# Process for a Designated Contract Market or Swap Execution Facility To Make a Swap Available to Trade, Swap Transaction Compliance and Implementation Schedule, and Trade Execution Requirement Under the Commodity Exchange Act

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2013-12250

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** June 4, 2013
- **Citation:** 78 FR 33606

## Text

COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 37 and 38
RIN 3038-AD18
Process for a Designated Contract Market or Swap Execution Facility To Make a Swap Available to Trade, Swap Transaction Compliance and Implementation Schedule, and Trade Execution Requirement Under the Commodity Exchange Act

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Final rule.

SUMMARY:

The Commodity Futures Trading Commission (“Commission”) is adopting regulations that establish a process for a designated contract market (“DCM”) or swap execution facility (“SEF”) to make a swap subject to the trade execution requirement pursuant to the Commodity Exchange Act (“CEA”). The Commission is also adopting regulations to establish a schedule to phase in compliance with the trade execution requirement. The schedule will provide additional time for compliance with this requirement.

DATES:

The rules will become effective August 5, 2013.

FOR FURTHER INFORMATION CONTACT:

Nhan Nguyen, Special Counsel, Division of Market Oversight (“DMO”, 202-418-5932,
nnguyen@cftc.gov;
Roger Smith, Attorney Advisor, DMO, 202-418-5344,
rsmith@cftc.gov;
or David Van Wagner, Chief Counsel, DMO, 202-418-5119,
dvanwagner@cftc.gov;
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

II. Sections 37.10 and 38.12 of the Commission's Regulations—Final Rules

A. Sections 37.10(a) and 38.12(a)—Procedure To Make a Swap Available to Trade

1. Sections 37.10(a)(1) and 38.12(a)(1)—Required Submission

2. Sections 37.10(a)(2) and 38.12(a)(2)—Listing Requirement

3. Submission of a Group, Category, Type or Class of Swaps

4. Consideration of Swaps on Another SEF or DCM, or Bilateral Transactions

B. Sections 37.10(b) and 38.12(b)—Factors to Consider To Make a Swap Available to Trade

C. Sections 37.10(c) and 38.12(c)—Applicability

D. Sections 37.10(d) and 38.12(d)—Removal

E. Annual Review

F. Notice to the Public of Available To Trade Determinations

III. Sections 37.12 and 38.11 of the Commission's Regulations—Trade Execution Compliance Schedule

IV. Related Matters

A. Regulatory Flexibility Act

B. Paperwork Reduction Act

1. Proposed Information Provided by Reporting Entities/Persons

2. Summary of Comments and Commission Response

C. Cost-Benefit Considerations

1. Available-to-Trade Rule

a. Part 40 Process and Determination Factors

b. Applicability

c. Consideration of Section 15(a) Factors—Available-to-Trade Rule

2. Trade Execution Compliance Schedule

V. List of Commenters

Text of the Regulations, Guidance and Acceptable Practices

I. Background

Section 723(a)(3) of the Dodd-Frank Act added section 2(h)(8) of the Commodity Exchange Act (“CEA”) to require that swap transactions subject to the clearing requirement must be traded on either a designated contract market (“DCM”) or swap execution facility (“SEF”), unless no DCM or SEF “makes the swap available to trade” or the transaction is not subject to the clearing requirement under section 2(h)(7) (the “trade execution requirement”).
1

1
For example, section 2(h)(7) of the CEA, as amended by section 723 of the Dodd-Frank Act, provides an exception to the CEA section 2(h)(1) clearing requirement (“the end-user exception”) if one of the counterparties to a swap (i) is not a financial entity, (ii) is using swaps to hedge or mitigate commercial risk, and (iii) notifies the Commission how it generally meets its financial obligations associated with entering into non-cleared swaps. 7 U.S.C 2(h)(7). Under the authority given by section 2(h)(7)(C)(ii) of the CEA, the Commission has also adopted regulations to exempt certain small banks, saving associations, farm credit system institutions, and credit unions from the definition of “financial entity,” thus potentially allowing the transactions of those entities to qualify for an exemption from the clearing requirement. 17 CFR 50.5(d). The Commission may determine that swap transactions exempted from the clearing requirement pursuant to other statutory authority would also not be subject to the section 2(h)(8) trade execution requirement. For example, on April 11, 2013, the Commission published final rules issued under section 4(c) of the CEA to exempt swaps between certain affiliated entities (“inter-affiliates”) within a corporate group from the clearing requirement. The Commission determines that such swaps would not be subject to the trade execution requirement.

On December 14, 2011, the Commodity Futures Trading Commission (“Commission”) proposed regulations to establish a process for a DCM or SEF to notify the Commission that a swap is “available to trade” for purposes of the trade execution requirement (“Further Notice of Proposed Rulemaking” or “FNPRM”).
2

The proposed regulations would be included in part 37 and part 38 of the Commission's regulations to implement the available-to-trade provision in section 2(h)(8) of the CEA. The comment period for the FNPRM ended on February 13, 2012. The Commission received 32 written comments from members of the public and hosted a public roundtable on this topic. Commission staff also participated in several meetings with market participants.
3

As a result of the written comments received and dialogue with market participants, the Commission in this final rule has revised and/or eliminated certain provisions that were proposed in the FNPRM.

