Core Principles and Other Requirements for Swap Execution Facilities

Federal RegisterJun 4, 2013

Ask Donna

What actually matters in this document.

Text

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 37

RIN 3038-AD18

Core Principles and Other Requirements for Swap Execution Facilities

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Final rule.

SUMMARY:

The Commodity Futures Trading Commission (“Commission” or “CFTC”) is adopting new rules, guidance, and acceptable practices to implement certain statutory provisions enacted by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The final rules, guidance, and acceptable practices, which apply to the registration and operation of a new type of regulated entity named a swap execution facility (“SEF”), implement the Dodd-Frank Act's new statutory framework that, among other requirements, adds a new section 5h to the Commodity Exchange Act (“CEA” or “Act”) concerning the registration and operation of SEFs, and adds a new section 2(h)(8) to the CEA concerning the execution of swaps on SEFs.

DATES:

The rules will become effective August 5, 2013, with the exception of regulation 37.3(b)(5) (17 CFR 37.3(b)(5)), which shall become effective August 5, 2015.

Compliance date:

October 2, 2013, except that: (a) From August 5, 2013 until October 2, 2014 market participants may comply with the minimum market participant requirement in regulation 37.9(a)(3) (17 CFR 37.9(a)(3)) by transmitting a request for a quote to no less than two market participants; and (b) each affected entity shall comply with the warning letter requirement in regulation 37.206(f) (17 CFR 37.206(f)) no later than August 5, 2014.

FOR FURTHER INFORMATION CONTACT:

Amir Zaidi, Special Counsel, 202-418-6770,

azaidi@cftc.gov

, Alexis Hall-Bugg, Special Counsel, 202-418-6711,

ahallbugg@cftc.gov

, or David Van Wagner, Chief Counsel, 202-418-5481,

dvanwagner@cftc.gov

, Division of Market Oversight; Michael Penick, Senior Economist, 202-418-5279,

mpenick@cftc.gov

, or Sayee Srinivasan, Research Analyst, 202-418-5309,

ssrinivasan@cftc.gov

, Office of the Chief Economist, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

A. Swaps and Title VII of the Dodd-Frank Act

B. SEF Notice of Proposed Rulemaking

II. Part 37 of the Commission's Regulations—Final Rules

A. Adoption of Regulations, Guidance, and Acceptable Practices

B. General Regulations (Subpart A)

1. § 37.1—Scope

2. § 37.2—Applicable Provisions

3. § 37.3—Requirements for Registration

4. § 37.4—Procedures for Listing Products and Implementing Rules

5. § 37.5—Information Relating to Swap Execution Facility Compliance

6. § 37.6—Enforceability

7. § 37.7—Prohibited Use of Data Collected for Regulatory Purposes

8. § 37.8—Boards of Trade Operating Both a Designated Contract Market and a Swap Execution Facility

9. § 37.9—Permitted Execution Methods

10. § 37.10—Swaps Made Available for Trading

11. § 37.11—Identification of Non-Cleared Swaps or Swaps Not Made Available To Trade

C. Regulations, Guidance, and Acceptable Practices for Compliance With the Core Principles

1. Subpart B—Core Principle 1 (Compliance With Core Principles)

2. Subpart C—Core Principle 2 (Compliance With Rules)

(a) § 37.200—Core Principle 2—Compliance With Rules

(b) § 37.201—Operation of Swap Execution Facility and Compliance With Rules

(d) § 37.203—Rule Enforcement Program

(e) § 37.204—Regulatory Services Provided by a Third Party

(f) § 37.205—Audit Trail

(g) § 37.206—Disciplinary Procedures and Sanctions

(h) § 37.207—Swaps Subject to Mandatory Clearing

3. Subpart D—Core Principle 3 (Swaps Not Readily Susceptible to Manipulation)

4. Subpart E—Core Principle 4 (Monitoring of Trading and Trade Processing)

(a) § 37.401—General Requirements

(b) § 37.402—Additional Requirements for Physical-Delivery Swaps

(d) § 37.404—Ability To Obtain Information

(e) § 37.405—Risk Controls for Trading

(f) § 37.406—Trade Reconstruction

(g) § 37.407—Additional Rules Required

5. Subpart F—Core Principle 5 (Ability To Obtain Information)

(a) § 37.501—Establish and Enforce Rules

(b) § 37.502—Collection of Information

(d) § 37.504—Information-Sharing Agreements

6. Subpart G—Core Principle 6 (Position Limits or Accountability)

7. Subpart H—Core Principle 7 (Financial Integrity of Transactions)

(a) § 37.701—Mandatory Clearing

(b) § 37.702—General Financial Integrity

8. Subpart I—Core Principle 8 (Emergency Authority)

(a) § 37.801—Additional Sources for Compliance

9. Subpart J—Core Principle 9 (Timely Publication of Trading Information)

10. Subpart K—Core Principle 10 (Recordkeeping and Reporting)

11. Subpart L—Core Principle 11 (Antitrust Considerations)

12. Subpart M—Core Principle 12 (Conflicts of Interest)

13. Subpart N—Core Principle 13 (Financial Resources)

(a) § 37.1301—General Requirements

(b) § 37.1302—Types of Financial Resources

(d) § 37.1304—Valuation of Financial Resources

(e) § 37.1305—Liquidity of Financial Resources

(f) § 37.1306—Reporting Requirements

14. Subpart O—Core Principle 14 (System Safeguards)

(a) § 37.1401—Requirements

15. Subpart P—Core Principle 15 (Designation of Chief Compliance Officer)

(a) § 37.1501—Chief Compliance Officer

III. Related Matters

A. Regulatory Flexibility Act

B. Paperwork Reduction Act

C. Cost Benefit Considerations

1. Introduction

2. SEF Market Structure

3. Registration

4. Recordkeeping and Reporting

5. Compliance

6. Monitoring and Surveillance

7. Financial Resources

8. Emergency Operations and System Safeguards

IV. List of Commenters

V. Text of Final Regulations, Guidance, and Acceptable Practices

I. Background

A. Swaps and Title VII of the Dodd-Frank Act

Historically, swaps have traded in over-the-counter (“OTC”) markets, rather than on regulated exchanges given their exemption from regulation.

The OTC swaps market is less transparent than exchange-traded futures and securities markets. This lack of transparency was a major contributor to the 2008 financial crisis because regulators and market participants lacked visibility to identify and assess the implications of swaps market exposures and counterparty relationships.

As a result, on July 21,

2010, President Obama signed the Dodd-Frank Act,

which tasked the Commission with overseeing a large portion of the U.S. swaps market.

See

Commodity Futures Modernization Act of 2000, Public Law 106-554, 114 Stat. 2763 (2000).

See

The Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report: Final Report of

the National Commission on the Causes of the Financial and Economic Crisis in the United States (Official Government Edition), at 299, 352, 363-364, 386, 621 n. 56 (2011),

available at http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf.

The Commission has acknowledged, however, that the benefits of enhanced market transparency are not boundless, particularly in swap markets with limited liquidity.

See

Procedures to Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades, 77 FR 15460, 15466 (proposed Mar. 15, 2012). In implementing these regulations, the Commission has taken into account the benefits and concerns related to market transparency.

Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).

Title VII of the Dodd-Frank Act

amended the CEA

to establish a comprehensive new regulatory framework for swaps and security-based swaps (“SB-swaps”). A key goal of the Dodd-Frank Act is to bring greater pre-trade and post-trade transparency to the swaps market. Pre-trade transparency with respect to the swaps market refers to making information about a swap available to the market, including bid (offers to buy) and offer (offers to sell) prices, quantity available at those prices, and other relevant information before the execution of a transaction. Such transparency lowers costs for investors, consumers, and businesses; lowers the risks of the swaps market to the economy; and enhances market integrity to protect market participants and the public. The Dodd-Frank Act also ensures that a broader universe of market participants receive pricing and volume information by providing such information upon the completion of every swap transaction (

i.e.,

post-trade transparency).

By requiring the trading of swaps on SEFs and designated contract markets (“DCMs”), all market participants will benefit from viewing the prices of available bids and offers and from having access to transparent and competitive trading systems or platforms.

Pursuant to section 701 of the Dodd-Frank Act, Title VII may be cited as the “Wall Street Transparency and Accountability Act of 2010.”

7 U.S.C. 1

et seq.

See

Financial Stability Board, Implementing OTC Derivatives Market Reforms, at 41 (Oct. 25, 2010),

available at http://www.financialstabilityboard.org/publications/r_101025.pdf;

Technical Committee of the International Organization of Securities Commissions, Transparency of Structured Finance Products Final Report, at 17, 21 (Jul. 2010),

available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD326.pdf.

In addition to facilitating greater transparency and trading of swaps on SEFs, Title VII of the Dodd-Frank Act establishes a comprehensive regulatory framework, including registration, operation, and compliance requirements for SEFs.

For example, section 733 of the Dodd-Frank Act sets forth a broad registration provision that requires any person who operates a facility for the trading of swaps to register as a SEF or as a DCM.

In addition, section 721 of the Dodd-Frank Act amended the CEA to define SEF as a trading platform where multiple participants have the ability to execute swaps by accepting bids and offers made by multiple participants in the platform.

Furthermore, section 723 of the Dodd-Frank Act set forth a trade execution requirement, which states that swap transactions subject to the clearing requirement must be executed on a DCM or SEF, unless no DCM or SEF makes the swap available to trade or for swap transactions subject to the clearing exception under CEA section 2(h)(7).

Section 733 of the Dodd-Frank Act provided that to be registered and maintain registration, a SEF must comply with fifteen enumerated core principles and any requirement that the Commission may impose by rule or regulation.

See

CEA section 5h, as enacted by section 733 of the Dodd-Frank Act; 7 U.S.C. 7b-3. This regulatory framework includes: (i) Registration, operation, and compliance requirements for SEFs and (ii) fifteen core principles. Applicants and registered SEFs are required to comply with the core principles as a condition of obtaining and maintaining their registration as a SEF.

CEA section 5h(a)(1), as enacted by section 733 of the Dodd-Frank Act; 7 U.S.C. 7b-3(a)(1).

CEA section 1a(50), as amended by section 721 of the Dodd-Frank Act; 7 U.S.C. 1a(50).

CEA section 2(h)(8), as amended by section 723 of the Dodd-Frank Act; 7 U.S.C. 2(h)(8).

CEA section 5h, as enacted by section 733 of the Dodd-Frank Act; 7 U.S.C. 7b-3.

B. SEF Notice of Proposed Rulemaking

The Dodd-Frank Act amended the CEA to provide that, under new section 5h, the Commission may in its discretion determine by rule or regulation the manner in which SEFs comply with the core principles.

In consideration of both the novel nature of SEFs and its experience in overseeing DCMs' compliance with core principles, the Commission carefully assessed which SEF core principles would benefit from regulations, providing legal certainty and clarity to the marketplace, and which core principles would benefit from guidance or acceptable practices, where flexibility is more appropriate. Based on that evaluation, on January 7, 2011, the Commission proposed a combination of regulations, guidance, and acceptable practices for the registration, oversight, and regulation of SEFs (“SEF NPRM”).

CEA section 5h(f)(1); 7 U.S.C. 7b-3(f)(1).

Core Principles and Other Requirements for Swap Execution Facilities, 76 FR 1214 (proposed Jan. 7, 2011).

The SEF NPRM provided, among other requirements, the following:

(1) Procedures for temporary and full SEF registration.

Id.

at 1238.

(2) A minimum trading functionality requirement that all SEFs must offer,

which took into account the SEF definition,

the core principles applicable to SEFs,

and the goals provided in section 733 of the Dodd-Frank Act.

The minimum trading functionality required a SEF to provide a centralized electronic trading screen upon which any market participant can post both executable and non-executable bids and offers that are transparent to all other market participants of the SEF.

For a trader who has the ability to execute against its customer's order or to execute two customers' orders against each other, the SEF NPRM also required the trader be subject to a 15 second time delay between the entry of those two orders.

In addition, the proposal allowed a Request for Quote (“RFQ”) System

that operates in conjunction with the SEF's minimum trading functionality.

Finally, the SEF NPRM stated that a SEF may offer other functionalities in conjunction with the minimum trading functionality, as long as those functionalities meet the SEF definition and comply with the core principles.

Id.

at 1241.

CEA section 1a(50); 7 U.S.C. 1a(50).

CEA section 5h(f); 7 U.S.C. 7b-3(f).

The goals of section 733 of the Dodd-Frank Act are to promote the trading of swaps on SEFs and to promote pre-trade price transparency in the swaps market. CEA section 5h(e); 7 U.S.C. 7b-3(e).

Core Principles and Other Requirements for Swap Execution Facilities, 76 FR at 1241.

Id.

By “in conjunction with the SEF's minimum trading functionality,” the Commission means that the SEF NPRM required a SEF to offer the minimum trading functionality, and if that SEF also offered an RFQ System, it was required to communicate any bids or offers resting on the minimum trading functionality to the RFQ requester along with the responsive quotes.

See

the discussion below regarding “Taken Into Account and Communicated” Language in the RFQ System Definition under § 37.9(a)(1)(ii)—Request for Quote System in the preamble for further details.

Core Principles and Other Requirements for Swap Execution Facilities, 76 FR at 1220.

(3) The classification of swap transactions into two categories: Required Transactions (

i.e.,

transactions subject to the trade execution mandate under section 2(h)(8) of the CEA and not block trades) and Permitted Transactions (

i.e.,

transactions not

subject to the clearing and trade execution mandates, illiquid or bespoke swaps, or block trades).

Under the SEF NPRM, Required Transactions were required to be executed on the minimum trading functionality, an Order Book meeting the minimum trading functionality, or an RFQ System (in conjunction with the minimum trading functionality).

The SEF NPRM also allowed a SEF to provide additional methods of execution for Permitted Transactions, including Voice-Based Systems.

Id.

at 1241.

Id.

(4) Regulations, guidance, and acceptable practices to implement the 15 core principles specified in section 5h(f) of the Act.

Id.

at 1241-1253, 1256-1258.

The initial comment period for the SEF NPRM ended on March 8, 2011. Subsequently, the Commission reopened the comment period until June 3, 2011, as part of its global extension of comment periods for various rulemakings implementing the Dodd-Frank Act.

After the second comment period ended, the Commission continued to accept and consider late comments, which it did until April 30, 2013.

The Commission received approximately 107 comment letters on the SEF NPRM from members of the public.

The Chairman and Commissioners, as well as the Commission staff, participated in numerous meetings with representatives of single dealer platforms, interdealer brokers, DCMs, trade associations, OTC market participants, potential SEF applicants, and other interested parties.

In addition, the Commission consulted with the Securities and Exchange Commission (“SEC”) and international regulators on numerous occasions.

