulemaking, where it seeks and considers the views of the
public in amending its regulations, rather than leaving SEFs to
continue to rely on a staff-provided no-action position that does not
bind the Commission, provides less long-term certainty, and offers a
more limited opportunity for public input.
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 anti-competitive means of achieving the
objectives of the CEA, in issuing any order or adopting any Commission
rule or regulation.\102\ The Commission does not anticipate that the
amendments to parts 23 and 37 of its regulations would promote or
result in anti-competitive consequences or behavior. The Commission did
not receive any comments on any anti-competitive consequences or
behavior.
---------------------------------------------------------------------------
\102\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------
List of Subjects
17 CFR Part 23
Confirmations, Swaps.
17 CFR Part 37
Swaps, Swap confirmations, Uncleared swap confirmations, Swap
execution facilities.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR parts 23 and 37 to read as follows:
PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS
0
1. The authority citation for part 23 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6p, 6r, 6s, 6t,
9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21. Section 23.160 also
issued under 7 U.S.C. 2(i); Sec. 721(b), Pub. L. 111-203, 124 Stat.
1641 (2010).
0
2. In Sec. 23.501, revise paragraph (a)(4)(i) to read as follows:
Sec. 23.501 Swap confirmation.
(a) * * *
(4) * * *
(i) Any swap transaction executed on or pursuant to the rules of a
swap execution facility or designated contract market shall be deemed
to satisfy the requirements of this section, provided that the rules of
the swap execution facility or designated contract market establish
that confirmation of all terms of the transaction shall take place as
soon as technologically practicable after execution.
* * * * *
PART 37--SWAP EXECUTION FACILITIES
0
3. 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
4. Revise Sec. 37.6 to read as follows:
Sec. 37.6 Enforceability.
(a) A transaction executed on or pursuant to the rules of a swap
execution facility shall not be void, voidable, subject to rescission,
otherwise invalidated, or rendered unenforceable as a result of:
(1) A violation by the swap execution facility of the provisions of
section 5h of the Act or this part;
[[Page 35002]]
(2) Any Commission proceeding to alter or supplement a rule, term,
or condition under section 8a(7) of the Act or to declare an emergency
under section 8a(9) of the Act; or
(3) Any other proceeding the effect of which is to:
(i) Alter or supplement a specific term or condition or trading
rule or procedure; or
(ii) Require a swap execution facility to adopt a specific term or
condition, trading rule or procedure, or to take or refrain from taking
a specific action.
(b) A swap execution facility shall provide each counterparty to a
transaction that is executed on or pursuant to the rules of the swap
execution facility with a written record of all of the terms of the
transaction which shall legally supersede any conflicting terms of a
previous agreement and serve as a confirmation of the transaction. The
confirmation of all terms of the transaction shall take place as soon
as technologically practicable after execution; provided that specific
customer identifiers for accounts included in bunched orders involving
swaps need not be included in confirmations provided by a swap
execution facility if the applicable requirements of Sec. 1.35(b)(5)
of this chapter are met.
(1) For a confirmation of an uncleared swap transaction, the swap
execution facility may satisfy the requirements of this paragraph (b)
by incorporating by reference terms from underlying, previously
negotiated agreements governing such transaction between the
counterparties, without obtaining such incorporated agreements except
as otherwise necessary to fully perform its operational, risk
management, governance, or regulatory functions, or any requirements
under this part.
(2) [Reserved]
Issued in Washington, DC, on April 25, 2024, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Swap Confirmation Requirements for Swap Execution
Facilities--Voting Summary and Chairman's and Commissioners' Statements
Appendix 1--Voting Summary
On this matter, Chairman Behnam and Commissioners Johnson,
Goldsmith Romero, Mersinger, and Pham voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Statement of Chairman Rostin Behnam
I am very pleased that the Commission voted to finalize
necessary amendments to the Commission's regulations addressing
longstanding issues with the uncleared swap confirmation
requirements under Rule 37.6(b). During the initial implementation
of part 37, SEFs informed the CFTC that the confirmation requirement
for uncleared swaps was operationally and technologically difficult
and impractical to implement. In light of these challenges, the
Division of Market Oversight provided targeted no-action positions
for SEFs with respect to certain provisions of Commission
regulations throughout the last decade.\1\
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\1\ See CFTC Letter No. 13-58, Time Limited No-Action Relief to
Temporarily Registered Swap Execution Facilities from Commission
Regulation 37.6(b) for non-Cleared Swaps in All Asset Classes (Sept.
30, 2013), https://www.cftc.gov/csl/13-58/download; CFTC Letter No.