2
Process for a Designated Contract Market or Swap Execution Facility to Make a Swap Available to Trade, 76 FR 77728 (Dec. 14, 2011). Sections 5(d)(1) and 5h(f)(1) of the CEA require DCMs and SEFs, respectively, to comply with any requirement that the Commission may impose by rule or regulation pursuant to section 8a(5) of the CEA, 7 U.S.C. 12a(5), which authorizes the Commission to promulgate such regulations as, in the judgment of the Commission, that are reasonably necessary to effectuate any of the provisions or to accomplish any of the purposes of the CEA. In addition, section 721(b) of the Dodd-Frank Act provides the Commission with authority to adopt rules to define “[any] term included in an amendment to the Commodity Exchange Act . . . made by [the Dodd-Frank Act].” 15 U.S.C. 8321, as enacted by section 721 of the Dodd-Frank Act.

3
Meeting summaries are available through the Commission's Web site at
http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1125.

On September 20, 2011, the Commission also proposed regulations to establish a schedule to implement the trade execution requirement.
4

The proposed regulations would be included in part 37 and part 38 of the Commission's regulations. The comment period for the proposed regulations ended on November 4, 2011. The Commission received 33 written comments from members of the public, and after consideration of those comments, is adopting the final implementation schedule for the trade execution requirement as proposed, but with certain clarifications.

4
Swap Transaction Compliance and Implementation Schedule: Clearing and Trade Execution Requirements under Section 2(h) of the CEA, 76 FR 58186 (Sep. 20, 2011).

The final regulations adopted herein will become effective August 5, 2013.

II. Sections 37.10 and 38.12 of the Commission's Regulations—Final Rules

As proposed in the FNPRM, §§ 37.10 and 38.12 established a process for a SEF or a DCM, respectively, to make a swap available to trade under section 2(h)(8) of the CEA.

• Proposed §§ 37.10(a) and 38.12(a) set forth the filing procedure that SEFs

and DCMs would utilize to demonstrate that a swap is available to trade. Under the proposal, a SEF or DCM would be required to submit an available-to-trade determination with the Commission under the rule approval and self-certification procedures in part 40 of the Commission's regulations.

• Proposed §§ 37.10(b) and 38.12(b) set forth eight factors that a DCM or SEF may consider, as appropriate, to determine that a swap is available to trade.
5

5

See infra
note 90 and accompanying text.

• Proposed §§ 37.10(c) and 38.12(c) required that upon a determination that a swap is available to trade by a SEF or DCM, all other DCMs and SEFs listing or offering that swap or an economically equivalent swap for trading must also make those swaps available to trade.

• Proposed §§ 37.10(d) and 38.12(d) required DCMs and SEFs to perform an annual review and assessment of their determinations.

A. Sections 37.10(a) and 38.12(a)—Procedure To Make a Swap Available to Trade

1. Sections 37.10(a)(1) and 38.12(a)(1)—Required Submission

Under proposed §§ 37.10(a) and 38.12(a), a SEF or DCM would initially determine that a swap is available to trade and submit that determination to the Commission, either for approval or self-certification, pursuant to the rule filing procedures of part 40 of the Commission's regulations.
6

6

See
Sections 40.5 and 40.6 and Provisions Common to Registered Entities, 76 FR 44776 (Jul. 27, 2011). The Commission views a DCM or SEF's determination that a swap is available to trade as a “trading protocol” that falls under the definition of a “rule” under § 40.1 of the Commission's regulations. Section 40.1(i) defines a rule as “any constitutional provision, article of incorporation, bylaw, rule, regulation, resolution, interpretation, stated policy, advisory, terms and conditions, trading protocol, agreement or instrument corresponding thereto, including those that authorize a response or establish standards for responding to a specific emergency, and any amendment or addition thereto or repeal thereof, made or issued by a registered entity or by the governing board thereof or any committee thereof, in whatever form adopted.” Therefore, SEFs and DCMs would be required to submit a determination to the Commission for approval or self-certification under part 40 of the Commission's regulations.

Under § 40.5, a registered entity may request Commission approval of a new rule prior to its implementation.
7

The Commission has a 45-day review period to review the request and may extend the review period for an additional 45 days in specified circumstances.
8

The Commission may also extend the review period beyond an additional 45 days, based on a written agreement with the registered entity.
9

Under § 40.6, a registered entity may submit a new rule to the Commission under self-certification procedures. The Commission has 10 business days to review the rule before it is deemed certified and can be made effective. The Commission, however, may stay the certification for an additional 90 days, during which time it must provide a 30-day public comment period.
10

Under either procedure, the registered entity must initially provide an explanation and analysis of the rule and its compliance with the applicable provisions of the CEA, including the core principles, and the Commission's regulations thereunder.
11

7
17 CFR 40.5(a).

8
17 CFR 40.5(c) and (d). In determining whether to extend the review period, the Commission will consider whether the proposed rule raises novel or complex issues, the submission is incomplete, or the requestor does not respond completely to Commission questions in a timely manner. 17 CFR 40.5(d)(1).

9
17 CFR 40.5(d)(2).

10
17 CFR 40.6(b) and (c). In determining whether to stay a self-certification, the Commission will consider whether the rule presents novel or complex issues; is accompanied by inadequate explanation; or is potentially inconsistent with the CEA. 17 CFR 40.6(c)(1).

11

See
17 CFR 40.5(a)(5), 40.6(a)(7)(v).

In the case of an available-to-trade determination, the accompanying explanation and analysis in the submission would detail the manner in which the SEF or DCM considered the factors in proposed § 37.10(b) or § 38.12(b).
12

At any time during its review under § 40.5 or during the 90-day review period under § 40.6, the Commission may notify the registered entity that it objects to the proposed certification because it is inconsistent or appears to be inconsistent with the CEA or the Commission's regulations.
13

12

See infra
note 90 and accompanying text for a list of the proposed determination factors in the FNPRM.