Reopening and Extension of Comment Periods for Rulemakings Implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act, 76 FR 25274 (May 4, 2011). The Commission extended the applicable comment periods to provide the public an additional opportunity to comment on the proposed new regulatory framework. The Commission also opened an additional comment period, which ended on June 10, 2011, to provide the public an opportunity to comment on the Commission's phased implementation of the Act, as amended, including its implementation of section 733 of Dodd-Frank Act. Joint Public Roundtable on Issues Related to the Schedule for Implementing Final Rules for Swaps and Security-Based Swaps Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, 76 FR 23221 (Apr. 26, 2011).

The Commission also held two roundtables touching on issues related to the SEF NPRM: (1) “Available to Trade” Provision for Swap Execution Facilities and Designated Contract Markets; and (2) Proposed Regulations Implementing Core Principle 9 for Designated Contract Markets. Transcripts are available through the Commission's Web site at

http://www.cftc.gov/PressRoom/Events/2012Events/index.htm.

A list of the full names and abbreviations of commenters to the SEF NPRM is included in section IV at the end of this release. The Commission notes that many commenters submitted more than one comment letter. Additionally, all comment letters that pertain to the SEF NPRM, including those from the additional comment periods related to implementation of the final Dodd-Frank rules, are contained in the SEF rulemaking comment file and are available through the Commission's Web site at

http://comments.cftc.gov/PublicComments/CommentList.aspx?id=955.

Meeting summaries are available through the Commission's Web site at

http://comments.cftc.gov/PublicComments/CommentList.aspx?id=955.

II. Part 37 of the Commission's Regulations—Final Rules

A. Adoption of Regulations, Guidance, and Acceptable Practices

In this final rulemaking, the Commission is adopting many of the proposed regulations that each SEF must meet in order to comply with section 5h of the CEA, both initially upon registration and on an ongoing basis, and related guidance, and acceptable practices. As a result of the written comments received and dialogue and meetings with the public, the Commission has revised or eliminated a number of regulations that were proposed in the SEF NPRM, and in a number of instances, has codified guidance and/or acceptable practices in lieu of the proposed regulations. In determining the scope and content of the final SEF regulations, the Commission has carefully considered the costs and benefits for each rule with particular attention to the public comments. Additionally, the Commission has taken into account the concerns raised by commenters regarding the potential effects of specific rules on SEFs offering different swap contracts and trading systems or platforms and the importance of the statutory differences between SEFs and DCMs. The Commission addresses these issues below in its discussion of specific rule provisions.

The Commission also notes that the SEC has proposed rules related to security-based SEFs (“SB-SEFs”) as required under section 763 of the Dodd-Frank Act (“SB-SEF NPRM”).

Section 712(a) of the Dodd-Frank Act states that before commencing any rulemaking regarding swap execution facilities, the Commission “shall consult and coordinate to the extent possible with the Securities and Exchange Commission and the prudential regulators for the purposes of assuring regulatory consistency and comparability . . . .”

The Commission has also received several comments stating that the Commission and the SEC should harmonize their rules as much as possible.

Registration and Regulation of Security-Based Swap Execution Facilities, 76 FR 10948 (proposed Feb. 28, 2011).

15 U.S.C. 8302(a)(1).

Tradeweb Comment Letter at 3-4 (Jun. 3, 2011); Reuters Comment Letter 3-4 (Mar. 8, 2011); FSR Comment Letter at 10-11 (Mar. 8, 2011); WMBAA Comment Letter at 10-11 (Mar. 8, 2011).

The Commission has coordinated with the SEC to harmonize the SEF and SB-SEF requirements to the extent possible and has taken into consideration the comments for greater harmonization between the SEF and SB-SEF regulations. However, there may be appropriate differences in the approach that each agency may take regarding the regulation of SEFs and SB-SEFs. Cognizant of the different products and markets regulated by the SEC and the Commission, the SEC recognized in its SB-SEF NPRM that there may be differences in the approach that each agency may take regarding the regulation of SEFs and SB-SEFs.

Registration and Regulation of Security-Based Swap Execution Facilities, 76 FR at 10950.

Similarly, the Commission is mindful that swaps may also trade on DCMs. Thus, in addition to its efforts to coordinate its approach with the SB-SEF regulations, the Commission also seeks, where possible, to harmonize the final SEF regulations with the DCM regulations in order to minimize regulatory differences between SEFs and DCMs in those instances where Congress enacted similar core principles for the two types of registered entities. In addition, some differences in the agencies' regulatory oversight regimes may be attributed to the fact that, unlike the SEC that is only responsible for overseeing trading in SB-swaps, such as single-name securities and narrow-based security indexes, the Commission is charged with the oversight of swaps trading over a broad range of asset categories. Consequently, the Commission has taken into account the varied characteristics of those underlying commodities in formulating the regulatory responsibilities of SEFs.

In the preamble sections below, the Commission responds to the substantive comments submitted in response to the SEF NPRM. The Commission reviewed and considered all comments in adopting this final rulemaking. Further, the final regulations include a number of technical revisions and non-substantive changes to the proposed rule text intended to clarify certain provisions, standardize terminology

within this part 37, conform terminology to that used in other parts of the Commission's regulations, and more precisely state regulatory standards and requirements. For example, a minimum trading functionality requirement was in proposed § 37.9, which has been moved to the registration section under final § 37.3 to clarify that this functionality is required in order to register as a SEF. The final regulations will become effective 60 days after their publication in the

Federal Register

B. General Regulations (Subpart A)

The regulations in this final rulemaking are codified in subparts A through P under part 37 of the Commission's regulations. The general regulations consisting of §§ 37.1 through 37.9 are codified in subpart A, and the regulations applicable to each of the 15 core principles are codified in subparts B through P, respectively.

Subparts B through P begin with a regulation containing the language of the core principle in the Act.

1. § 37.1—Scope

Proposed § 37.1 provided that part 37 applies to entities that are registered SEFs, have been registered SEFs, or are applying to become registered SEFs. The proposed rule also stated that part 37 does not restrict the eligibility of SEFs to operate under the provisions of parts 38 or 49 of this chapter.

(a) Commission Determination

The Commission received no comments on this section and is adopting the provision as proposed.

The Commission has removed the phrase “has been registered” from proposed § 37.1 because a SEF that has been registered is the same as a SEF that is registered.

2. § 37.2—Applicable Provisions

Proposed § 37.2 listed the Commission regulations that, in addition to part 37, will be applicable to SEFs, including regulations that have been codified and are proposed to be codified upon the Commission's finalization of the rulemakings implemented pursuant to the Dodd-Frank Act.

(a) Commission Determination

Although it received no comments on this section, the Commission is revising proposed § 37.2 to generally state that SEFs shall comply with, in addition to part 37, all applicable Commission regulations, and to only cite those specific provisions whose applicability to SEFs may not be apparent. The Commission notes that a separate rulemaking adopted conforming changes to existing regulations to clarify the pre-Dodd Frank provisions applicable to SEFs.

There are, however, certain existing regulations that will apply to SEFs that the separate rulemaking did not address. Accordingly, for clarity purposes, the Commission is specifically stating that § 1.60

and part 9

of its regulations will apply to SEFs. These revisions will eliminate the need for the Commission to continually update § 37.2 when new regulations with which SEFs must comply are codified.

Adaptation of Regulations to Incorporate Swaps, 77 FR 66288 (Nov. 2, 2012). The Commission may promulgate a second phase of conforming changes to its regulations once more rules relating to swaps are finalized.

The term “contract market” used in § 1.60 of the Commission's regulations should be interpreted to include a SEF for purposes of applying the requirements of § 1.60 to a SEF. 17 CFR 1.60.

The term “exchange” used in part 9 of the Commission's regulations should be interpreted to include a SEF for purposes of applying the requirements of part 9 to a SEF. 17 CFR part 9.

3. § 37.3—Requirements for Registration

The Commission is renaming the title of this section from “Requirements for Registration” to “Requirements and Procedures for Registration” to provide greater clarity. The Commission is also restructuring the order of § 37.3 to provide clarity.

Proposed § 37.3 established, among other procedures, application procedures for temporary and full registration of new SEFs, and procedures for the transfer of a registration. To assist prospective SEF applicants, the SEF NPRM included under appendix A to part 37 an application form titled Form SEF. Form SEF included information that an applicant would be required to provide to the Commission in order for the Commission to make a determination regarding the applicant's request for SEF registration.

With respect to which entities must register as a SEF, the SEF NPRM stated that in order for an entity to meet the SEF definition and satisfy the SEF registration requirements, multiple parties must have the ability to execute or trade swaps by accepting bids and offers made by multiple participants.

In this regard, the SEF NPRM stated that one-to-one voice services and single dealer platforms do not satisfy the SEF definition because multiple participants do not have the ability to execute or trade swaps with multiple participants.

In addition, the SEF NPRM stated that entities that operate exclusively as swap processors do not meet the SEF definition and should not be required to register.

Although the SEF NPRM stated that the registration provision in CEA section 5h(a)(1) could be read to require the registration of entities that solely engage in trade processing,

it stated that such entities do not meet the SEF definition and should not be required to register as SEFs because: (1) They do not provide the ability to execute or trade a swap as required by the SEF definition; and (2) the SEF definition does not include the term “process.”

Core Principles and Other Requirements for Swap Execution Facilities, 76 FR at 1219.

Id.

Core Principles and Other Requirements for Swap Execution Facilities, 76 FR at 1219.

The SEF NPRM also noted that CEA section 2(h)(8) requires that transactions involving swaps subject to the clearing requirement be executed on a DCM or SEF, unless no DCM or SEF makes such swaps available to trade or such swaps qualify for the clearing exception under CEA section 2(h)(7).

In this regard, the SEF NPRM stated that market participants may desire to avail themselves of the benefits of trading on SEFs for swaps that are not subject to the CEA section 2(h)(8) trade execution requirement, but it also acknowledged that such swaps are not required to be executed on a SEF or DCM.

Id.

at 1221-22. CEA sections 2(h)(7) and 2(h)(8); 7 U.S.C. 2(h)(7) and 2(h)(8).

See

discussion below under § 37.10—Swaps Made Available for Trading in the preamble for further details regarding this process.

Id.

at 1222.

(a) Requirements for Registration

(1) Summary of Comments

Several commenters asserted that the proposed rule is ambiguous as to who must register as a SEF as required under CEA section 5h(a)(1) and requested clarification.

For example, UBS stated that the Commission should clarify that “the SEF registration requirement in [CEA section 5h(a)(1)] only applies to platforms that meet the SEF definition.”

In addition, Barclays

commented that the language of CEA section 5h(a)(1) should not be read broadly to require SEF registration for any platform or system that executes or processes swaps to the extent it is deemed to be a “facility” without considering whether such swaps are or are not subject to the CEA section 2(h)(8) trade execution mandate.

Similarly, Bloomberg noted the broad language under the CEA section 5h(a)(1) registration requirement, and stated that if Congress intended that all swaps be traded on a SEF or DCM, then the trade execution mandate under CEA section 2(h)(8) would be unnecessary.

The Commission also received comments and specific requests for a Commission determination as to whether certain business models or services must register as a SEF, including one-to-many platforms, blind auction platforms, aggregation services or portals, portfolio compression services, risk mitigation services, and swap processing services.

CEA section 5h(a)(1) states that “[n]o person may operate a facility for the trading or processing of swaps unless the facility is registered as a swap execution facility or designated contract market. . . .” 7 U.S.C. 7b-3(a)(1). UBS Comment Letter at 1-2 (May 18, 2012); UBS Comment Letter at 2-3 (Nov. 2, 2011); Barclays Comment Letter at 2 (Jun. 3, 2011); Deutsche Comment Letter at 6 (Mar. 8, 2011); Bloomberg Comment Letter at 3 (Mar. 8, 2011); State Street Comment Letter at 3 (Mar. 8, 2011); CME Comment Letter at 8 (Mar. 8, 2011).

UBS Comment Letter at 1 (May 18, 2012). The Commission notes that UBS submitted 2 comment letters on May 18, 2012.

Barclays Comment Letter at 2 (Jun. 3, 2011).

Bloomberg Comment Letter at 3 (Mar. 8, 2011).

(i) One-to-Many Systems or Platforms

AFR opined that single dealer or one-to-many platforms do not meet the SEF definition in CEA section 1a(50), which refers to a system in which multiple parties have the ability to execute or trade swaps by accepting bids or offers from multiple participants.

Similarly, IECA stated that SEFs should operate in a way that publicly reveals market prices, and that preserving the “one-to-one” pricing model of existing dealer systems is inconsistent with the SEF definition.

AFR Comment Letter at 3-4 (Mar. 8, 2011). JP Morgan also commented that it agrees with the Commission that a single dealer platform cannot qualify as a SEF because it fails to satisfy the “multiple to multiple” language in the SEF definition. JP Morgan Comment Letter at 3 (Mar. 8, 2011).

IECA Comment Letter at 3 (May 24, 2011).

(ii) Blind Auction Systems or Platforms

Nodal commented that a blind auction platform should be able to register as a SEF.

Nodal contended that its blind auction platform meets the SEF definition because multiple participants have the ability to execute swap transactions by accepting bids and offers made by multiple participants albeit without the pre-trade posting of bids or offers.

Nodal explained that its platform allows participants to submit firm bids and offers without the disclosure of the terms of those bids and offers to other participants, and that the auction algorithmically processes the bids and offers to match participants efficiently.

Nodal further explained that auction volume is awarded to participants at the same price and at a price equal to or better than the participants' auction order.

Nodal Comment Letter at 2-3 (Jun. 3, 2011); Nodal Comment Letter at 2-3 (Mar. 8, 2011). Nodal also expressed support for blind auction platforms in its comment letter to the Second Amendment to July 14, 2011 Order for Swap Regulation Notice of Proposed Amendment, 77 FR 28819 (proposed May 16, 2012).

Nodal Comment Letter at 3 (Mar. 8, 2011).

Id.

at 2.

(iii) Aggregation Services or Portals

UBS and Bloomberg requested clarification whether aggregator services are required to register as SEFs.

UBS stated that an aggregator service will provide customers with the ability to access the best available liquidity and pricing on multiple SEFs through the aggregator's screen so that customers will not have to connect to each SEF individually.

UBS stated that an aggregator service should not be required to register as a SEF because the transaction is executed on the relevant SEF's platform.

UBS Comment Letter at 1 (May 18, 2012); Meeting with UBS dated Mar. 27, 2012; Meeting with Bloomberg dated Jan. 18, 2012.

See also

UBS Comment Letter at 1 (Nov. 2, 2011).

Meeting with UBS dated Mar. 27, 2012.

See also

UBS Comment Letter at 1 (Nov. 2, 2011).