14-108, Staff No-Action Position Regarding SEF Confirmations and
Recordkeeping Requirements under Certain Provisions Included in
Regulations 37.6(b) and 45.2 (Aug. 18, 2014), https://www.cftc.gov/csl/14-108/download; CFTC Letter No. 15-25, Extension of No-Action
Relief for SEF Confirmation and Recordkeeping Requirements under
Commission Regulations 37.6(b), 37.1000, 37.1001, and 45.2, and
Additional Relief for Confirmation Data Reporting Requirements under
Commission Regulation 45.3(a) (Apr. 22, 2015), https://www.cftc.gov/csl/15-25/download; CFTC Letter No. 16-25, Extension of No-Action
Relief for Swap Execution Facility Confirmation and Recordkeeping
Requirements under Commodity Futures Trading Commission Regulations
37.6(b), 37.1000, 37.1001, 45.2, and 45.3(a) (Mar. 14, 2016),
https://www.cftc.gov/csl/16-25/download; and CFTC Letter no. 17-17,
Extension of No-Action Relief for Swap Execution Facility
Confirmation and Recordkeeping Requirements under Commodity Futures
Trading Commission Regulations 37.6(b), 37.1000, 37.1001, 45.2, and
45.3(a) (Mar. 24, 2017), https://www.cftc.gov/csl/17-17/download.
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As there was no workable solution that could effectuate the
original language of the relevant rule, the Commission is has voted
to amend Rule 37.6(b) to codify the longstanding staff no-action
position. The amendment enables SEFs to incorporate terms by
reference in an uncleared swap confirmation without being required
to obtain the underlying, previously negotiated agreements between
the counterparties. An amendment to Rule 23.501 will clarify the
consistent treatment of trades executed away from a SEF or
designated contract market (DCM) and permit confirmation of all
terms of a swap transaction as soon as technologically practicable
following execution, as opposed to requiring confirmation ``at the
same time as execution.'' \2\
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\2\ Commission Rule 23.501(a)(4)(i), 17 CFR 23.501(a)(4)(i).
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This final rule is an example of my continuing focus on
providing market participants with clarity and certainty by, where
possible, codifying existing staff no-action positions.
I would like to thank Roger Smith in our Division of Market
Oversight for his work on this important final rule.
Appendix 3--Statement of Commissioner Kristin N. Johnson
An essential component of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act) is its framework for the
regulation of swaps, including central clearing and trade execution
requirements, registration and comprehensive regulation of swap
dealers, and recordkeeping and reporting requirements.
I vote to approve today's final rule on Swap Confirmation
Requirements for Swap Execution Facilities (Final Rule), which
facilitates predictability and consistency in swaps markets by
codifying long-standing no-action relief into regulation, while
maintaining a robust regulatory regime for swaps and swap execution
facilities (SEFs).
The Dodd-Frank Act amended the Commodity Exchange Act (CEA) by
adding Section 5h, which provides that a person may not operate ``a
facility for the trading or processing of swaps unless the facility
is registered as a [SEF] or as a designated contract market.'' \1\ A
SEF allows multiple participants to execute or trade swaps. As such,
SEFs facilitate swap transactions in our markets by facilitating the
execution of swaps between market participants. Additionally, SEFs
play a critical role in price discovery and transparency and
policing and reporting swap transactions in an effort to monitor
systemic risk.
---------------------------------------------------------------------------
\1\ 7 U.S.C. 7b-3(a).
---------------------------------------------------------------------------
In 2013, the Commission adopted new rules and principles for
SEFs. Under CFTC Regulation 37.6(b), a SEF must provide each
counterparty to cleared and uncleared swaps with ``a written record
of all of the terms of the transaction which shall legally supersede
any previous agreement and serve as a confirmation of the
transaction.'' \2\ This confirmation is required to ``take place at
the same time as execution,'' subject to certain exceptions related
to bunched orders involving swaps.\3\
---------------------------------------------------------------------------
\2\ 17 CFR 37.6(b).
\3\ Id.
---------------------------------------------------------------------------
In the adopting release, the Commission noted that a SEF may
comply with the swap confirmation requirement for uncleared swaps by
incorporating terms set forth in master agreements previously
negotiated by counterparties, if such agreements had been submitted
to the SEF prior to execution and the counterparties ensure that
nothing in the confirmation terms contradict the terms incorporated
from the master agreement.\4\ SEFs and market participants voiced
concerns that it was operationally and technologically difficult and
impracticable to obtain and store the underlying, bespoke, highly-
negotiated swap agreements of SEF members for purposes of satisfying
the swap confirmation requirement.
---------------------------------------------------------------------------
\4\ See Core Principles and Other Requirements for Swap
Execution Facilities, 78 FR 33,476, 33,491 n.195 (June 4, 2013).