13

See
17 CFR 40.5(e), 40.6(c)(3).

Upon the Commission approving a SEF's or DCM's available-to-trade determination or permitting a SEF's or DCM's available-to-trade determination certification to become effective, the swap involved would be deemed available to trade. If that swap also is subject to the clearing requirement, then the swap must be executed on a SEF as a Required Transaction (as defined in part 37 of the Commission's regulations) or on a DCM in order to satisfy the trade execution requirement under section 2(h)(8) of the CEA. The Commission notes that the trade execution requirement does not apply to swaps that are not subject to the clearing requirement under section 2(h)(1) of the CEA.
14

14

See supra
note 1. The Commission addresses the methods by which swaps that are subject to the trade execution requirement must be executed on a SEF or DCM. Swaps that are subject to the trade execution requirement (and are not block trades as defined under § 43.2 of the Commission's regulations) and that are traded on a SEF are defined as Required Transactions under part 37 of the Commission's regulations governing SEFs. Under § 37.9(a)(2), Required Transactions must be executed by either (1) an Order Book, as defined in § 37.3(a)(3); or (2) a Request for Quote System, as defined in § 37.9(a)(3), that operates in conjunction with an Order Book.
See
Core Principles and Other Requirements for Swap Execution Facilities (May 17, 2013). Swaps that are subject to the trade execution requirement and traded on a DCM must be executed pursuant to subpart J of part 38 of the Commission's regulations, which implements revised DCM Core Principle 9 under section 5(d)(9) of the CEA, as amended by section 735(b) of the Dodd-Frank Act. 7 U.S.C. 7(d)(9).

Summary of Comments

With respect to the filing procedures set forth in proposed §§ 37.10(a) and 38.12(a), several commenters opposed the procedures and recommended that all swaps subject to the clearing requirement under section 2(h)(1) of the CEA should be subject to the trade execution requirement because the Dodd-Frank Act does not specify a separate process to make a swap available to trade.
15

In this regard, some commenters stated that under section 2(h)(8)(B) of the CEA, swaps subject to the clearing requirement are automatically subject to mandatory trade execution unless a SEF or DCM does not list the swap for trading.
16

Some commenters viewed the proposed procedure as duplicative of the mandatory clearing determination process and accordingly stated that the Commission should rely on the clearing determination process to also determine whether a swap is available to trade.
17

The commenters further stated that utilizing the clearing determination as the exclusive basis for finding that a swap is available to trade would subject more swaps to the trade execution

requirement and further the objectives of the Dodd-Frank Act.
18

15
MarketAxess Comment Letter at 3; WMBAA Comment Letter at 3; AFR Comment Letter at 3; SDMA Comment Letter at 3; ODEX Comment Letter at 1.

16
MarketAxess Comment Letter at 2; AFR Comment Letter at 4; ODEX Comment Letter at 1. Section 2(h)(8)(B) of the CEA states that mandatory trade execution does not apply “
if no
[DCM or SEF]
makes the swap available to trade”
(emphasis added). 7 U.S.C. 2(h)(8)(B).

17
SDMA Comment Letter at 4-5; WMBAA Comment Letter at 3; MarketAxess Comment Letter at 3-5; AFR Comment Letter at 4.
See infra
note 90 and accompanying text for a description of the proposed determination factors. Under § 39.5(a)(3)(ii)(A) of the Commission's regulations, a mandatory clearing submission must include information regarding the “existence of significant outstanding notional exposures, trading liquidity, and adequate pricing data” of a subject swap.

18
WMBAA Comment Letter at 2; MarketAxess Comment Letter at 9.

In contrast, some commenters stated that the process for determining whether a swap is available to trade is separate from the process for determining whether a swap is subject to the clearing requirement. Some of the commenters relied on the statutory language
19

and legislative history
20

of the Dodd-Frank Act to support this view, with some commenters arguing that “available for trading” should mean more than mere listing.
21

As statutory support, several commenters stated that section 2(h)(8) of the CEA specifies two distinct prerequisites for subjecting a swap to mandatory trade execution: (1) The swap must be subject to mandatory clearing and (2) the swap must be made available to trade.
22

Markit also noted that the language of the clearing requirement under section 2(h)(1)-(2) of the CEA, as enacted by the Dodd-Frank Act, does not address making a swap available to trade.
23

Further, AIMA noted that the clearing determination factors differ from the proposed factors in an available-to-trade determination.
24

19
Markit Comment Letter at 2; ICI Comment Letter at 3-4; SIFMA AMG Comment Letter at 3; CEWG Comment Letter at 2; AIMA Comment Letter at 1.

20
Some commenters cited the July 2010 Senate floor remarks of U.S. Senator Blanche Lincoln, in which she stated that determining whether a swap is available to trade should consist of more than conducting a listing inquiry. According to Senator Lincoln, “[t]he [Commission] could consider, for example, whether there is a minimum amount of liquidity such that the swap can actually be traded on the facility. The mere `listing' of the swap by a [SEF], in and of itself . . . should not be sufficient to trigger the Trade Execution Requirement.” Markit Comment Letter at 2 n.6; Chatham Comment Letter at 2-3; ICI Comment Letter at 3-4.