Meeting with UBS dated Mar. 27, 2012.

(iv) Services Facilitating Portfolio Compression and Risk Mitigation Transactions

Several commenters sought clarification that portfolio compression and risk mitigation services are not required to register as SEFs.

According to TriOptima, its portfolio compression service provides a netting mechanism that reduces the outstanding trade count and outstanding gross notional value of swaps in participants' portfolios by terminating or modifying existing trades.

Specifically, TriOptima stated that prospective participants may sign up for a scheduled compression cycle and the participants must provide detailed data about their respective portfolios and risk tolerances.

Other than to update mark-to-market values shortly before the compression cycle is run, prospective participants have no further input into the compression process, which is entirely controlled by the compression algorithm.

On a specified date, TriOptima runs the compression cycle, which produces a set of proposed transactions for each participant.

The proposed transactions, if effected, would terminate or modify participants' existing trades in order to reduce the outstanding trade count and outstanding gross notional value of swaps in the participants' portfolios.

Each participant receives only details of the proposed compression transactions to which it is a party, but all of the compression transactions must be accepted in order for the particular compression cycle to occur.

If a single participant declines to agree to the proposed compression transactions, then the entire compression cycle fails and the pre-compression swap transactions remain in effect.

TriOptima contended that such services do not perform the role of a trade execution venue so they should not be regulated as a SEF.

Meeting with ICAP and TriOptima dated Sep. 6, 2012; Meeting with ICAP dated Aug. 29, 2012; Meeting with ICE dated Jul. 25, 2012; WMBAA Comment Letter at 3 (Jul. 18, 2011); ICAP Comment Letter at 2 (Jul. 7, 2011); TriOptima Comment Letter at 1 (Mar. 8, 2011).

TriOptima Comment Letter at 2, 4 (Mar. 8, 2011).

Id.

at 2. The service does not place any constraints on the number of positions or risk tolerances of prospective participants.

Id.

at 3.

Id.

ICAP stated that its bulk risk mitigation service assists market participants in managing their risk exposures by identifying offsetting risk requirements and executing new offsetting trades among those participants.

Specifically, ICAP stated that its risk mitigation service sets the curve and price for all trades based on a survey of market making entities, such as banks, or other entities that are willing to provide quotes, as well as price quotes on DCMs.

All prospective participants in a particular risk mitigation run are first shown the curve and prices for transactions along the curve.

Subsequently, the prospective participants provide ICAP with data about any of their positions of their choosing and their acceptable risk tolerances.

ICAP then runs a proprietary algorithm, which produces a set of proposed transactions for each participant.

The proposed transactions, if effected, would result in new trades for the participants that enable them to manage their exposures to market, credit, or other sources of

risk.

All transactions must be accepted in order for a particular risk mitigation run to occur.

If a single participant declines to agree to the proposed risk mitigation transactions, then the entire risk mitigation run fails and the existing swap transactions remain in effect.

While its bulk risk mitigation services result in market participants entering into new trades, ICAP commented that such services do not meet the SEF definition because they do not permit participants to trade in real-time, negotiate price, or initiate directional trades.

Meeting with ICAP dated Aug. 29, 2012; ICAP Comment Letter at 1, 4 (Jul. 7, 2011).

Meeting with ICAP dated Aug. 29, 2012; ICAP Comment Letter at 4 (Jul. 7, 2011).

Id.

The service does not place any constraints on the number of positions or risk tolerances of prospective participants.

Id.

ICAP Comment Letter at 2 (Jan. 16, 2013); ICAP Comment Letter at 4 (Jul. 7, 2011).

(v) Swap Processing Services

In its first comment letter, MarkitSERV agreed with the SEF NPRM that entities operating exclusively as swap processors should not have to register as SEFs because they only provide post-execution services that facilitate clearing and settlement, not services relating to the execution of swaps.

However, in a subsequent comment letter, after the SEC's proposed rule that would require certain providers of post-trade services to register with the SEC as clearing agencies, MarkitSERV recommended that the Commission regulate entities that perform the confirmation and processing of swaps.

While MarkitSERV acknowledged that the SEC's authority under the Securities and Exchange Act of 1934 to regulate swap processors as a clearing agency has no parallel in the CEA, MarkitSERV recommended that the Commission register such entities to avoid unnecessarily inconsistent regulations.

MarkitSERV recommended that the Commission require swap processors to register as a sub-category of SEFs because CEA section 5h(a)(1) references the processing of swaps.

MarkitSERV Comment Letter at 6 (Mar. 8, 2011).

MarkitSERV Comment Letter at 1-2 (Jun. 3, 2011).

Id.

at 3-4.

Id.

at 5.

(2) Commission Determination

In response to commenters' requests for clarification regarding the registration requirement, the Commission is clarifying how it interprets the broad registration provision in section 5h(a)(1) of the Act in coordination with the specific requirements for a SEF's structure found in section 1a(50) of the Act and the trade execution requirement in section 2(h)(8) of the Act. As noted in the SEF NPRM, the Commission views the CEA section 5h(a)(1) registration requirement

as applying only to facilities that meet the SEF definition in CEA section 1a(50).

Section 1a(50) of the Act defines a SEF as “a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce, including any trading facility, that—(A) Facilitates the execution of swaps between persons; and (B) is not a designated contract market.”

Accordingly, the Commission is revising proposed § 37.3 to clarify the scope of the registration requirement, which states that “[a]ny person operating a facility that offers a trading system or platform in which more than one market participant has the ability to execute or trade swaps with more than one other market participant on the system or platform shall register the facility as a swap execution facility under this part 37 or as a designated contract market under part 38 of this chapter.”

CEA section 5h(a)(1) states that “[n]o person may operate a facility for the trading or processing of swaps unless the facility is registered as a swap execution facility or as a designated contract market. . . .” 7 U.S.C. 7b-3(a)(1).

See

Core Principles and Other Requirements for Swap Execution Facilities, 76 FR at 1219 (explaining that entities that operate exclusively as swap processors do not meet the SEF definition and should not be required to register as a SEF despite the broad language in the CEA section 5h(a)(1) registration provision).

CEA section 1a(50); 7 U.S.C. 1a(50). The Commission notes that the Secretary of the Treasury issued a written determination pursuant to CEA sections 1a(47)(E) and 1b that foreign exchange swaps and foreign exchange forwards should not be regulated as swaps under the CEA, and therefore should be exempted from the definition of the term “swap” under the CEA.

See

Determination of Foreign Exchange Swaps and Foreign Exchange Forwards Under the Commodity Exchange Act, 77 FR 69694 (Nov. 20, 2012). Accordingly, if a facility offers a trading system or platform solely for the execution or trading of foreign exchange swaps or foreign exchange forwards, then the facility would not be required to register as a SEF.

The Commission is adding this new provision to § 37.3(a)(1). As a result, proposed § 37.3(a) is adopted as § 37.3(b), proposed § 37.3(b) is adopted as § 37.3(c), proposed § 37.3(c) is adopted as § 37.3(d), proposed § 37.3(d) is adopted as § 37.3(e), proposed § 37.3(e) is adopted as § 37.3(f), and proposed § 37.3(f) is adopted as § 37.3(g). The SEF NPRM stated that certain entities such as one-to-one voice services and single-dealer platforms do not provide the ability for participants to conduct multiple-to-multiple execution or trading because they limit the provision of liquidity to a single liquidity provider. Core Principles and Other Requirements for Swap Execution Facilities, 76 FR at 1219.

The Commission also clarifies that swap transactions that are not subject to the CEA section 2(h)(8) trade execution requirement may be executed on either a registered SEF (

i.e.,

a facility that meets the SEF definition) or an alternative entity that is not required to register as a SEF (

e.g.,

see one-to-many system or platform discussion below).

This clarification is consistent with the Commission's acknowledgement in the SEF NPRM that swap transactions that are not subject to the CEA section 2(h)(8) trade execution requirement would not have to be executed on a registered SEF.

The Commission notes that it is not tying the registration requirement in CEA section 5h(a)(1) to the trade execution requirement in CEA section 2(h)(8), such that only facilities trading swaps subject to the trade execution requirement would be required to register as a SEF. Therefore, a facility would be required to register as a SEF if it operates in a manner that meets the SEF definition even though it only executes or trades swaps that are not subject to the trade execution mandate. The Commission also notes that transactions involving swaps on SEFs that are subject to the trade execution mandate are considered to be “Required Transactions” under part 37 of the Commission's regulations, whereas “Permitted Transactions” are transactions not involving swaps that are subject to the trade execution mandate. As discussed further below, the regulatory obligations which pertain to Permitted Transactions differ from, and are somewhat less rigorous than, those for Required Transactions.

See

discussion below regarding Permitted Transactions under § 37.9(a)(1)(iv)—Required Transactions and § 37.9(a)(1)(v)—Permitted Transactions in the preamble.

See also

Core Principles and Other Requirements for Swap Execution Facilities, 76 FR at 1222.

The Commission believes that its interpretation of the registration provision in CEA section 5h(a)(1) is consistent with the statute and helps further the goals provided in CEA section 5h, which are to promote the trading of swaps on SEFs and to promote pre-trade price transparency in the swaps market. Although the registration provision is written in broad language and could be read to require the registration of any facility for the trading or processing of swaps, the Commission notes that other statutory provisions appear to narrow the registration requirement. For example, the CEA section 2(h)(8) trade execution requirement and CEA section 5h(d)(2), which states that “[f]or all swaps that are not required to be executed through a swap execution facility . . . such trades may be executed through any other available means of interstate commerce[,]”

when read together, contemplate alternative entities that are not required to register as SEFs and may execute those swaps that are not

required to be executed on a SEF (

i.e.,

those swaps that are not subject to the CEA section 2(h)(8) trade execution requirement). The Commission is interpreting the CEA section 5h(a)(1) registration provision in a manner that is consistent with the SEF definition in CEA section 1a(50), the trade execution requirement in CEA section 2(h)(8), and CEA section 5h(d)(2), as discussed above.

CEA section 5h(d)(2); 7 U.S.C. 7b-3(d)(2).

The following discussion is not intended to comprehensively cover which entities are required to register as a SEF. Whether a particular entity falls within the scope of CEA section 5h(a)(1) depends on all of the relevant facts and circumstances of the entity's operations. The Commission is mindful that any rule attempting to capture all of the possible configurations of facilities that provide for the execution or trading of swaps may be or become over-inclusive or under-inclusive in light of technological changes and the ever evolving swaps market.

However, in response to commenters' requests, the Commission is providing examples of how it would interpret the CEA section 5h(a)(1) registration requirement with respect to certain categories of better understood facilities.

The Commission notes that entities seeking guidance concerning their SEF registration obligations may request such further guidance from the Division of Market Oversight (“DMO”).

(i) One-to-Many Systems or Platforms

The Commission continues to believe that a one-to-many system or platform on which the sponsoring entity is the counterparty to all swap contracts executed through the system or platform would not meet the SEF definition in section 1a(50) of the Act and, therefore, would not be required to register as a SEF under section 5h(a)(1) of the Act. In the Commission's view, such a system or platform does not meet the SEF definition because it limits the provision of liquidity to a single liquidity provider (

i.e.,

the sponsoring entity). Accordingly, market participants do not have the ability to conduct multiple-to-multiple execution or trading on such a trading system or platform. The Commission notes, however, that transactions in swaps that are subject to the trade execution mandate, under CEA section 2(h)(8), must be executed on a DCM or SEF and, accordingly, may not be executed on a one-to-many system or platform.

Transactions in swaps that are subject to the clearing requirement in CEA section 2(h)(1) and “made available to trade” would be subject to the trade execution requirement.

See

CEA sections 2(h)(1) and 2(h)(8); 7 U.S.C. 2(h)(1) and 2(h)(8).

See also

Process for a Designated Contract Market or Swap Execution Facility To Make a Swap Available To Trade, 76 FR 77728 (proposed Dec. 14, 2011) (discussing the process by which a swap is determined to be subject to the trade execution requirement in CEA section 2(h)(8)). The trade execution requirement provides an exception to the requirement for swap transactions subject to the clearing exception under CEA section 2(h)(7).

(ii) Blind Auction Systems or Platforms

The Commission understands from commenters that a blind auction system or platform, as described above, allows market participants to submit firm bids and offers without disclosure of the terms of those bids and offers to other participants. Such bids and offers are matched through a pre-determined algorithm. The Commission believes that an entity that provides such a blind auction system or platform would meet the SEF definition in CEA section 1a(50) because more than one market participant has the ability to execute or trade swaps with more than one other market participant on the system or platform. Accordingly, an entity that provides such a blind auction system or platform would have to register as a SEF under section 5h(a)(1) of the Act.

(iii) Aggregation Services or Portals

The Commission understands that certain entities may seek to provide their users with the ability to access multiple SEFs and the market participants thereon, but do not provide for execution on their aggregation services as execution occurs on one of those individual SEFs. The Commission believes that an entity that provides such an aggregation service would not meet the SEF definition in CEA section 1a(50) because it is only providing a portal through which its users may access multiple SEFs and swaps are not executed or traded through the service. Accordingly, an entity that provides such an aggregation service or portal would not have to register as a SEF under section 5h(a)(1) of the Act.

However, the Commission notes that to the extent that an aggregation service or portal itself provides a trading system or platform whereby more than one market participant has the ability to execute or trade swaps with more than one other market participant on the system or platform, the aggregation service would be required to register as a SEF.

The Commission notes that footnote 423 below classifies aggregator platforms as a type of independent software vendor (“ISV”). Therefore, other types of ISVs would not have to register as a SEF if they only provide their users with the ability to access multiple SEFs, but do not provide for execution or trading of swaps.

See

discussion below regarding ISVs under § 37.202(a)—Impartial Access by Members and Market Participants in the preamble.

For example, some aggregation services may provide their users with a portal to multiple SEFs and also execute swap transactions between their multiple users. These services would have to register as a SEF under section 5h(a)(1) of the Act. The Commission notes that if other types of ISVs provide a system or platform whereby more than one participant has the ability to execute or trade swaps with more than one other participant on the system or platform, then they would also have to register as a SEF under section 5h(a)(1) of the Act.

See

discussion below regarding ISVs under § 37.202(a)—Impartial Access by Members and Market Participants in the preamble.

(iv) Services Facilitating Portfolio Compression and Risk Mitigation Transactions

The Commission notes that portfolio compression services provide a netting mechanism that reduces the outstanding trade count and outstanding gross notional value of swaps in two or more swap counterparties' portfolios.

To achieve this result, a portfolio compression service, for example, may wholly terminate or change the notional value of some or all of the swaps submitted by the counterparties for inclusion in the portfolio compression exercise and, depending on the methodology employed, replace the terminated swaps with other swaps whose combined notional value (or some other measure of risk) is less than the combined notional value (or some other measure of risk) of the terminated swaps in the compression exercise.