---------------------------------------------------------------------------
Pursuant to a no-action letter issued in March 2017, which was
the last extension of a no-action letter originally issued in August
2014,\5\ SEFs were permitted to incorporate by
[[Page 35003]]
reference the terms of previously-negotiated agreements and were
relieved of the obligation to: (1) obtain documents incorporated by
reference in a swap confirmation and (2) report confirmation data
contained in such agreements. SEFs were required to comply with
certain additional conditions, including that their rulebooks
require participants to provide copies of the underlying agreements
to the SEF upon request.
---------------------------------------------------------------------------
\5\ CFTC No-Action Letter 17-17 (Extension of No-Action Relief
for Swap Execution Facility Confirmation and Recordkeeping
Requirements under Commodity Futures Trading Commission Regulations
37.6(b), 37.1000, 37.1001, 45.2, and 45.3(a)) (Mar. 24, 2017),
https://www.cftc.gov/csl/17-17/download; CFTC No-Action Letter 14-
108 (Staff No-Action Position Regarding SEF Confirmations and
Recordkeeping Requirements under Certain Provisions Included in
Regulations 37.6(b) and 45.2) (Aug. 18, 2014), https://www.cftc.gov/csl/14-108/download.
---------------------------------------------------------------------------
On August 25, 2023, the Commission released a Notice of Proposed
Rulemaking to codify this no-action relief (Proposed Rule) for
uncleared swaps. The Commission did not incorporate the conditions
in No-Action Letter 17-17 into new CFTC Regulation 37.6(b)(1). The
Commission takes the view that, as noted below, the existing
requirements for SEFs under the CEA, particularly Core Principle 5,
and the Commission's Part 37 regulations sufficiently account for
and obviate the need for these conditions.\6\
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\6\ Final Rule, Swap Confirmation Requirements for Swap
Execution Facilities, at 14.
---------------------------------------------------------------------------
As I noted at that time, the Commission ``issued guidance and
exemptive relief based on concerns that SEFs had been unable to
develop a practicable and cost-effective method to request, accept,
and maintain a library of the underlying previously-negotiated
freestanding agreements between counterparties.'' \7\
---------------------------------------------------------------------------
\7\ Kristin N. Johnson, Commissioner, CFTC, Statement in Support
of the Notice of Proposed Rulemaking on Swap Confirmation
Requirements for Swap Execution Facilities (July 26, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement072623c.
---------------------------------------------------------------------------
The Final Rule approved today fully adopts the Proposed Rule. In
addition to permitting SEFs to incorporate by reference terms of
previously negotiated agreements between counterparties, without
having to obtain a copy of such agreements, the Final Rule will
amend CFTC Regulation 37.6(b) to permit confirmation of all terms of
a swap transaction to take place ``as soon as technologically
practicable'' after the execution of the swap transaction.
Additionally, the Final Rule amends CFTC Regulation 37.6(b) to make
clear that the confirmation a SEF provides under CFTC Regulation
37.6(b) legally supersedes only conflicting terms in a previous
agreement.
Importantly, as noted above, both SEFs and the Commission will
retain the ability to obtain essential information, including copies
of the underlying agreements for uncleared swaps. Under SEF Core
Principle 5, a SEF must ``[e]stablish and enforce rules that will
allow the facility to obtain any necessary information to perform
any of the functions described in section 5h of the [CEA].'' \8\ The
SEF must also ``[p]rovide [this] information to the Commission on
request.'' \9\ A SEF must also have ``the authority to examine books
and records kept by [its] members and by persons under
investigation.'' \10\ As the Final Rule notes, given these
requirements, a SEF should have ``the ability and authority to
request copies of the underlying agreements that are incorporated by
reference into a confirmation for an uncleared swap transaction and
to provide such agreements to the Commission upon request.'' \11\
---------------------------------------------------------------------------
\8\ 17 CFR 37.500.
\9\ Id.
\10\ 17 CFR 37.203(b).
\11\ Final Rule, Swap Confirmation Requirements for Swap
Execution Facilities, at 14-15.
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I support this Final Rule, which provides a practical approach
to implementing our regulatory requirements, while maintaining
robust oversight of SEFs and our markets.
Thank you to the staff of the Division of Market Oversight and
Roger Smith as well as the Office of the General Counsel, the Market
Participants Division, and the Office of the Chief Economist, for
their hard work on this Final Rule.
Appendix 4--Statement of Commissioner Summer K. Mersinger
Workable rules are essential to maintain the confidence of the
American public in the integrity of our derivatives markets. So,
when we become aware that our rules are not as workable as we
thought, or impose substantial operational burdens with little
corresponding regulatory benefit, we should address these
shortcomings promptly. Unfortunately, though, the Commission
sometimes chooses to ``kick the can down the road'' by relying on
staff no-action letters instead--often for many years--without
tackling the root cause of the problem in the rule itself.