21
Morgan Stanley Comment Letter at 3; Bloomberg Comment Letter at 4; Sunguard Kiodex Comment Letter at 2; Spring Trading Comment Letter at 3 (Jan. 12, 2012); ICI Comment Letter at 3-4.

22
SIFMA AMG Comment Letter at 3; ICI Comment Letter at 3; CEWG Comment Letter at 2.

23
Markit Comment Letter at 2.

24
AIMA Comment Letter at 1.

Some commenters also asserted that the mandatory clearing determination and the proposed available-to-trade determination differ from one another in practical respects.
25

For example, SIFMA AMG stated that whether a swap should be mandatorily cleared depends on whether the swap (1) can be priced for a derivatives clearing organization's (“DCO”) risk management purposes; and (2) is standardized; therefore, unlike the available-to-trade determination, liquidity is not a primary consideration.
26

AIMA and Morgan Stanley similarly commented that stated liquidity is considered in a clearing determination to make certain that a DCO could adequately price the swap to calculate margin requirements and fulfill risk management requirements. They further stated that the minimum liquidity needed to clear a swap is lower than the minimum liquidity needed to support mandatory trade execution on a DCM or a SEF.
27

Markit and FXall also stated that differing tenors of a given swap would be clearable if any tenor of that swap is cleared, but different tenors would have significantly different liquidity characteristics.
28

25
MFA Comment Letter at 3; SIFMA AMG Comment Letter at 4; Morgan Stanley Comment Letter at 4; AIMA Comment Letter at 1-2; FHLB Comment Letter at 4 n.2; ICI Comment Letter at 3-4; Markit Comment Letter at 3; FXall Comment Letter at 5.

26
SIFMA AMG Comment Letter at 4.

27
AIMA Comment Letter at 1-2; Morgan Stanley Comment Letter at 4.

28
Markit Comment Letter at 3; FXall Comment Letter at 5.

Therefore, commenters stated that only the more liquid swaps should be available to trade
29

to avoid negatively affecting swap pricing and liquidity.
30

Morgan Stanley and FXall stated that subjecting illiquid swaps to the trade execution requirement would further reduce liquidity in those swaps, as market participants would be reluctant to reveal their trading interest in low volume markets; such premature imposition of the trade execution requirement upon illiquid swaps would likely result in increasing bid-ask spreads and trading costs.
31

ICI commented that the risks of low trading volume would drive market participants to other markets.
32

29
MFA Comment Letter at 3; Markit Comment Letter at 2; FXall Comment Letter at 2-3, CEWG Comment Letter at 2; JPMorgan Comment Letter at 2; FHLB Comment Letter at 4 n.2; Morgan Stanley Comment Letter at 3; Vanguard Comment Letter at 4; ICI Comment Letter at 3-4; Chatham Comment Letter at 2.

30
Vanguard Comment Letter at 4; FXall Comment Letter at 5; ICI Comment Letter at 4; Morgan Stanley Comment Letter at 3-4.

31
Morgan Stanley Comment Letter at 3; FXall Comment Letter at 5.

32
ICI Comment Letter at 4.

MFA also commented that separate processes, with adequate Commission oversight and public comment, would mitigate potential “first-mover advantage” issues.
33

33
MFA Comment Letter at 2.
See infra
discussion at note 41.

Of the commenters who supported separate processes, some commenters supported the proposed filing procedures.
34

CBOE stated that §§ 40.5 and 40.6 allow for timely Commission review and have been successfully utilized in other areas.
35

34
CBOE Comment Letter at 1-2; Spring Trading Comment Letter at 2 (Jan. 12, 2012); AIMA Comment Letter at 3 (supporting use of the § 40.5 rule approval process only).

35
CBOE Comment Letter at 1-2.

Other commenters, however, opposed the proposed filing procedures.
36

ISDA stated that neither § 40.5 nor § 40.6 should be used because an available-to-trade determination is neither a trading protocol nor a rule.
37

Some opposing commenters stated that the Commission, not SEFs and DCMs, should determine whether a swap is available to trade.
38

Some commenters asserted that the Commission is more qualified to make the determination based on its access to market data.
39

Several commenters also stated that SEFs and DCMs should not make the determination because they may have a financial incentive-based conflict of interest to maximize the number of swaps subject to mandatory trade execution.
40

Commenters expressed a related concern that a SEF's or DCM's determination would be influenced by a desire to gain a “first-mover advantage,” (
i.e.,
acquiring market share in the trading of a particular swap before other venues can list and develop trading activity in that swap), which would lead to premature or ill-advised mandatory trading of illiquid swaps on a SEF or DCM.
41

Further, several commenters stated that neither § 40.5 nor § 40.6 would provide the Commission with adequate time to review rule filings and to solicit public comment, which would allow SEFs and DCMs to acquire this advantage
42

and

make it hard for the Commission to reject a determination.
43

36
Markit Comment Letter at 5; ISDA Comment Letter at 4-5; Bloomberg Comment Letter at 3; CEWG Comment Letter at 2-3; Morgan Stanley Comment Letter at 5-6; AIMA Comment Letter at 2-3 (opposing use of § 40.6 certification process).

37
ISDA Comment Letter at 6.

38
Markit Comment Letter at 5-6; Vanguard Comment Letter at 5; Geneva Energy Markets Comment Letter at 2; JPMorgan Comment Letter at 1; CME Comment Letter at 4-5; FHLB Comment Letter at 3; FSR Comment Letter at 4; FXall Comment Letter at 5-6; Morgan Stanley Comment Letter at 5-6; CEWG Comment Letter at 6; ISDA Comment Letter at 3-4, 6; Tradeweb Comment Letter at 4-5.