The swap counterparties' risk profiles are not materially changed as a result of the portfolio compression exercise.

Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants, 77 FR 55904, 55932 (Sep. 11, 2012).

Id.

at 55960.

The Commission does not believe that a portfolio compression service, as described above, provides for the execution or trading of swap transactions between counterparties because the compression service is providing a netting mechanism whereby the outstanding trade count and outstanding gross notional value of swaps in two or more swap counterparties' portfolios are reduced. Therefore, an entity providing such a portfolio compression service would not meet the SEF definition in section 1a(50) of the Act and would not have to register as a SEF under section 5h(a)(1) of the Act.

The Commission notes, however, that transactions in swaps that are subject to the trade execution mandate, under CEA section 2(h)(8), must be executed on a DCM or SEF and, accordingly, may not be executed on a portfolio compression service (unless no DCM or SEF makes the swap available to trade or the swap transaction is excepted or exempted from clearing under CEA section 2(h)(7) or as otherwise provided by the Commission).

The Commission understands from commenters that certain entities provide

risk mitigation services, as described above, that operate to assist market participants in managing their exposures to market, credit, and other sources of risk. These risk mitigation services may redistribute or mitigate market participants' risks, but they do not provide a netting mechanism. To redistribute or mitigate risk, a risk mitigation service, for example, may allow market participants to identify elements of risk in their respective portfolios and to submit information about these risks to the service. The risk mitigation service may set the prices for all points along the maturity or credit curve for all trades and the service's proprietary algorithm produces a set of proposed transactions for each participant. If all participants accept the proposed transactions, then the new trades are executed.

In the Commission's view, such an entity would meet the SEF definition in CEA section 1a(50) because more than one market participant has the ability to execute swaps with more than one other market participant on the system or platform.

In response to ICAP's comment that such services do not meet the SEF definition because they do not permit participants to trade in real-time, negotiate price, or initiate directional trades, the Commission notes that the SEF definition does not require any of these stated characteristics. As noted above, the outcome of a successful risk mitigation run is the execution of new trades between multiple participants at prices accepted by those multiple participants.

The Commission also notes that ICAP's Web sites for its Reset and ReMatch risk mitigation services support the notion that these services are executing trades between counterparties. ICAP's Reset Web site states that “[t]he new RESET matching engine allows for unilateral matching with hedging. No longer is it necessary to have an offsetting position for each trade to be executed.”

See http://www.reset.net/aboutus.php.

A press article regarding ReMatch states that “ReMatch addresses the problem of minimal or no exit liquidity . . . [by] enabling market participants to exit positions that they may otherwise have been unable to.”

See http://www.icap.com/news-events/in-the-news/news/2011/rematch-expands-service-into-us-financials.aspx.

Additionally, the Commission notes that there are alternative avenues to managing the same risks that risk mitigation services manage, including bringing the risk mitigating orders to the open market. For instance, a market participant could assess the various risk elements in its portfolio using appropriate tools, and then decide on a set of trades to mitigate these risks. The market participant could choose to execute these trades through a risk mitigation service, a SEF, or a DCM. In fact, in the DCM context, market participants execute such risk mitigating trades on the DCM and not through a separate non-DCM service. As such, risk mitigation services are providing an alternative avenue to execute certain swap transactions between counterparties.

Furthermore, the Commission believes that the confluence of trading interests from a diverse range of motivations (

e.g.,

risk mitigating and risk taking trades) brings depth to the marketplace and helps to build liquid markets. If the Commission did not require these risk mitigation services to register as SEFs, then market participants would be able to execute certain swap transactions away from the SEF, which would hurt liquidity and also the trading of swaps on SEFs. This would contradict one of the goals in section 5h of the Act, which is to promote the trading of swaps on SEFs.

CEA section 5h(e); 7 U.S.C. 7b-3(e).

For the reasons mentioned above, the Commission believes that an entity that provides such a risk mitigation service would have to register as a SEF under section 5h(a)(1) of the Act. However, the Commission notes that such entities may not have to register as a SEF if they only provide the analytical services that produce the proposed risk mitigation transactions and the execution of those transactions occurs elsewhere and, in particular, the execution of those transactions that are subject to the trade execution mandate occurs on a SEF.

(v) Swap Processing Services

As noted in the SEF NPRM, entities that solely engage in trade processing would not meet the SEF definition in CEA section 1a(50) because they do not provide the ability to execute or trade a swap as required by the definition. Accordingly, swap processing services would not have to register as a SEF under CEA section 5h(a)(1). Consistent with this distinction, the Commission declines to create a sub-category of SEFs for processing services that would be subject to some limited subset of SEF core principles as requested by MarkitSERV.

Finally, the Commission notes that platforms seeking guidance concerning the SEF registration obligations and its application to their particular operations may request informal guidance from the Division of Market Oversight (“DMO”).

(b) § 37.9(b)(2)—Minimum Trading Functionality (Final § 37.3(a)(2))

To further clarify what functionalities a SEF must provide if it is required to register as a SEF, as opposed to what functionalities trigger the registration requirement, the Commission is moving proposed § 37.9(b)(2) to final § 37.3(a)(2). As discussed in the SEF NPRM, an entity that must register as a SEF under CEA section 5h(a)(1) must ensure that its operations comply with the minimum trading functionality requirement.

100

The minimum trading functionality requirement in proposed § 37.9(b)(2) provided that an applicant seeking registration as a SEF must, at a minimum, offer trading services to facilitate Required Transactions by providing market participants with the ability to post both firm and indicative quotes on a centralized electronic screen accessible to all market participants who have access to the SEF.

100

Core Principles and Other Requirements for Swap Execution Facilities, 76 FR at 1219.

(1) Summary of Comments

Several commenters stated that the minimum trading functionality is similar to an order book, which is not required by the SEF definition.

101

In this regard, Commissioner Sommers offered a dissent to the SEF NPRM, which was published as Appendix 3 to that notice.

102

Commissioner Sommers' dissent asserted that the minimum trading functionality requirement is not mandated by the Dodd-Frank Act.

103

In addition, Commissioner Sommers' dissent argued for a broader interpretation of the terms “trading system” and “platform,” which are included in the statutory SEF definition so that SEFs can offer a broader model for executing swaps.

104

Many commenters also stated that the SEF definition only requires that the facility provide multiple participants with the “ability” to execute or trade swaps by accepting bids and offers made by “multiple participants” and, thus, the definition does not require making bids or offers transparent to the entire market but rather to multiple participants.

105

Better Markets commented that the Commission's minimum trading

functionality requirement is an overly broad interpretation of the SEF definition because it allows a SEF to be almost any type of system or platform.

106

Therefore, it recommended that the Commission narrowly interpret the multiple participant to multiple participant requirement so that the scope of acceptable execution methods has rational boundaries.

107

101

Reuters Comment Letter at 3-4 (Dec. 12, 2011); Rosen et al. Comment Letter at 8-9 (Apr. 5, 2011); WMBAA Comment Letter at 4, 9 (Mar. 8, 2011); ISDA/SIFMA Comment Letter at 5-6 (Mar. 8, 2011); FXall Comment Letter at 4-5 (Mar. 8, 2011). Commissioner Sommers' dissent to the SEF NPRM.

See

Core Principles and Other Requirements for Swap Execution Facilities, 76 FR at 1259.

102

Core Principles and Other Requirements for Swap Execution Facilities, 76 FR at 1259.

103

Id.

104

Id.

105

Reuters Comment Letter at 3-4 (Dec. 12, 2011); Rosen et al. Comment Letter at 8 (Apr. 5, 2011); ISDA/SIFMA Comment Letter at 5-6 (Mar. 8, 2011); CME Comment Letter at 7-8 (Mar. 8, 2011); FXall Comment Letter at 4-5 (Mar. 8, 2011); Barclays Comment Letter at 5 (Mar. 8, 2011); MarketAxess Comment Letter at 32-33 (Mar. 8, 2011); WMBAA Comment Letter at 8 (Mar. 8, 2011).

106

Better Markets Comment Letter at 6-7 (Mar. 8, 2011).

107

Id.

Several commenters expressed concern about the requirement to post indicative quotes.

108

Nodal and other commenters expressed concern that indicative quotes could be used for manipulative purposes.

109

Tradeweb commented that, under the proposal, SEFs operating an anonymous order book system would be required to offer indicative quotes due to the minimum trading functionality requirement, which would not be suitable for anonymous order book marketplaces.

110

108

Nodal Comment Letter at 3-4 (Mar. 8, 2011); ISDA/SIFMA Comment Letter at 6 (Mar. 8, 2011); SIFMA AMG Comment Letter at 9 (Mar. 8, 2011); ICE Comment Letter at 3 (Mar. 8, 2011); Tradeweb Comment Letter at 6 (Mar. 8, 2011).

109

Nodal Comment Letter at 3-4 (Mar. 8, 2011); ISDA/SIFMA Comment Letter at 6 (Mar. 8, 2011); SIFMA AMG Comment Letter at 9 (Mar. 8, 2011); ICE Comment Letter at 3 (Mar. 8, 2011).

110

Tradeweb Comment Letter at 6 (Mar. 8, 2011).

(2) Commission Determination

The Commission reiterates its view in the SEF NPRM that an entity that must register as a SEF under CEA section 5h(a)(1) must ensure that its operations comply with the minimum trading functionality requirement.

111

The Commission reaffirms that an acceptable SEF system or platform must provide at least a minimum functionality to allow market participants the ability to make executable bids and offers, and to display them to all other market participants on the SEF. The Commission is adopting a revised version of proposed § 37.9(b)(2), which now requires a SEF to provide an Order Book as defined in final § 37.3(a)(3) (

i.e.,

an electronic trading facility, a trading facility, or a trading system or platform in which all market participants have the ability to enter multiple bids and offers, observe or receive bids and offers, and transact on such bids and offers) because, as noted by several commenters, the proposed minimum trading functionality description is similar to the proposed definition of an Order Book.

112

In response to comments, like the one provided by Commissioner Sommers, that an order book is not required by the SEF definition, the Commission believes that an Order Book, as defined in final § 37.3(a)(3), is consistent with the SEF definition and promotes the goals provided in section 733 of the Dodd-Frank Act.

113

This interpretation is also consistent with the SEF NPRM, as the Commission noted that it took into account these requirements when proposing the minimum trading functionality requirement.

114

111

Core Principles and Other Requirements for Swap Execution Facilities, 76 FR at 1219.

112

The Commission is renumbering proposed § 37.9(b)(2) to § 37.3(a)(2).

113

CEA section 1a(50); 7 U.S.C. 1a(50). In section 5h(e) of the Act, Congress provided a “rule of construction” to guide the Commission's interpretation of certain SEF provisions (stating that the goals of section 5h of the Act are to “promote the trading of swaps on [SEFs] and to promote pre-trade price transparency in the swaps market”). 7 U.S.C. 7b-3(e).

114

Core Principles and Other Requirements for Swap Execution Facilities, 76 FR at 1219.

The Commission notes, however, that the final regulations provide SEFs with additional flexibility in the execution methods for Required Transactions by allowing SEFs to offer an RFQ System in conjunction with an Order Book, as described below, to permit market participants to access multiple market participants, but not necessarily the entire market.

115

The Commission also notes that a SEF may petition the Commission under § 13.2 of the Commission's regulations to amend its regulations to include additional execution methods for Required Transactions.

116

The final regulations further allow a SEF to utilize “any means of interstate commerce” in providing the execution methods in § 37.9(a)(2)(i)(A) or (B) (

i.e.,

an Order Book or an RFQ System that operates in conjunction with an Order Book, as described below).

117

The Commission also notes that a SEF may provide any method of execution for Permitted Transactions.

118

By allowing SEFs to offer additional methods of execution, and permitting flexible means for executing swaps through these methods of execution, as discussed below, the Commission is effectuating the Congressional direction to allow multiple participants to execute swaps by accepting bids and offers made by multiple participants through any means of interstate commerce.

119

The Commission notes that a DCM must operate as a trading facility and in conjunction with that trading facility is also permitted to utilize additional execution methods; however, those additional execution methods are limited by the requirements set forth in DCM Core Principle 9, for which there is no identical core principle for SEFs.

115

See

discussion below under § 37.9(a)(1)(ii)—Request for Quote System in the preamble.

116

See

discussion below under § 37.9(b)(1) and (b)(4)—Execution Methods for Required Transactions in the preamble. Section 13.2 will allow the Commission to consider if a broader model for executing on SEFs, consistent with the suggestion in Commissioner Sommers' dissent, would be appropriate on a case-by-case basis, in conformance with the CEA and the Commission's regulations. Core Principles and Other Requirements for Swap Execution Facilities, 76 FR at 1259.

117

See

discussion below under § 37.9(b)(1) and (b)(4)—Execution Methods for Required Transactions in the preamble.

118

See

§ 37.9(c)(2).

119

CEA section 1a(50); 7 U.S.C. 1a(50).

Finally, given the changes to the minimum trading functionality requirement, the Commission notes that SEFs are not required to offer indicative quote functionality. The Commission agrees with commenters that indicative quotes would not be appropriate for certain trading systems or platforms complying with the Order Book definition in final § 37.3(a)(3) (

e.g.,

central limit order books facilitating only anonymous trading).

The Commission is also moving proposed § 37.9(a)(1)(i) to final § 37.3(a)(3) given the relocation of, and changes to, the minimum trading functionality section as discussed above. Proposed § 37.9(a)(1)(i) defined the term “Order Book” to mean: (A) An electronic trading facility, as that term is defined in section 1a(16) of the Act;

120

(B) a trading facility, as that term is defined in section 1a(51) of the Act;

121

(C) a trading system or platform in which all market participants in the trading system or platform can enter multiple bids and offers, observe bids and offers entered by other market participants, and choose to transact on such bids and offers; or (D) any such

other trading system or platform as may be determined by the Commission.

120

The term “electronic trading facility” means “a trading facility that—(A) operates by means of an electronic or telecommunications network; and (B) maintains an automated audit trail of bids, offers, and the matching of orders or the execution of transactions on the facility.” CEA section 1a(16); 7 U.S.C. 1a(16). The Commission notes that, under section 1a(16) of the Act, the term “electronic trading facility” incorporates the definition of “trading facility” as that term is defined under section 1a(51) of the Act.

121

The term “trading facility” means “a person or group of persons that constitutes, maintains, or provides a physical or electronic facility or system in which multiple participants have the ability to execute or trade agreements, contracts, or transactions—(i) by accepting bids or offers made by other participants that are open to multiple participants in the facility or system; or (ii) through the interaction of multiple bids or multiple offers within a system with a pre-determined non-discretionary automated trade matching and execution algorithm.” CEA section 1a(51)(A); 7 U.S.C. 1a(51)(A).