I have not been shy about expressing my feelings related to no-
action letters during my tenure as a Commissioner. Yes, there are
appropriate reasons for staff to issue no-action letters, and I do
see their utility in providing flexibility when needed. However, I
believe there has at times been an over-reliance on this practice at
the agency, and we must move forward in a manner that respects the
role of the Commissioners in agency policy-making.
My point is perfectly illustrated by Commission Rule 37.6(b)
regarding confirmations for swaps executed on or pursuant to the
rules of a swap execution facility (``SEF''). The rule requires that
a SEF provide each counterparty to a transaction with a written
record of all the terms of the transaction.\1\ But things get
complicated with respect to uncleared swaps, since the terms of such
swaps also may include previously-negotiated agreements between the
counterparties (such as an ISDA Master Agreement, and related
Schedule and Credit Support Annex).
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\1\ Commission Rule 37.6(b), 17 CFR 37.6(b).
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Accordingly, when the Commission adopted Rule 37.6(b) in 2013,
it stated that a SEF's written confirmation of an uncleared swap can
incorporate the terms of such agreements by reference, but with a
catch--namely, that such agreements must be submitted to the SEF
prior to execution.\2\ This approach imposed on each SEF the
virtually impossible (and, frankly, needless) task of building and
maintaining a library of every previous bilateral agreement from
counterparties to uncleared swap transactions on its platform.
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\2\ See Core Principles and Other Requirements for Swap
Execution Facilities, 78 FR 33476, 33491 n.195 (June 4, 2013).
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Recognizing the enormous operational problems posed by the
Commission's approach to SEF swap confirmations for uncleared swaps,
as well as the limited value of that approach, Commission staff
issued four successive no-action letters beginning in 2014.\3\
Although it has taken a full decade, I am pleased that the
Commission is finally adopting a permanent and practicable SEF
confirmation solution. These rule amendments, among other things,
will codify the existing staff no-action position that permits SEFs,
in an uncleared swap confirmation, to incorporate by reference the
terms of previously-negotiated counterparty agreements without
obtaining the underlying agreements themselves.
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\3\ See (i) CFTC Letter No. 14-108 (Division of Market Oversight
(``DMO'') August 18, 2014); (ii) CFTC Letter No. 15-25 (DMO April
22, 2015); (iii) CFTC Letter No. 16-25 (DMO March 14, 2016); and
(iv) CFTC Letter No. 17-17 (DMO March 24, 2017). These no-action
letters are available at https://www.cftc.gov/LawRegulation/CFTCStaffLetters/letters.htm?field_csl_letter_types_target_id%5B%5D=636.
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But there remains more work to be done in this regard. I will
continue to push the agency to act through notice-and-comment
rulemaking, rather than relying on perpetual staff no-action relief,
with respect to other rules that are not workable for those who must
comply with them--especially where, as here, their asserted benefits
are largely illusory.
Appendix 5--Statement of Commissioner Caroline D. Pham
I support the Final Rule on Swap Confirmation Requirements for
Swap Execution Facilities (SEF Confirmation Final Rule) because it
resolves the temporal impossibility of requiring SEF confirmations
at the time of execution for block trades, which are in fact
executed away from the SEF and then submitted to the SEF afterwards.
I would like to thank Roger Smith, Nora Flood, and Vince McGonagle
in the Division of Market Oversight for their work on the SEF
Confirmation Final Rule.
Conflicting or impossible regulatory requirements can make
compliance with our rules nonsensical.\1\ That is clear from the
years of CFTC staff no-action relief that led to the rule amendments
codified today in the SEF Confirmation Final Rule.\2\ I am pleased
[[Page 35004]]
that the Commission has decided to fix an unworkable aspect of our
existing rules, and encourage the Commission to continue to do so
promptly when market participants identify these problems in the
future. Continuous improvement of our regulatory frameworks, as
appropriate, serves the public interest of well-functioning markets
that are efficient and effective in providing risk management and
price discovery.
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\1\ See Statement of Commissioner Caroline D. Pham In Support of
Swap Confirmation Requirements for Swap Execution Facilities
Proposal (July 26, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement072623c.
\2\ See, e.g., CFTC Staff Letter No. 17-17, Re: Extension of No-
Action Relief for Swap Execution Facility Confirmation and
Recordkeeping Requirements under Commodity Futures Trading
Commission Regulations 37.6(b), 37.1000, 37.1001, 45.2, and 45.3(a)
(Mar. 24, 2017).
[FR Doc. 2024-09368 Filed 4-30-24; 8:45 am]
BILLING CODE 6351-01-P