39
FHLB Comment Letter at 3-4; ISDA Comment Letter at 3; Markit Comment Letter at 5; FXall Comment Letter at 6.

40
Bloomberg Comment Letter at 2; CME Comment Letter at 4-5; FHLB Comment Letter at 3; Markit Comment Letter at 5; CEWG Comment Letter at 2; ISDA Comment Letter at 3; Morgan Stanley Comment Letter at 5-6; AIMA Comment Letter at 2; Vanguard Comment Letter at 5; Geneva Energy Markets Comment Letter at 2; JPMorgan Comment Letter at 2.

41
FXall Comment Letter at 6-7; Bloomberg Comment Letter at 2; Tradeweb Comment Letter at 2-3; FSR Comment Letter at 2; ISDA Comment Letter at 3; CME Comment Letter at 4; Morgan Stanley Comment Letter at 5-6.

42
UBS Comment Letter at 1; Chatham Comment Letter at 3; AIMA Comment Letter at 2; ISDA Comment Letter at 3-5; CEWG Comment Letter at 3; Markit Comment Letter at 5-6; Morgan Stanley Comment Letter at 5.

43
Markit Comment Letter at 6; ISDA Comment Letter at 3; ICI Comment Letter at 5.

Several commenters offered alternative approaches to the proposed process. Bloomberg recommended a separate standalone rule.
44

Several commenters, however, recommended that the Commission establish a “pilot program” to phase in the available-to-trade process by initially deeming certain highly liquid swaps as available to trade (and therefore making them subject to the trade execution requirement) for a fixed time period. Commenters stated that this approach would provide market participants and trading venues with time to adjust to the trade execution requirement
45

and minimize market disruptions caused during implementation.
46

44
Bloomberg Comment Letter at 3 n.10.

45
Vanguard Comment Letter at 4; FSR Comment Letter at 5; JPMorgan Comment Letter at 2.

46
Markit Comment Letter at 3; Tradeweb Comment Letter at 3-4.

MarketAxess and CME recommended that only swaps that have been determined to be subject to the clearing requirement should be subject to an available-to-trade determination.
47

Both commenters argued that determining whether a swap is available to trade, for purposes of the trade execution requirement, would be legally insignificant unless a swap is required to be cleared first, and thus believe that the Commission should first determine which swaps will be subject to the clearing requirement.
48

47
CME Comment Letter at 3; MarketAxess Comment Letter at 7-8.

48

Id.

Bloomberg also noted that the Commission has the authority under § 5c(c) of the CEA to deny an available-to-trade determination only if it is “inconsistent with” the CEA or the Commission's regulations and requested clarification on how the Commission would interpret this term in this context.
49

49
Bloomberg Comment Letter at 3 n.10.

Commission Determination

The Commission is adopting the proposed available-to-trade process, subject to modifications discussed herein. The Commission agrees with commenters who assert that the CEA's statutory language supports an available-to-trade determination that is separate from a mandatory clearing determination.
50

In response to comments, the Commission has determined that at this time, it will only review available-to-trade submissions for swaps that it has first determined to be subject to the clearing requirement under § 39.5 of the Commission's regulations.
51

The Commission believes that adopting a sequenced approach in such a manner is consistent with the trade execution requirement under section 2(h)(8) of the CEA because the trade execution mandate only applies if a swap is (1) subject to mandatory clearing and (2) made available to trade by a SEF or DCM.
52

50
In response to comments that the Dodd-Frank Act does not condition mandatory trade execution of a swap on an affirmative Commission determination, the Commission further notes that section 8a(5) of the CEA authorizes the Commission to promulgate such regulations as, in its judgment, are reasonably necessary to effectuate any of the provisions or to accomplish any of the purposes of the CEA. 7 U.S.C. 12a(8). Further, section 721(b) of the Dodd-Frank Act provides the Commission with authority to adopt rules to define “[any] term included in an amendment to the Commodity Exchange Act . . . made by [the Dodd-Frank Act].” 15 U.S.C. 8321, as enacted by section 721 of the Dodd-Frank Act. Additionally, sections 5(d)(1) and 5h(f)(1) of the CEA require DCMs and SEFs, respectively, to comply with any requirement that the Commission may impose by rule or regulation pursuant to section 8a(5) of the CEA.

51
Section 39.5 of the Commission's regulations sets forth a process under which the Commission will review swaps to determine whether the swaps are required to be cleared.

52
Section 50.25 of the Commission's regulations establishes a schedule to phase in compliance with the clearing requirement by category of market participant. Category 1 entities, which include a swap dealer, a security-based swap dealer, a major swap participant, a major security-based swap participant, or an active fund, have 90 days to comply with the clearing requirement. Category 2 entities, which include a commodity pool, private fund, or person predominantly engaged in activities that are in the business of banking or that are financial in nature, have 180 days to comply with the clearing requirement. Certain third-party subaccounts and all other swap transactions receive 270 days to comply with the clearing requirement.
See
Swap Transaction Compliance and Implementation Schedule: Clearing Requirement under Section 2(h) of the CEA, 77 FR 44441 (July 20, 2012). The Commission notes that it will accept for review available-to-trade determinations for swaps determined to be subject to the clearing requirement, prior to the applicable date for compliance.