(1) Summary of Comments

Better Markets commented that the definition of an “order book” should specify that SEF systems must operate pursuant to a best price, first-in-time trade matching algorithm.

122

Better Markets Comment Letter at 7 (Mar. 8, 2011).

(2) Commission Determination

The Commission is adopting the rule as proposed, subject to the modification described below.

123

The Commission notes that the Dodd-Frank Act does not mandate that the Commission specify or require a particular trade-matching algorithm for modes of execution provided by SEFs. Therefore, a SEF has the discretion to use a matching algorithm such as a price-time, price-size-time, or pro-rata allocation, provided, however, that such matching algorithm is published in the SEF's rulebook and submitted to the Commission for review and approval as part of the registration application. The Commission is eliminating proposed § 37.9(a)(1)(i)(D) because, as discussed in § 37.9 below, a SEF may petition the Commission under § 13.2 to amend § 37.9(a)(2) to include additional execution methods for Required Transactions.

124

123

The Commission is renumbering proposed § 37.9(a)(1)(i) to § 37.3(a)(3). The Commission is revising the definition in proposed § 37.9(a)(1)(i)(C) by replacing the word “can” with the phrase “have the ability to” and deleting the words “choose to.” The Commission is also adding the words “or receive” after the word “observe” so that the definition is technology neutral.

See

“Through Any Means of Interstate Commerce” Language in the SEF Definition discussion below under §§ 37.9(b)(1) and (b)(4)—Execution Methods for Required Transactions in the preamble for further details.

124

See

discussion below under § 37.9(b)(1) and (b)(4)—Execution Methods for Required Transactions in the preamble.

(d) § 37.3(a)—Application Procedures

125

The Commission is renaming the title of this section from “Application Procedures” to “Procedures for Full Registration” to provide greater clarity.

Proposed § 37.3(a) set forth the application and approval procedures for the registration of new SEFs. The proposed rule required a SEF applicant to apply to the Commission by electronically filing the proposed Form SEF.

126

The proposed rule also provided that the Commission would either approve or deny the application or, if deemed appropriate, register the applicant as a SEF subject to conditions.

126

Proposed Form SEF, as set forth in proposed appendix A to part 37, was to be used for initial or temporary registration as a SEF as well as for any amendments to an applicant's status otherwise not required to be submitted under part 40 of the Commission's regulations.

(1) Summary of Comments

The Commission received several comments encouraging the harmonization of the registration procedures for SEFs with the SEC's registration procedures for SB-SEFs.

127

In this regard, MarketAxess recommended that the Commission allow an SEC-registered SB-SEF to notice register with the Commission.

128

WMBAA recommended that the Commission and the SEC adopt a common application form, which would provide for a smoother, timelier transition to the new regulatory regime.

129

127

See

Registration and Regulation of Security-Based Swap Execution Facilities, 76 FR 10948 (proposed Feb. 28, 2011). Tradeweb Comment Letter at 3-4 (Jun. 3, 2011); MarketAxess Comment Letter at 20-21 (Mar. 8, 2011); WMBAA Comment Letter at 14 (Mar. 8, 2011); FSR Comment Letter at 10-11 (Mar. 8, 2011); Reuters Comment Letter at 3-4 (Mar. 8, 2011).

128

MarketAxess Comment Letter at 20-21 (Mar. 8, 2011).

129

WMBAA Comment Letter at 14 (Mar. 8, 2011).

Tradeweb requested that the Commission confirm that SEF applicants do not need to file separate applications for each mode of execution that it will offer to participants, provided that the application clearly identifies the different features of the separate marketplaces and that each feature is in compliance with the rules.

130

Additionally, MarketAxess requested clarification that the Commission does not intend proposed § 37.3(a)(6) to require amendments to Form SEF after the Commission approves an application.

131

130

Tradeweb Comment Letter at 13 (Mar. 8, 2011).

131

MarketAxess Comment Letter at 29 (Mar. 8, 2011).

(2) Commission Determination

The Commission is adopting § 37.3(a) and Form SEF as proposed, subject to certain modifications discussed below.

132

The Commission notes that there is no CEA provision which provides for SEF notice registration for SB-SEFs. The Commission does note, however, that section 5h(g) of the Act provides that the Commission “may exempt” a SEF from registration if the facility is subject to comparable, comprehensive supervision and regulation by the SEC, a prudential regulator, or the appropriate governmental authorities in the home country of the facility.

133

The Commission observes that the SEC and other regulators have not implemented comparable, comprehensive supervision and regulation to the Commission's SEF regulatory scheme at this time. The Commission also observes that, it must comprehensively review and understand a SEF's proposed trading models and operations, which will facilitate trading for a more diverse universe of financial instruments and underlying commodities than SB-SEFs. Therefore, at this time, the Commission is not allowing for exempt SEFs.

132

The Commission is renumbering proposed § 37.3(a) to § 37.3(b) and making several non-substantive revisions to this provision and Form SEF for clarity. The Commission is also moving proposed § 37.3(a)(7) regarding delegated authority to the Director of DMO to § 37.3(h).

133

CEA section 5h(g); 7 U.S.C. 7b-3(g).

In response to Tradeweb's comment about separate applications, the Commission clarifies that a SEF applicant does not need to file separate applications for each mode of execution that it will offer to market participants, but its application, as noted in Exhibit Q to Form SEF, must describe each mode of execution offered.

134

Additionally, in response to MarketAxess's comment about amendments to Form SEF after the Commission registers a SEF, the Commission is revising proposed § 37.3(a)(6)

135

and Form SEF to clarify that an amended Form SEF is required for a SEF applicant amending a pending application for registration or for a SEF requesting an amendment to its order of registration. Otherwise, once registered, a SEF must file any amendments to Form SEF as a submission under part 40 of the Commission's regulations or as specified by the Commission (

e.g.,

by filing quarterly financial resources reports pursuant to § 37.1306 or by filing an amended Form SEF). As stated in the SEF NPRM, the Commission clarifies that if any information contained in Form SEF is or becomes inaccurate for any reason, even after a SEF is registered, the SEF must promptly make the appropriate corrections with the Commission.

136

134

The Commission notes that subsequent modifications to a SEF's modes of execution or any additional SEF modes of execution would constitute rules; therefore, the SEF must submit such rules to the Commission for review pursuant to the procedures under part 40 of the Commission's regulations.

135

The Commission is renumbering proposed § 37.3(a)(6) to § 37.3(b)(3).

136

Core Principles and Other Requirements for Swap Execution Facilities, 76 FR at 1238.

The Commission is adding final § 37.3(b)(5) to the rule text that requires the Commission to review an application for registration as a SEF pursuant to the 180-day timeframe and procedures specified in CEA section

6(a).

137

This section will be effective for SEF applicants who submit their applications for registration as a SEF on or after two years from the effective date of part 37. The Commission is adopting this provision so that SEF applicants are treated comparably to DCM applicants who currently are subject to the 180-day Commission review period under CEA section 6(a). Although Congress did not impose a 180-day review period for SEFs, the Commission believes that harmonization of the review periods for DCM and SEF applicants is appropriate given the fact that both are registered entities for the trading of swaps. The Commission also believes that this requirement will provide greater certainty for SEF applicants regarding the time period for the Commission's review of their applications.

137

CEA section 6(a); 7 U.S.C. 8(a). The Commission notes that under CEA section 6(a), if the Commission notifies an applicant that its application is materially incomplete and specifies the deficiencies in the application, the running of the 180-day period is stayed from the time of such notification. The Commission also notes that if an applicant does not provide a complete Form SEF as provided for under § 37.3(b)(1)(i), the Commission will notify the applicant, pursuant to § 37.3(b)(4), that its application will not be deemed to have been submitted for purposes of the Commission's review. By “complete” Form SEF, the Commission means that the SEF applicant provides appropriately responsive answers to each of the informational and exhibit items set forth in Form SEF. The Commission notes that if the application is not deemed to have been submitted for purposes of the Commission's review, then the 180-day review period (when effective) will not have commenced.

Finally, the Commission is clarifying the standard upon which the Commission will grant or deny registration. Proposed § 37.3(a)(1) stated that “[t]he Commission shall approve or deny the application or, if deemed appropriate, register the applicant as a swap execution facility subject to conditions.” In addition, proposed § 37.3(a)(2) stated that “[t]he application must include information sufficient to demonstrate compliance with the core principles specified in Section 5h of the Act.” Consistent with these provisions, the Commission is clarifying in final § 37.3(b)(6) that: (i) The Commission will issue an order granting registration upon a Commission determination, in its own discretion, that the applicant has demonstrated compliance with the Act and the Commission's regulations applicable to swap execution facilities; (ii) if deemed appropriate, the Commission may issue an order granting registration subject to conditions; and (iii) the Commission may issue an order denying registration upon a Commission determination, in its own discretion, that the applicant has not demonstrated compliance with the Act and the Commission's regulations applicable to swap execution facilities.

(e) § 37.3(b)—Temporary Grandfather Relief From Registration

138

The Commission is renaming the title of this section from “Temporary Grandfather Relief from Registration” to “Temporary Registration” to provide greater clarity.

Proposed § 37.3(b) provided that an applicant for SEF registration may request that the Commission grant the applicant temporary grandfather relief from the registration requirement. The temporary relief would allow the applicant to continue operating during the pending application review process. Under the proposed rule, to receive temporary relief, the applicant was required to provide the following information to the Commission: (1) An application for SEF registration submitted in compliance with proposed § 37.3(a); (2) a notification of its interest in operating under the temporary relief; (3) transaction data substantiating that swaps have been traded and continue to be traded on the applicant's trading system or platform at the time of its application submission; and (4) a certification that the applicant believes that it will meet the requirements of part 37 of the Commission's regulations when it operates under temporary relief.

Under proposed § 37.3(b)(2), an applicant's grant of temporary relief would expire on the earlier of: (1) The date that the Commission grants or denies SEF registration; or (2) the date that the Commission rescinds the temporary relief. Proposed § 37.3(b)(3) contained a sunset date for the temporary relief provision of 365 days following the effective date of the final SEF regulations. Finally, the Commission proposed that the SEF rules, which include the requirements for temporary relief, would be effective 90 days after their publication in the

Federal Register

(1) Summary of Comments

(i) Comments on Temporary Grandfather Relief

MarketAxess commented that the phrase “temporary grandfather relief” is ambiguous and recommended that the Commission rename “temporary grandfather relief” to “temporary registration.”

139

MarketAxess Comment Letter at 16 (Mar. 8, 2011).

With respect to the substance of this provision, some commenters expressed concern that the existing trading activity requirement in proposed § 37.3(b)(1)(ii) would prevent new entities from qualifying for temporary relief.

140

In this regard, MarketAxess recommended that the Commission revise proposed § 37.3(b)(1)(ii) to permit SEF applicants, as an alternative to providing transaction data, to provide materials substantiating that the applicant's system is operational and therefore could facilitate trading in listed swaps upon receiving temporary registration from the Commission.

141

Further, several commenters recommended alternative certification standards under proposed § 37.3(b)(1)(iii).

142

Bloomberg, for example, recommended that SEFs be required to certify only that they have implemented rules “reasonably designed to ensure” compliance with part 37.

143

Similarly, MarketAxess recommended a more flexible certification requirement because compliance with certain core principles will need to await the build-out functionality of third-party regulatory service providers.

144

140

MarketAxess Comment Letter at 16-17 (Mar. 8, 2011); MFA Comment Letter at 4-5 (Mar. 8, 2011).

141

MarketAxess Comment Letter at 16-17 (Mar. 8, 2011).

142

MarketAxess Comment Letter at 4 (Jun. 3, 2011); Bloomberg Comment Letter at 5 (Jun. 3, 2011); State Street Comment Letter at 6-7 (Mar. 8, 2011); WMBAA Comment Letter at 14-15 (Mar. 8, 2011); Tradeweb Comment Letter at 13 (Mar. 8, 2011); MarketAxess Comment Letter at 17-19 (Mar. 8, 2011).

143

Bloomberg Comment Letter at 5 (Jun. 3, 2011).

144

MarketAxess Comment Letter at 17-19 (Mar. 8, 2011).

In addition, Phoenix commented that to avoid any market disruptions, the Commission should permit SEF applicants to operate under temporary relief while awaiting a Commission determination to either grant or deny the temporary relief request.

145

MarketAxess also noted that the Commission should not “tie its own hands” by imposing a fixed one-year post-effective time period for reviewing SEF applications.

146

145

Phoenix Comment Letter at 2 (Mar. 7, 2011).

146

MarketAxess Comment Letter at 20 (Mar. 8, 2011).

(ii) Comments on DCM Eligibility

CME commented that if a DCM has listed cleared swaps prior to the adoption of the final rules, then there is no reason to exclude them from applying for temporary relief.

147

NYSE Liffe recommended that temporary relief remain available to DCMs either as long as it is available to SEF applicants or on an ongoing basis so that a DCM required under DCM Core Principle 9 to delist a futures contract at any point in the future would be allowed to seek

temporary relief from registration as a SEF.

148

147

CME Comment Letter at 11 (Mar. 8, 2011).

148

NYSE Liffe Comment Letter at 3-4 (Sep. 2, 2011).

(iii) Comments on 90-Day Effective Date of Regulations

Some commenters recommended a longer time period for the effective date of the final regulations to provide applicants with additional time to implement the large number of changes required.

149

Nodal commented that the short effective date will disadvantage smaller exchanges because its supporting external parties will likely prioritize compliance obligations in order to be responsive to the largest exchanges first.

150

MarketAxess and NFA recommended that the Commission provide SEF applicants 180 days after adoption of the final rules to comply with the final SEF regulations in light of forthcoming operational challenges.

151

However, SDMA supported the 90-day effective date and urged the Commission to be vigilant in preventing further delays that undermine the realization of the goals of the Dodd-Frank Act.

152

149

AIMA Comment Letter at 3 (Jun. 10, 2011); Nodal Comment Letter at 3-5 (Jun. 3, 2011); WMBAA Comment Letter at 4-5 (Jun. 3, 2011); CME Comment Letter at 6 (Jun. 3, 2011); MarketAxess Comment Letter at 19 (Mar. 8, 2011); NFA Comment Letter at 2-3 (Mar. 8, 2011); WMBAA Comment Letter at 12-13 (Mar. 8, 2011); ICAP Comment Letter at 6 (Mar. 8, 2011); Nodal Comment Letter at 4-5 (Mar. 8, 2011).

150

Nodal Comment Letter at 4 (Jun. 3, 2011); Nodal Comment Letter at 4 (Mar. 8, 2011).

151

MarketAxess Comment Letter at 19 (Mar. 8, 2011); NFA Comment Letter at 2-3 (Mar. 8, 2011).

152

SDMA Comment Letter at 12 (Mar. 8, 2011).

(2) Commission Determination

(i) Temporary Grandfather Relief

The Commission agrees with MarketAxess that “temporary registration” is more accurate than “temporary grandfather relief” and is accordingly making such change. Additionally, based on the comments, the Commission is adopting proposed § 37.3(b) as final § 37.3(c) subject to a number of modifications.

153

The Commission is renumbering proposed § 37.3(b) to § 37.3(c) and making several non-substantive revisions for clarity.

The Commission further agrees with MarketAxess and other commenters that the trading activity requirement as proposed in § 37.3(b)(1)(ii) may limit temporary registration to incumbent platforms. Therefore, the Commission is eliminating the trading activity requirement and will permit all SEF applicants to apply for temporary registration if they meet the requirements under final § 37.3(c)(1). The Commission views the revised temporary registration provision as promoting competition between SEFs by providing fair opportunities for new entities to establish trading operations in competition with incumbents.

The Commission is deleting the certification requirement under proposed § 37.3(b)(1)(iii) because it is unnecessary. The Commission notes, as stated in the SEF NPRM, that once a SEF applicant is granted temporary registration it must comply with all provisions of the Act and the Commission's regulations that are applicable to SEFs.

154

Core Principles and Other Requirements for Swap Execution Facilities, 76 FR at 1216.

The Commission is revising the temporary registration provisions to clarify in final § 37.3(c)(1) that a SEF applicant may apply for temporary registration if it submits a complete Form SEF and a temporary registration notice.

155

The Commission is also revising the temporary registration provisions to require a SEF applicant that is already operating a swaps-trading platform, in reliance upon either an exemption granted by the Commission or some form of no-action relief granted by the Commission staff, to include in the temporary registration notice a certification that it is operating pursuant to such exemption or no-action relief. The Commission also clarifies that a SEF applicant may submit such temporary registration application after the final SEF regulations are published in the

Federal Register

until the termination of the temporary registration provision pursuant to final § 37.3(c)(5).

156

155

The applicant must comply with all of the requirements in final § 37.3(b)(1)(i) and must submit a temporary registration notice to the Commission to qualify for temporary registration.

See

Final § 37.3(c)(1) of the Commission's regulations.

156

The Commission notes that certain entities may continue to operate under current exemptions while their SEF applications are pending, as long as the entities submit a complete application (

i.e.,

the SEF applicant provides substantive answers to each of the informational and exhibit items set forth in Form SEF) and temporary registration notice before the effective date of the final SEF regulations.

See

CFTC No-Action Letter 12-48 (Dec. 11, 2012).

Pursuant to final § 37.3(c)(1), the Commission notes that it will grant a SEF applicant temporary registration upon a Commission determination that the applicant has provided a complete Form SEF as part of its registration application and submitted a notification requesting that the Commission grant temporary registration. If an applicant has not met these requirements, the Commission may deny its request for temporary registration. By “complete” Form SEF, the Commission means that the SEF applicant provides appropriately responsive answers to each of the informational and exhibit items set forth in Form SEF. The Commission notes that it will review a SEF applicant's Form SEF to ensure that it is complete, and will not conduct any substantive review of the form before granting or denying temporary registration. The Commission notes that this temporary registration process is similar to the notice registration process followed by the Commission in the context of other types of registrations.

157

The Commission will review SEF applicants' submissions on a rolling basis and the Commission will issue notices either granting or denying temporary registration.

158

The Commission believes that providing a clear and streamlined path to temporary registration will minimize the potential for regulatory arbitrage, ensure a level playing field, and promote competition among SEFs.

157

See

discussion below regarding swap dealer and major swap participant provisional registration rules.

158

The Commission is delegating to the Director of DMO, upon consultation with the General Counsel, the authority to issue a notice granting or denying temporary registration.

See

Final § 37.3(h) of the Commission's regulations.

The Commission stresses that a grant of temporary registration does not mean that the Commission has determined that a SEF applicant is fully compliant with the Act and Commission regulations, nor does it guarantee that a SEF applicant will eventually be granted full SEF registration. After granting a SEF applicant temporary registration, the Commission will review the applicant's application to assess whether the applicant is fully compliant with the requirements of the Act and the Commission's regulations applicable to SEFs. During such assessment, the Commission may request from the SEF applicant additional information in order to make a determination whether to issue a final order of registration.

The Commission is also revising the temporary registration provisions to clarify in final § 37.3(c)(2) that an applicant cannot operate as a SEF under temporary registration until the applicant receives a notice from the Commission or the Commission staff granting temporary registration.

159

In response to Phoenix's comment about a SEF operating while its temporary registration is pending, the Commission does not believe that a SEF applicant should be allowed to operate as a SEF

under temporary registration before the Commission has had a chance to review the application to ensure that it is complete. The Commission's review is especially merited given the Commission's decision to permit temporary registration of entities that have not previously traded swaps.

159

This provision is contained in final § 37.3(c)(2) of the Commission's regulations. This rule also states that in no case may an applicant begin operating as a temporarily registered SEF until the effective date of the SEF regulations.

The Commission believes that permitting entities to operate as temporarily registered SEFs, notwithstanding the lack of a substantive review of the SEF's application by the Commission, is not a novel concept and has been followed by the Commission in other contexts where it is important to allow entities to quickly reach the market, before an extensive Commission review. For instance, under the Commission's swap dealer and major swap participant registration rules, provisional registration is granted upon the filing of an application and documentation demonstrating compliance or the ability to comply with the CEA section 4s requirements in effect on such date—and not after review and approval of the documentation by the National Futures Association (“NFA”), as the Commission's delegee.

160

On and after the date on which NFA confirms that the applicant has demonstrated its initial compliance with the applicable requirements, the provisional registration of the applicant ceases and the applicant becomes registered as an SD or an MSP, as the case may be.

160

Registration of Swap Dealers and Major Swap Participants, 77 FR 2613 (Jan. 19, 2012).

The Commission envisions the SEF temporary registration process as operating in a similar fashion, with the Commission reviewing each application for completeness alone before granting temporary registration. Subsequently, and concurrent with the temporarily registered SEF's early operations, the Commission would conduct a comprehensive review of the application for compliance with all applicable SEF requirements.

The Commission is revising proposed § 37.3(b)(2) regarding the expiration of temporary registration to remove the ability of the Commission to rescind temporary registration. The Commission notes that the SEF NPRM did not provide a standard for the Commission to rescind temporary registration. Instead, in final § 37.3(c)(3), the Commission may rely on its ability to deny full registration, which will also cause temporary registration to expire. Therefore, the Commission believes that the ability to rescind temporary registration is unnecessary.

The Commission is extending the 365-day sunset provision for temporary registration to two years from the effective date of these regulations in final § 37.3(c)(5).

161

Given that the projected number of temporary SEF registrations may exceed 20 and the resource constraints faced by the Commission, the Commission may not be able to complete its registration reviews, enable SEFs to remedy any identified deficiencies, and ultimately grant or deny full registration for all of the SEF applicants within the proposed 365-day period. Extending the temporary registration provision will provide the Commission with adequate time to review the SEF registration applications while ensuring that SEFs can continue their operations under temporary registration, without interruption, until the Commission decides on their application for full registration.

161

This provision is contained in final § 37.3(c)(5) of the Commission's regulations.

The Commission is also revising final § 37.3(c)(5) to state that the temporary registration provision will not terminate for an applicant who applies for temporary registration before the termination of the temporary registration provision and has not been granted or denied registration under § 37.3(b)(6) by the time of the termination of the temporary registration provision. In addition, final § 37.3(c)(5) states that such an applicant may operate as a SEF under temporary registration upon receipt of a notice from the Commission granting temporary registration until the Commission grants or denies full registration pursuant to § 37.3(b)(6). On the termination date of the temporary registration provision, the Commission will review such applicant's application pursuant to the 180-day Commission review period and procedures in § 37.3(b)(5). These revisions will ensure that a temporarily registered SEF who does not have a full registration in place by the time the temporary registration provision terminates will not have to stop operating on such termination date.

(ii) DCM Eligibility

The Commission is withdrawing proposed § 37.3(b)(1)(ii) regarding the existing trading activity requirement so an operational DCM that seeks to create a new SEF would be able to qualify for temporary SEF registration. In consideration of NYSE Liffe's comment that temporary SEF registration for an existing DCM should not be subject to the sunset provision, the Commission is revising proposed § 37.3(b) in final § 37.3(c)(6) to allow for such an exemption.

162

The Commission notes that a DCM is subject to a higher regulatory standard than a SEF such that a non-dormant DCM who seeks to create a new SEF in order to transfer one or more of its contracts should be able to meet many of the SEF requirements. Therefore, the Commission believes that, on an ongoing basis, an operational DCM that also seeks to register as a SEF in order to transfer one or more of its contracts (whether the transfer of the contract is motivated by DCM Core Principle 9 or another reason) may request SEF temporary registration.

162

This provision is contained in final § 37.3(c)(6) of the Commission's regulations.

(iii) 90-Day Effective Date of Regulations

The Commission is shortening the proposed 90-day effective date to 60 days subsequent to publication in the

Federal Register

. In consideration of the comments received and the availability of the Commission staff resources, the Commission has determined to use its discretion to establish alternative dates for the commencement of its enforcement of regulatory provisions and is setting a general compliance date of 120 days subsequent to

Federal Register

publication.

163

With this use of an effective date and compliance date, a prospective SEF that is already operating a swaps-trading platform in reliance on a Commission staff relief letter (

e.g.,

CFTC No-Action Letter 12-48) could submit a SEF application and receive temporary registration before part 37's effective date so that it might begin operating as a SEF upon that effective date.

164

Alternatively, if such a prospective SEF took additional time to prepare its SEF application, it would have the option of forestalling the submission of its application until after the effective date, so long as it submitted its SEF application by the compliance date.

163

See Heckler

Chaney,

470 U.S. 821 (1985).

164

This scenario is not limited to a prospective SEF that is already operating a swaps-trading platform in reliance on a Commission staff relief letter. As noted above, all SEF applicants may apply for temporary registration if they meet the requirements under final § 37.3(c)(1).

The Commission believes that this combination of a 60-day effective date and a 120-day compliance date subsequent to

Federal Register

publication for prospective SEF applicants establishes a transition period that appropriately balances the Commission's need to provide regulatory certainty to potential applicants through issuance of final SEF regulations and the Commission's statutory directives to both promote fair

competition between swaps trading venues

165

and promote the trading of swaps on SEFs.

166

The new transition period ensures swaps market continuity, preserves competition between swaps trading venues, and facilitates the orderly restructuring of the swaps market in compliance with the Act and regulations thereunder. The Commission believes that the 60-day effective date and the 120-day compliance date approach will provide prospective SEF applicants with sufficient time to comply with the final regulations and, if they choose, to prepare an application for temporary registration.

165

Section 3(b) of the Act lists the promotion of “fair competition among boards of trade, other markets, and market participants” as a purpose of the Act. 7 U.S.C. 5(b).

166

Section 5h(e) of the Act lists the promotion of “the trading of swaps on swap executive facilities” as one goal of the Act. 7 U.S.C. 7b-3(e).

(f) § 37.3(c)—Reinstatement of Dormant Registration

Proposed § 37.3(c) provided procedures for a dormant SEF to reinstate its registration. The Commission received no comments on this section and is adopting § 37.3(c) as proposed.

167

The Commission is renumbering proposed § 37.3(c) to § 37.3(d) and making several non-substantive revisions for clarity.

(g) § 37.3(d)—Request for Transfer of Registration

Proposed § 37.3(d) provided procedures that a SEF must follow when seeking to transfer its registration from its current legal entity to a new legal entity as a result of a corporate event. The Commission received no comments on this section and is adopting § 37.3(d) as proposed.

168

The Commission is renumbering proposed § 37.3(d) to § 37.3(e) and making several non-substantive revisions for clarity.

(h) § 37.3(e)—Request for Withdrawal of Application for Registration

Proposed § 37.3(e) provided that a SEF applicant may withdraw its application for registration. The Commission received no comments on this section and is adopting § 37.3(e) as proposed.

169

The Commission is renumbering proposed § 37.3(e) to § 37.3(f) and making several non-substantive revisions for clarity.

(i) § 37.3(f)—Request for Vacation of Registration

Proposed § 37.3(f) provided that a SEF may vacate its registration. The Commission received no comments on this section and is adopting § 37.3(f) as proposed.

170

The Commission is renumbering proposed § 37.3(f) to § 37.3(g) and making several non-substantive revisions for clarity.

4. § 37.4—Procedures for Listing Products and Implementing Rules

Proposed § 37.4 detailed the approval and self-certification procedures under part 40 of the Commission's regulations that SEF applicants and SEFs must follow to submit its products and rules to the Commission. Proposed § 37.4 also provided that a SEF may request that the Commission consider, under the provisions of section 15(b) of the Act,

171

any of the SEF's rules or policies.

171

CEA section 15(b) requires the Commission to take into consideration the public interest to be protected by the antitrust laws and endeavor to take the least anticompetitive means of achieving the objectives of the Act, as well as the policies and purposes of the Act. 7 U.S.C. 19(b).

(a) Summary of Comments

WMBAA commented that SEFs should not be required to seek Commission approval for their products and rules.

172

WMBAA recommended that SEFs be allowed to submit to the Commission a simple self-certification that they complied with the applicable requirements.

173

CME stated that the proposed procedures for listing products would increase the burdens associated with new product submissions and rule changes and would create new and costly bureaucratic inefficiencies, competitive disadvantages in the global marketplace, and impediments to innovation.

174

MarketAxess recommended that the Commission revise proposed § 37.4 to clarify that temporarily registered SEFs may list swaps through the Commission's approval or self-certification procedures.

175

172

WMBAA Comment Letter at 15-16 (Mar. 8, 2011).

173

Id.

174

CME Comment Letter at 10, 13 (Feb. 22, 2011). CME also provided its comments to the rulemaking titled Provisions Common to Registered Entities, 76 FR 44776 (Jul. 27, 2011). In addition, rather than repeat its comments that pertain to both the DCM and SEF NPRMs, CME incorporated its entire DCM rulemaking comment letter dated Feb. 22, 2011 as Exhibit A to its SEF comment letter dated Mar. 8, 2011. The Commission notes these comments by referencing the Feb. 22, 2011 date of CME's DCM comment letter. The Commission is also changing CME's reference to “DCM” to “SEF” for these comments.

175

MarketAxess Comment Letter at 19 (Mar. 8, 2011). Tradeweb similarly commented that a SEF applicant should be able to introduce new products while it is operating under temporary relief. Tradeweb Comment Letter at 13 (Mar. 8, 2011).