The clearing determination process, which the Commission notes is not initiated by a SEF or DCM, primarily focuses on the ability to mitigate risk through clearing by a DCO and the five statutory factors under section 2(h)(2)(D) of the CEA.
53

In particular with respect to risk management, the Commission considers whether imposing the clearing requirement would mitigate systemic risk through the collateralization of risk exposures, which includes counterparty credit risk that arises between two counterparties to an uncleared swap.
54

In this regard, the Commission assesses whether a particular class of swaps has sufficient liquidity for risk management purposes,
i.e.,
pricing and margining of the cleared swaps.
55

The Commission has noted in the context of clearing for interest rate swaps, for example, that DCOs do not focus on the liquidity of specific individual swaps from a risk management perspective, but rather on a portfolio basis.
56

In contrast, the available-to-trade determination process will be initiated by a SEF or DCM and may focus primarily on whether a swap has sufficient trading liquidity to be subject to mandatory trade execution.

53
To make a clearing determination, the Commission must consider five factors: (1) The existence of significant outstanding notional exposures, trading liquidity, and adequate pricing data; (2) the availability of rule framework, capacity, operational expertise and resources, and credit support infrastructures to clear the contract on terms that are consistent with the material terms and trading conventions on which the contract is then traded; (3) the effect on the mitigation of systemic risk, taking into account the size of the market for such contract and the resources of the DCO available to clear the contract; (4) the effect on competition, including appropriate fees and charges applied to clearing; and (5) the existence of reasonable legal certainty in the event of the insolvency of the relevant derivatives clearing organization or one or more of its clearing members with regard to the treatment of customer and swap counterparty positions, funds, and property. 7 U.S.C. 2(h)(2)(D)(ii)(I)-(IV), as enacted by section 723 of the Dodd-Frank Act.

54
77 FR 74285. In the Commission's clearing requirement final rule, certain classes of credit default swaps (CDS) and interest rate swaps (IRS) would become subject to the clearing requirement,
i.e.,
cleared by a registered DCO. Per section 2(h)(2)(D)(ii) of the CEA, the Commission considered the effect of clearing those classes of swaps on mitigating systemic risk. With respect to the proposed CDS indices, the Commission believes that mandatory clearing would (1) mitigate counterparty credit risk by allowing a DCO to become the buyer to every seller of those indices, and vice versa; and (2) collateralize risk exposures by allowing a DCO to calculate and collect initial margin and guaranty fund contributions. 77 FR 74297-98. With respect to the IRS proposed to be cleared, the Commission believes that the three DCOs that have submitted clearing determinations—CME, LCH, and IDCH—would (1) mitigate counterparty credit risk by establishing themselves as a central counterparty to reduce the number of open bilateral contracts; and (2) facilitate collateral efficiency through a central counterparty clearing approach. 77 FR 74312.

55
For example, the Commission has noted that higher trading liquidity in swaps would assist DCOs in end-of-day settlement procedures, as well as in managing the risk of CDS portfolios, particularly in mitigating the liquidity risk associated with unwinding a portfolio of a defaulting clearing member. 77 FR 47176.

56
Specifically, liquidity is viewed by a DCO as a function of whether a portfolio of swaps has common specifications that are determinative of their economic characteristics, such that a DCO can price and risk manage the portfolio in a default situation. 77 FR 74301.

With respect to the proposed procedure to determine that a swap is available to trade, the Commission is adopting the rule as proposed and codifying the proposed rule text to §§ 37.10(a)(1) and 38.12(a)(1).
57

The part

40 procedures provide a reasonable approach by allowing DCMs and SEFs—the entities responsible for listing or offering the swaps for trading and supporting related trading activity—to initially determine whether a swap is available to trade, and therefore, subject to the trade execution requirement. The Commission notes that although it will have access to market data, SEFs and DCMs will have sufficient expertise and experience with respect to swaps trading to make an initial determination and to submit that determination to the Commission under the part 40 procedures. Accordingly, the part 40 procedures provide SEFs and DCMs with the flexibility to make an initial available-to-trade determination while allowing for appropriate Commission review and regulatory oversight, as well as an opportunity for public comment.

57
In response to ISDA's comment that neither 17 CFR 40.5 nor § 40.6 should apply because an available-to-trade determination is neither a trading

protocol nor a rule, the Commission notes that the definition of “rule” under 17 CFR 40.1(h) of the Commission's regulations would encompass an available-to-trade determination. Section 40.1(h) defines “rule” as “any constitutional provision, article of incorporation, bylaw, rule, regulation, resolution, interpretation, stated policy, term and condition, trading protocol, agreement or instrument corresponding thereto, in whatever form adopted, and any amendment or addition thereto or repeal thereof, made or issued by a registered entity . . . .” The Commission views an available-to-trade determination as a “trading protocol.”

The Commission also believes that the part 40 procedures should afford sufficient time for market participants to offer public comment on available-to-trade submissions and for the Commission to review such submissions and any related comments. In this regard, for swaps submitted by a SEF or DCM under the § 40.5 rule approval process or the § 40.6 rule certification process, initial available-to-trade determinations may present novel and complex issues that will warrant retention for an additional review.
58

Under § 40.6(c)(2) of the Commission's regulations, interested parties would have sufficient opportunity to comment on the certification during a 30-day mandatory public comment period. Therefore, swaps self-certified as available to trade may initially be subject to a review period of up to 100 days.
59

Similarly, for swaps submitted under the § 40.5 rule approval process that present novel or complex issues, the review period for initial rule approval submissions may be extended for at least additional 45 days for the same reason.
60

The Commission notes that it routinely solicits public comments for § 40.5 rule approval submissions and anticipates that market participants would be similarly able to provide the Commission with comments on available-to-trade filings.