(b) Commission Determination

The Commission is adopting proposed § 37.4 subject to certain modifications. The Commission is removing many of the details from the proposed rule, which are already contained in part 40 of the Commission's regulations, and is instead referring SEFs to part 40.

176

The Commission is also removing the CEA section 15(b) consideration provision because, when reviewing any SEF rule, the Commission is already required to take into consideration the provisions under section 15(b) of the Act.

176

17 CFR part 40.

In response to WMBAA's comments that SEFs should not be required to seek Commission approval of their products and rules, the Commission notes that a SEF is a registered entity under the Act and pursuant to section 5c(c) of the Act, registered entities must submit product terms and conditions and rules to the Commission for approval or under self-certification procedures.

177

In addition, the Commission notes that CME's comments were addressed in the part 40 rulemaking and are outside the scope of this rulemaking.

178

The Commission also clarifies that temporarily registered SEFs may list swaps or submit rules through the Commission's approval or self-certification procedures under part 40 of this chapter, and that the timelines under those procedures shall apply.

177

CEA section 5c(c); 7 U.S.C. 7a-2(c).

178

See

Provisions Common to Registered Entities, 76 FR 44776 (Jul. 27, 2011).

5. § 37.5—Information Relating to Swap Execution Facility Compliance

Proposed § 37.5(a) required a SEF to file with the Commission information related to its business as a SEF as specified in the Commission's request. Proposed § 37.5(b) required a SEF to file with the Commission a written demonstration of compliance with the core principles. Proposed § 37.5(d) delegated the Commission's authority to seek information as set forth in § 37.5(b) to the Director of DMO or such other employee as the Director may designate.

Proposed § 37.5(c) required a SEF to file with the Commission a notice of the transfer of ten percent or more of its equity no later than the business day following the date on which the SEF enters into a firm obligation to transfer the equity interest.

179

The proposed rule also required that the notification include any relevant agreement and a representation from the SEF that it meets all of the requirements of section 5h of the Act and Commission regulations adopted thereunder. Additionally, the proposed rule

required the SEF to notify the Commission of the consummation of the transaction on the day on which it occurs. Furthermore, the proposed rule required that, upon the transfer of the equity interest, the SEF certify, no later than two business days following the date on which the change in ownership occurs, that the SEF meets all of the requirements of section 5h of the Act and Commission regulations adopted thereunder.

179

See generally

Core Principles and Other Requirements for Swap Execution Facilities, 76 FR at 1217 (explaining the proposed ten percent threshold).

(a) Summary of Comments

The Commission did not receive any comments on proposed § 37.5(a), (b), or (d). The Commission did, however, receive comments on the equity interest transfer provisions in proposed § 37.5(c).

CME commented that the submissions required to be simultaneously filed with the initial notification of an equity interest transfer do not lend themselves to preparation within the 24-hour time frame proposed in the rules.

180

CME further commented that the representation of compliance with the requirements of CEA section 5h and the Commission's regulations adopted thereunder would be more appropriate if required upon consummation of the equity interest transfer, rather than with the initial notification.

181

180

CME Comment Letter at 13 (Feb. 22, 2011).

181

Id.

MarketAxess commented that public companies should not have to file a notice of an equity interest transfer because the ownership structure of a public company does not implicate the control and influence concerns raised by the Commission in its proposal, and shareholders are already obligated under the SEC's regulations to report threshold acquisitions of equity interests within ten days of such an acquisition.

182

MarketAxess Comment Letter at 29 (Mar. 8, 2011).

Lastly, Better Markets recognized the important implications of transferring control in a regulated marketplace and it recommended that the Commission lower the transfer threshold for reporting to five percent as similarly required by the SEC for public equity transfers.

183

Better Markets Comment Letter at 21-22 (Mar. 8, 2011).

(b) Commission Determination

The Commission is adopting § 37.5(a), (b), and (d) as proposed subject to certain non-substantive clarifications.

184

The Commission is adopting proposed § 37.5(c) with certain revisions discussed below.

184

The Commission is removing the reference to “information relating to data entry and trade details” in proposed § 37.5(a) because it is unnecessary. The rule text is broad enough to encompass such information as it states that, upon the Commission's request, a SEF shall file with the Commission information related to its business as a SEF.

The Commission is revising § 37.5(c) to provide that a SEF must submit to the Commission a notification of each transaction involving the transfer of fifty percent or more of the equity interest in the SEF, and that such notification must be provided at the earliest possible time, but in no event later than the open of the business day that is ten business days following the date in which the SEF enters into a firm obligation

185

to transfer the equity interest. However, in all cases, the Commission notes that a SEF must provide the Commission staff with sufficient time, prior to consummating the equity interest transfer, to review and consider the implications of the change in ownership, including whether the change in ownership will adversely impact the operations of the SEF or the SEF's ability to comply with the core principles and the Commission's regulations thereunder.

185

The Commission interprets “firm obligation” to mean when a SEF enters into a letter of intent or any other document that demonstrates a SEF's firm intent to transfer its equity interest as described in § 37.5(c).

The Commission acknowledges CME's concern regarding the one business day time period for filing the supporting documents with the equity interest transfer notification. Thus, in addition to extending the time period to up to ten business days for a SEF to file notification with the Commission, the Commission is revising the rule to eliminate the requirement that specific documents be provided with the notification. Rather, the Commission is revising the rule text to clarify that upon receiving a notification of the equity interest transfer, the Commission may request appropriate documentation pursuant to its authority under § 37.5 of the Commission's regulations. For example, such documentation may include, but is not limited to: (i) Relevant agreement(s), including any preliminary agreements (not including draft documents); (ii) associated changes to relevant corporate documents; (iii) a chart outlining any new ownership or corporate or organizational structure, if available; and (iv) a brief description of the purpose and any impact of the equity interest transfer.

The Commission is deleting the requirement for a SEF to provide a representation of compliance with section 5h of the Act and the Commission regulations thereunder with the equity interest transfer notification, as requested by CME. The Commission agrees with CME that this requirement is more appropriate upon consummation of the equity interest transfer, rather than with the initial notification. Therefore, the Commission is maintaining the certification requirement upon consummation of the equity interest transfer as proposed in the SEF NPRM.

With respect to the other comments, the Commission believes that the notice requirements should not be limited to privately-held companies as the Commission's objective is to ensure that equity transfers do not negatively impact the operations of registered entities. The Commission must oversee and ensure the continued compliance of all SEFs with the core principles and the Commission's regulations. In order to fulfill its oversight obligations, and to ensure that SEFs maintain compliance with their self-regulatory obligations, the Commission must receive a notice of an equity interest transfer. The Commission acknowledges the suggestion by Better Markets to lower the equity interest transfer threshold to five percent; however, the Commission believes that the revisions to § 37.5(c) will still allow the Commission to fulfill its oversight obligations, while reducing the costs for SEFs to comply with the equity interest transfer requirements.

Finally, the Commission is revising the rule to remind SEFs that if any aspect of an equity interest transfer requires the SEF to file a rule as defined in part 40 of the Commission regulations, then the SEF must comply with the rule submission requirements of section 5c(c) of the CEA and part 40 of this chapter, and all other applicable Commission regulations.

6. § 37.6—Enforceability

Section 37.6 is intended to provide market participants who execute swap transactions on or pursuant to the rules of a SEF with legal certainty with respect to such transactions. In that regard, proposed § 37.6(a) established that any transaction entered into, on, or pursuant to the rules of a SEF cannot be voided, rescinded, or held unenforceable as a result of: (1) The SEF violating any provision of section 5h of the CEA or part 37; (2) any Commission proceeding to alter or supplement a rule, term, or condition under section 8a(7) of the CEA or to declare an emergency under section 8a(9) of the CEA; or (3) any other proceeding the effect of which is to alter or supplement a specific term or condition or trading rule or procedure, or require a registered

SEF to adopt a specific term or condition, trading rule or procedure, or to take or refrain from taking a specific action. Proposed § 37.6(b) required that all transactions executed on or pursuant to the rules of a SEF include written documentation memorializing all terms of the swap transaction, the legal effect of which is to supersede any previous agreement between the counterparties. The proposed rule also required that the confirmation of all terms of the transaction take place at the same time as execution.

186

The Commission proposed § 37.6(b) to facilitate the process contemplated by the confirmation definition. A swap “confirmation” is defined as the consummation (electronically or otherwise) of legally binding documentation (electronic or otherwise) that memorializes the agreement of the counterparties to all of the terms of a swap. A confirmation must be in writing (whether electronic or otherwise) and must legally supersede any previous agreement (electronically or otherwise). 17 CFR 45.1; Swap Data Recordkeeping and Reporting Requirements, 77 FR 2136, 2197 (Jan. 13, 2012).

(a) Summary of Comments

Three commenters addressed the practicality of a SEF confirming all terms of a transaction at the same time as execution. MarketAxess recommended that a SEF be responsible for confirming only the swap creation data in its possession at the time of execution, consistent with the Commission's approach in its proposed part 45 regulations.

187

MarketAxess also requested that the Commission clarify that SEFs are only responsible for producing a confirmation for swaps entered into on, and not just pursuant to the rules of, a SEF.

188

187

MarketAxess Comment Letter at 28-29 (Mar. 8, 2011). Proposed § 45.3 required that for all transactions executed on a SEF, regardless of whether the swap was cleared, the SEF would be responsible for reporting to a swap data repository only the primary economic terms of the transaction in its possession at the time of execution, and that reporting of confirmation data consisting of all terms of the transaction would be the responsibility of either the derivatives clearing organization (if cleared) or one of the counterparties (if uncleared). Swap Data Recordkeeping and Reporting Requirements, 75 FR 76574, 76580-81 (proposed Dec. 8, 2010). As adopted by the Commission, however, § 45.3 requires a SEF to report both the primary economic terms data as well as all confirmation data consisting of all transaction terms for each swap executed on or pursuant to the rules of the SEF as soon as technologically practicable after execution of the swap. 17 CFR 45.3; Swap Data Recordkeeping and Reporting Requirements, 77 FR 2136, 2199 (Jan. 13, 2012).

188

MarketAxess Comment Letter at 29 (Mar. 8, 2011).

MarkitSERV stated that when counterparties choose to execute a swap on a SEF that is not subject to the clearing mandate and not submitted for clearing to a clearinghouse, the parties will require a long-term credit relationship to be in place, often memorialized in an ISDA Master Agreement.

189

MarkitSERV further stated that the confirmation terms provided by a SEF may not be able to accommodate the specificity of such a master agreement, thus making the SEF's confirmation inadequate for purposes of complying with the Commission's regulations.

190

189

MarkitSERV Comment Letter at 4-5 (Mar. 8, 2011).

190

Id.

MarkitSERV also expressed concern that the SEF NPRM is conflating the concepts of confirmation and affirmation with the audit trail requirements in proposed § 37.205. For example, MarkitSERV sought clarification regarding the SEF NPRM's statement that “[v]oice transactions must be entered into some form of electronic affirmation system immediately upon execution.” Core Principles and Other Requirements for Swap Execution Facilities, 76 FR at 1221. Given the audit trail requirement in proposed § 37.205(b)(1), which states that SEFs that “permit intermediation must require that all orders or requests for quotes received by phone that are executable be immediately entered into the trading system or platform[,]” MarkitSERV recommended that the Commission use the term “electronic processing system” instead of “electronic affirmation system” because audit trail records and affirmation are different concepts.

Id.

at 1244. MarkitSERV Comment Letter at 4, 6 (Mar. 8, 2011). ABC/CIEBA also sought clarification as to whether SEFs must enter Permitted Transactions into an affirmation system, and if so, ABC/CIEBA noted that the SEF NPRM is inconsistent with other rules. ABC/CIEBA Comment Letter at 7-8 (Mar. 8, 2011). The Commission notes that the final SEF rules do not require the use of an “electronic affirmation system.” The Commission also clarifies that confirmation and the creation of an audit trail in § 37.205 are two separate and distinct requirements. In addition, the Commission notes that § 37.205(b) merely establishes the requirement that SEFs must capture audit trail data for regulatory purposes and does not address affirmation, confirmation, or the public reporting or dissemination of such data.

Similarly, the Energy Working Group expressed concern over the provision's requirement that the SEF's confirmation supersede any previous agreement between the transacting parties, noting that this language appears to prevent a master agreement from operating between counterparties transacting on a SEF.

191

The Energy Working Group also stated that confirmation cannot take place at the same time as execution because they are two distinct steps in the swap transaction process.

192

191

Energy Working Group Comment Letter at 5 (Mar. 8, 2011).

192

Id.

(b) Commission Determination

The Commission is adopting § 37.6(a) as proposed.

193

The Commission is also adopting § 37.6(b) as proposed subject to the two revisions discussed below. Although the comments received regarding proposed § 37.6(b) did not cite ambiguity in the SEF NPRM regarding a SEF's affirmative duty to provide confirmation documentation to counterparties, the Commission has determined to revise § 37.6(b) to state explicitly that a “swap execution facility shall provide each counterparty” with written documentation of all terms of the transaction to serve as confirmation of such transaction. In response to MarketAxess's comments, the Commission notes that § 37.6(b) is consistent with the requirement in final part 45 of the Commission's regulations that a SEF report confirmation data consisting of all terms of a transaction to a swap data repository (“SDR”) for each swap executed on or pursuant to the rules of the SEF.

194

193

The Commission is making certain non-substantive revisions to § 37.6(a) for clarity.

194

Part 45 requires a SEF to report all confirmation data and all primary economic terms data as defined in part 23 and § 45.1 of the Commission's regulations for each swap executed on or pursuant to the rules of the SEF as soon as technologically practicable after execution of the swap. 17 CFR 45.3; Swap Data Recordkeeping and Reporting Requirements, 77 FR 2136, 2199 (Jan. 13, 2012). Part 45 defines confirmation data as “all of the terms of a swap matched and agreed upon by the counterparties in confirming the swap.”

Id.

at 2197.

With regard to the specific comments received about the role of master agreements in the written confirmation provided by a SEF, the Commission has determined that counterparties choosing to execute a transaction not submitted for clearing on or pursuant to the rules of a SEF must have all terms, including possible long-term credit support arrangements, agreed to no later than execution, such that the SEF can provide a written confirmation inclusive of those terms at the time of execution and report complete, non-duplicative, and non-contradictory data to an SDR as soon as technologically practicable after execution.

195

This requirement, as mentioned above, is necessary to provide market participants who execute swap transactions on or pursuant to the rules of a SEF with legal certainty with respect to such transactions, and to promote the Commission's policy goal of achieving “straight-through processing” of swap

transactions in order to facilitate orderly markets, whether bilateral or facility traded.