58
Under §§ 40.5(d)(1) and 40.6(c) of the Commission's regulations, the Commission may stay the certification of a new rule or rule amendment that, among other things, presents “novel or complex issues that require additional time” to review or analyze.

59
Under 17 CFR 40.6(c)(3), a new rule subject to a stay would become effective, pursuant to its certification, at the expiration of the 90-day review period unless the Commission withdraws the stay prior to that time, or the Commission notifies the registered entity during the 90-day period that it objects to the proposed certification on the grounds that the proposed rule or rule amendment is inconsistent with the CEA or the Commission's regulations.

60
As noted, under 17 CFR 40.5(d)(2), the Commission may extend the review period beyond an additional 45 days based on written agreement with the submitting SEF or DCM.

The Commission expects that over time, available-to-trade filings should present fewer novel or complex issues, thereby not warranting extensions of the applicable review period; SEFs and DCMs would likely submit swap determinations that are similar to previous submissions and the Commission would become more experienced with the process. The Commission, however, will continue to consider whether to stay rule certifications or rule approval submissions on a case-by-case basis.

In response to Bloomberg's request for clarification, the Commission notes that whether a SEF's or DCM's initial determination is “inconsistent” with the CEA and the Commission's rules and regulations would depend upon the SEF's or DCM's analysis and application of the determination factors to the swap submitted as available to trade, as discussed further below. The Commission also notes that a determination could also be deemed inconsistent if it does not consider one or more of the required factors, or the swap otherwise does not meet other prerequisites established in the submission process, discussed further below.

2. Sections 37.10(a)(2) and 38.12(a)(2)—Listing Requirement

The FNPRM requested comment on (1) whether the Commission should allow a SEF or DCM to submit an available-to-trade determination for a swap under proposed §§ 37.10(a) and 38.12(a) if the SEF or DCM making the submission does not itself list that swap for trading; and (2) if so, whether the Commission would allow that SEF or DCM to consider the same swap or an economically equivalent swap that trades on another SEF, DCM, or primarily or solely in bilateral transactions.
61

61
76 FR 77733.

Summary of Comments

Several commenters recommended that a SEF or DCM must list the swap that it submits for an available-to-trade determination.
62

For example, Spring Trading and SIFMA AMG recommended that a SEF or DCM must list a swap for at least 90 days before submitting its determination.
63

ISDA recommended that a SEF or DCM must list the swap during the 6-month period that it proposed for Commission review of the available-to-trade determination.
64

ISDA noted that the lack of a listing requirement would incentivize SEFs and DCMs to try to submit as many determinations as possible merely to promote centralized trading.
65

According to some commenters, the Commission or the trading facility could evaluate the data gathered
66

and obtain experience
67

during the listing period to determine whether the swap should be made available to trade. SDMA, however, recommended that a SEF or DCM should be allowed to submit a determination for a swap that it does not list.
68

62
Eaton Vance Management Comment Letter at 3; SIFMA AMG Comment Letter at 10; UBS Comment Letter at 2; Morgan Stanley Comment Letter at 6 n.6; ISDA Comment Letter at 7; Tradeweb Comment Letter at 5.

63
SIFMA AMG Comment Letter at 10; Spring Trading Comment Letter at 3 (Jan. 12, 2012).

64
ISDA Comment Letter at 7. ISDA proposed eliminating the proposed § 40.6 certification process and stated that the Commission should establish a minimum 6-month review period for determinations submitted by a SEF or DCM.

65
ISDA Comment Letter at 6.

66
ISDA Comment Letter at 7; SIFMA AMG Comment Letter at 10; Spring Trading Comment Letter at 3.

67
Tradeweb Comment Letter at 5; UBS Comment Letter at 2; Morgan Stanley Comment Letter at 6 n.6.

68
SDMA Comment Letter at 9.

Commission Determination

The Commission agrees with commenters who support a listing requirement and is amending the proposed rule text to adopt new §§ 37.10(a)(2) and 38.12(a)(2), which requires a SEF or DCM to certify that it is listing the swap for which it submits an available-to-trade determination.
69

The Commission believes that an initial determination that a swap is available to trade should be made by a SEF or a DCM that offers the swap for trading.
70

The Commission, however, is not adopting a minimum listing period so as to avoid delaying the determination process, and hence implementation of the trade execution requirement as discussed below. The Commission also notes, as discussed further below, that a SEF or DCM is allowed to consider activity in the same swap listed on another SEF or DCM as well as the amount of off-exchange activity in the same swap.

69
The Commission notes that such swap would be certified or approved under § 40.2 or § 40.3 of the Commission's regulations prior to listing the swap for trading.

70
Bloomberg requested that a SEF submitting an available-to-trade determination for a particular swap would be able to incorporate by reference, in its submission, information and analysis already completed by a DCO and the Commission as part of the mandatory clearing determination process

with respect to that swap. Bloomberg Comment Letter at 4-5. In response to Bloomberg's request, the Commission views the part 40 process as flexible and would allow relevant information from a clearing determination to be referenced in an available-to-trade submission. The Commission, however, emphasizes that such information leading to an affirmative clearing determination would not automatically indicate that a swap is available to trade.