196

Furthermore, the Commission believes that credit-support arrangements for uncleared transactions can impact the ultimate price of a swap, and thus should be agreed to no later than the time of trade execution in order to promote the statutory goal of pre-trade price transparency.

197

195

The Commission notes that swap trading relationship documentation is not required for swaps cleared by a derivatives clearing organization.

See

§ 23.504(a)(1) of the Commission's regulations. The Commission also notes that the commenters' concerns are most relevant to those transactions that are truly bespoke, not subject to the clearing mandate, and not voluntarily cleared. There is no reason why a SEF's written confirmation terms cannot incorporate by reference the privately negotiated terms of a freestanding master agreement for these types of transactions, provided that the master agreement is submitted to the SEF ahead of execution and the counterparties ensure that nothing in the confirmation terms contradict the standardized terms intended to be incorporated from the master agreement.

See also

Real-Time Public Reporting of Swap Transaction Data, 77 FR 1182, 1193 (Jan. 9, 2012) (discussing confirmation and incorporating documents by reference).

196

The OTC Derivatives Supervisors' Group, a collaboration of market participant leadership headed by the Federal Reserve Bank of New York, recognized the potential of electronic trading to facilitate the objectives of straight-through processing in the wake of the 2008 financial crisis.

See

Confirmation, Portfolio Reconciliation, and Portfolio Compression Requirements for Swap Dealers and Major Swap Participants, 75 FR 81519, 81521-22 (proposed Dec. 28, 2010) (noting that “[t]imely and accurate confirmation of transactions is critical for all downstream operational and risk management processes, including the correct calculation of cash flows and discharge of settlement obligations as well as accurate measurement of counterparty credit exposures.”).

197

See

CEA section 5h(e); 7 U.S.C. 7b-3(e) (stating that the goal of this section is to promote pre-trade price transparency in the swaps market). While straight-through processing may not be as relevant to credit risk associated with transactions executed on or pursuant to the rules of a SEF but not submitted for clearing, the data and real-time reporting requirements already finalized by the Commission mandate reporting by the SEF of all swap transaction terms “as soon as technologically practicable” in order to effectuate the statutory mandate of post-trade price transparency.

See

17 CFR 43.3(b)(1) (real-time reporting); 17 CFR 45.3(a)(1) (swap data recordkeeping and reporting requirements). This allowance of a slight timing delay, however, is meant to account for “the prevalence, implementation and use of technology by comparable market participants,” and not post-execution confirmation of other terms such as credit agreements for uncleared swaps.

See, e.g.,

17 CFR 43.2; Real-Time Public Reporting of Swap Transaction Data, 77 FR 1182, 1191 (Jan. 9, 2012) (discussing the definition of “as soon as technologically practicable”).

Finally, in response to the Energy Working Group's comment that confirmation cannot take place at the same time as execution, the Commission is revising § 37.6(b) to state 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 § 1.35(b)(5) of this chapter are met.” The Commission acknowledges that for bunched orders the post-execution allocation of trades is required for confirmation. The above revisions to § 37.6 are consistent with Commission regulation 1.35(b)(5) and provide sufficient time for the post-execution allocation of bunched orders, but allow SEFs to meet the requirement that confirmation takes place at the same time as execution.

198

See

17 CFR 1.35; Customer Clearing Documentation, Timing of Acceptance for Clearing, and Clearing Member Risk Management, 77 FR 21278, 21286-287, 306 (Apr. 9, 2012); Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants, 77 FR 55904, 55923 (Sep. 11, 2012) for further details.

7. § 37.7—Prohibited Use of Data Collected for Regulatory Purposes

Proposed § 37.7 prohibited a SEF from using for commercial purposes proprietary data or personal information that it obtains from or on behalf of any person for regulatory purposes. The purpose of this provision was to protect customer privacy and prevent a SEF from using such information to advance its commercial interests.

199

Core Principles and Other Requirements for Swap Execution Facilities, 76 FR at 1218 n. 34.

(a) Summary of Comments

Several commenters recommended that the Commission adopt a more flexible approach toward the use of data collected for regulatory purposes.

200

CME, for example, stated that a SEF should be allowed to use information that is provided for both regulatory and non-regulatory purposes for commercial purposes, as long as transparent rules or policies are in place.

201

Some commenters believed that commercial use should be allowed, provided that market participants' identities are protected

202

or prior consent is obtained.

203

For example, FSR believed that commercial use should be allowed for aggregate data as long as the sources of the information are not revealed.

204

200

MarketAxess Comment Letter at 31 (Mar. 8, 2011); FSR Comment Letter at 9 (Mar. 8, 2011); ICE Comment Letter at 5-6 (Mar. 8, 2011); CME Comment Letter at 14 (Feb. 22, 2011).

201

CME Comment Letter at 14 (Feb. 22, 2011).

202

MarketAxess Comment Letter at 31 (Mar. 8, 2011); FSR Comment Letter at 9 (Mar. 8, 2011).

203

CME Comment Letter at 14 (Feb. 22, 2011); MarketAxess Comment Letter at 31 (Mar. 8, 2011).

204

FSR Comment Letter at 9 (Mar. 8, 2011).

However, SIFMA AMG stated that, given the broad authority under the proposed rules for SEFs to acquire information, the term “proprietary data” is too narrow to adequately protect market participants from improper disclosure.

205

Freddie Mac requested that the Commission strengthen the proposed rule to additionally prohibit any SEF from asserting ownership rights over the trading information of any transacting party.

206

205

SIFMA AMG Comment Letter at 15-16 (Mar. 8, 2011).

206

Freddie Mac Comment Letter at 5 (Mar. 8, 2011).

Finally, WMBAA requested that the Commission clarify the meaning of “proprietary data or personal information,” and recommended limiting the rule to information obtained outside the ordinary course of trade execution and related to market surveillance activities.

207

WMBAA Comment Letter at 17 (Mar. 8, 2011).

(b) Commission Determination

The Commission is adopting § 37.7 as proposed, subject to certain modifications. In response to the commenters, the Commission is modifying the proposed rule to allow SEFs to use proprietary data or personal information for business or marketing purposes if the person from whom it collects or receives such information clearly consents to the use of its information in such manner. The Commission is also revising the proposed rule to prohibit a SEF from conditioning access to its facility based upon such consent. The Commission believes that the consent requirement will protect persons by allowing them to first weigh the benefits and consequences of allowing a SEF to make commercial use of their information. In response to CME's comment about information provided for both regulatory and non-regulatory purposes, the Commission notes that a SEF may use information that it receives for both regulatory and non-regulatory purposes for business or marketing purposes if the source of the information clearly consents to the use in such a manner.

In response to comments about the definition of “proprietary data and personal information,” the Commission declines to adopt a further definition and is maintaining a flexible approach. However, the Commission notes that some examples of proprietary data and personal information would include information that separately discloses business transactions, market positions, or trade secrets. The Commission recommends that SEFs define these terms in their rulebooks, which will be subject to Commission review during the SEF registration process.

8. § 37.8—Boards of Trade Operating Both a Designated Contract Market and a Swap Execution Facility

Proposed § 37.8(a) required that a board of trade that operates a DCM and also intends to operate a SEF must separately register the SEF under part 37, and on an ongoing basis, comply with the core principles under section 5h of the Act and the part 37 regulations issued thereunder. Proposed § 37.8(b) implemented CEA section 5h(c) by requiring a board of trade that operates both a DCM and SEF and uses the same electronic trade execution system for executing and trading swaps on both registered entities to clearly identify to market participants for each swap

whether the execution or trading of such swaps is taking place on the DCM or the SEF.

208

CEA section 5h(c); 7 U.S.C. 7b-3(c).

(a) Summary of Comments

CME stated that the rules of a DCM and SEF would clearly identify, as necessary, the trade platform upon which a swap was being executed, rendering the requirements of proposed § 37.8 unnecessary.

209

CME requested that the Commission clarify whether proposed § 37.8 created additional substantive obligations on the part of DCMs and SEFs given that market participants often interface with electronic platforms via proprietary or third-party front end systems not under the control of DCMs or SEFs.

210

209

CME Comment Letter at 14 (Feb. 22, 2011).

210

Id.

(b) Commission Determination

The Commission is adopting § 37.8(a) as proposed, subject to one revision. Proposed § 37.8(a) only addressed the SEF registration and compliance of a board of trade that already operates a DCM and intends to operate a SEF. To address all situations regarding DCM and SEF registration and compliance, the Commission is revising § 37.8(a) to apply to “[a]n entity that intends to operate both a [DCM] and a [SEF].” The rule requires the entity to separately register the DCM and SEF pursuant to part 38 and part 37 of the Commission's regulations, respectively, and to comply with the applicable core principles and regulations.

As to CME's comments regarding § 37.8(b), the Commission clarifies that it would not be sufficient for a board of trade that operates both a DCM and a SEF to simply have rules that identify whether a transaction is being executed on the DCM or the SEF. The Commission notes that section 5h(c) of the Act clearly requires a board of trade that operates both a DCM and a SEF to identify to market participants whether each swap is being executed on the DCM or the SEF.

211

Accordingly, a consolidated DCM/SEF trading screen must identify whether the execution is occurring on the DCM or the SEF, irrespective of how proprietary or third-party front end systems eventually present that data to market participants.

212

211

The Commission notes that only eligible contract participants may execute a swap on a SEF so a board of trade that operates both a DCM and a SEF must ensure that its SEF does not allow for non-eligible contract participant trading on the SEF.

See

CEA section 2(e); 7 U.S.C. 2(e).

212

The Commission notes that it is not replacing the term “board of trade” in § 37.8(b) with the term “entity” as in § 37.8(a) because in § 37.8(b) only a board of trade would be able to use the same electronic trade execution system for executing and trading swaps on the DCM and on the SEF (

i.e.,

a trading facility). The Commission also notes that § 37.8(b) implements CEA section 5h(c), which uses the term “board of trade.”

9. § 37.9—Permitted Execution Methods

213

The Commission is renaming the title of this section from “Permitted Execution Methods” to “Methods of Execution for Required and Permitted Transactions” to provide greater clarity.

As mentioned above, the SEF NPRM required a SEF to offer a minimum trading functionality (

i.e.,

a centralized electronic trading screen upon which any market participant can post both firm and indicative bids and offers that are transparent to all other market participants of the SEF). The SEF NPRM provided that Required Transactions (

i.e.,

transactions subject to the trade execution mandate under section 2(h)(8) of the CEA and not block trades) must be executed through the SEF's minimum trading functionality, Order Book meeting the minimum trading functionality, or RFQ System that operates in conjunction with the SEF's minimum trading functionality.

214

The SEF NPRM made it clear that for Required Transactions, pre-trade transparency must be met.

215

The SEF NPRM also allowed a SEF to provide additional execution methods for Permitted Transactions (

i.e.,

transactions not subject to the clearing and trade execution mandates, illiquid or bespoke swaps, and block trades), including Voice-Based System.

214

See

the discussion below regarding “Taken Into Account and Communicated” Language in the RFQ System Definition under § 37.9(a)(1)(ii)—Request for Quote System in the preamble for further details.

215

Core Principles and Other Requirements for Swap Execution Facilities, 76 FR at 1220.

The Commission is restructuring the order of the rule text in § 37.9 and this corresponding preamble discussion to provide clarity. Despite the order of other preamble sections, which generally follows the order of the SEF NPRM, the Commission's preamble discussion of § 37.9 generally follows the order of the restructured rule text. Additionally, as discussed above in the registration section, the Commission is moving the minimum trading functionality and Order Book sections from proposed § 37.9 to final § 37.3.

(a) § 37.9(a)(1)(iv)—Required Transactions and § 37.9(a)(1)(v)—Permitted Transactions

Proposed § 37.9(a)(1)(iv) defined Required Transactions as transactions that are subject to the execution requirements under the Act and are made available for trading pursuant to § 37.10, and are not block trades. Proposed § 37.9(a)(1)(v) defined Permitted Transactions as transactions that meet any of the following requirements: (A) Are block trades; (B) are not swaps subject to the Act's clearing and execution requirements; or (C) are illiquid or bespoke swaps.

(1) Summary of Comments

Several commenters recommended revisions to the definition of Permitted Transactions.

216

To ensure that there are no gaps between the definitions of Required Transactions and Permitted Transactions, MarketAxess recommended that the proposed definition of Permitted Transactions in § 37.9(a)(1)(v) be revised to include all transactions that are not Required Transactions as defined in proposed § 37.9(a)(1)(iv).

217

Freddie Mac recommended that the Commission revise the proposed definition of Permitted Transactions to incorporate hedging transactions by any end-user (

i.e.,

non-dealer) counterparty.

218

Additionally, the Coalition commented that the Commission should define illiquid or bespoke transactions to include typical end-user trades.

219

216

Additionally, WMBAA commented that the distinction between Required Transactions and Permitted Transactions is not required or authorized by the CEA. WMBAA Comment Letter at 6-7 (Mar. 8, 2011). In this regard, the Commission notes that the CEA sets out specific trading requirements for swaps that are subject to the trade execution mandate.

See

CEA sections 2(h)(1) and 2(h)(8); 7 U.S.C. 2(h)(1) and 2(h)(8). To meet these statutory requirements, final § 37.9(a)(1) defines these swaps as Required Transactions and provides specific methods of execution for such swaps. To distinguish these swaps from other swaps that are not subject to the trade execution mandate, the Commission defines such swaps in final § 37.9(c)(1) as Permitted Transactions and allows these swaps to be voluntarily traded on a SEF by using any method of execution.

See

discussion below regarding execution methods for Required and Permitted Transactions under § 37.9(b)(1) and (b)(4)—Execution Methods for Required Transactions and § 37.9(c)—Execution Methods for Permitted Transactions in the preamble.

217

MarketAxess Comment Letter at 32 (Mar. 8, 2011). Similarly, ISDA/SIFMA and the Energy Working Group requested clarity regarding the definition of Permitted Transactions. ISDA/SIFMA Comment Letter at 7 (Mar. 8, 2011); Energy Working Group Comment Letter at 4 (Mar. 8, 2011).

218

Freddie Mac Comment Letter at 3 (Mar. 8, 2011). Similarly, MFA recommended that the Commission expand the definition of Permitted Transactions to include other transactions, such as exchanges for physical, exchanges for swaps, and linked or packaged transactions. MFA Comment Letter at 8 (Mar. 8, 2011). The Commission interprets MFA's comment to be a request that the Commission create through rulemaking an

exception to the CEA section 2(h)(8) trade execution requirement similar to the centralized market trading exception established by DCM Core Principle 9 for certain exchange of futures for related positions.

See

CEA section 5(d)(9); 7 U.S.C. 7(d)(9);