3. Submission of a Group, Category, Type or Class of Swaps

The FNPRM requested comment on (1) whether the Commission should allow a SEF or DCM to submit its available-to-trade determination for a “group, category, type or class of swaps” based on the factors proposed in §§ 37.10(b) and 38.12(b) of the FNPRM; and (2) how “group, category, type or class of swaps” should be defined.
71

71
76 FR 77733.

Summary of Comments

Some commenters stated that the Commission should allow SEFs and DCMs to submit determinations for a group, category, type, or class of swap.
72

In defining “group, category, type, or class” of swap, AIMA stated that the Commission should take into account specific characteristics of certain swaps to avoid subjecting certain illiquid swaps to mandatory trade execution.
73

72
Spring Trading Comment Letter at 5 (Jan. 12, 2012); AIMA Comment Letter at 2; SDMA Comment Letter at 7; AFR Comment Letter at 2 (inferring that mandatory trade execution should be determined for a “class” of swaps).

73
AIMA Comment Letter at 2.

Other commenters, however, expressed concern about making determinations based on group, category, type or class of swap.
74

SIFMA AMG and CEWG commented that swaps within a potential “group” may feature different liquidity and trading patterns,
75

while Markit and ISDA stated that liquidity may differ significantly even among different tenors of a given swap.
76

ISDA and Morgan Stanley also highlighted the difficulty at the outset of defining “group, category, type or class of swap.”
77

Markit stated that determinations should be allowed for individual swaps and then applied to “buckets” of maturities and tenors.
78

74
Markit Comment Letter at 2-3; SIFMA AMG Comment Letter at 11; CEWG Comment Letter at 3-4; ISDA Comment Letter at 10; UBS Comment Letter at 2; Morgan Stanley Comment Letter at 9.

75
SIFMA AMG Comment Letter at 11; CEWG Comment Letter at 4. With respect to energy commodities, CEWG provided Henry Financial LD1 Fixed Swap, Henry Financial LD4 Fixed Swap, and ICE's Physical Basis LD1, which differ in contract size and term, as examples of swaps within a potential group or class that each possess different liquidity characteristics, thereby warranting individual determinations. SIFMA AMG also noted that the liquidity of interest rate swaps differs significantly depending on time to maturity.

76
Markit Comment letter at 2; ISDA Comment Letter at 11. ISDA offered the Federal Reserve Bank of New York's analysis of trade data as a demonstration of varying trading volumes for different tenors of credit default swaps.

77
Morgan Stanley Comment Letter at 9.

78
Markit Comment Letter at 2. Markit defines “buckets” as groups of maturities and tenors for a given swap that have similar liquidity measures.

Commission Determination

The Commission is allowing SEFs and DCMs to submit determinations for a group, category, type or class of swap to provide greater efficiency to the available-to-trade determination process. To address commenters' concerns that swaps within a group, category, type or class may have different liquidity and trading characteristics, a SEF or DCM must address, in its submission, the applicable determination factor or factors apply to all of the swaps within that group, category, type or class. Further, a SEF and DCM will be allowed to define the scope of the group, category, type or class of swap that it determines is available to trade.
79

To the extent that a SEF or DCM possesses flexibility to define that scope, however, the Commission still may approve or deem only part or some of the swaps within that group, category, type or class as available to trade, based on its review.
80

79
The Commission notes that for clearing determinations under § 39.5, it may define a particular group, category, type or class of swaps for purposes of a clearing determination based on several considerations. 76 FR 44468. To the extent that such a determination is informative as to whether a proposed group, category, type or class of swap that is defined by a SEF or DCM is available to trade, the Commission may take those considerations into account. For example, a SEF or a DCM could define a group, category, type or class of interest rate swaps based on characteristics that include the nature of the payments streams (
e.g.,
fixed-to-floating, floating-to-floating, forward rate agreement (FRA), or overnight indexed swap (OIS)); currency (
e.g.,
U.S. dollar, euro, British pound, Japanese yen); floating rate index referenced (
e.g.,
LIBOR, EURIBOR); and stated termination date (
e.g.,
1-year, 2-year, 5-year, 10-year).

80
Where the Commission does not approve or deem all of the swaps within a group, category, type or class submitted by a SEF or DCM as available to trade, DMO would notify the SEF or DCM of such an action.

4. Consideration of Swaps on Another SEF or DCM, or Bilateral Transactions

The FNPRM requested comment on whether the Commission should allow a SEF or DCM, in evaluating the factors under proposed §§ 37.10(b) and 38.12(b), to consider (1) the same swap or an economically equivalent swap on another SEF or DCM; and (2) the amount of activity in the same swap or an economically equivalent swap available primarily or solely in bilateral transactions.
81

81
76 FR 77733.

Summary of Comments

Several commenters stated that a SEF or DCM should be able to consider relevant swap activity on other SEFs and DCMs when making an available-to-trade determination.
82

Vanguard commented that determining whether a “meaningful” portion of trading in the swap occurs on a SEF or DCM is important in determining that a swap is available to trade.
83

SIFMA AMG stated that the existence of a liquid trading environment on SEFs and DCMs could indicate that a swap could be made available to trade without harm to liquidity.
84

FXall stated that determinations should be based on a swap's marketwide trading patterns, so as to avoid unintended effects on liquidity.
85

82
MFA Comment Letter at 3; Spring Trading Comment Letter at 6 (Jan. 12, 2012); Markit Comment Letter at 3 (discussing importance of marketwide data); Vanguard Comment Letter at 5; SIFMA AMG Comment Letter at 6; AIMA Comment Letter at 2; Morgan Stanley Comment Letter at 6 n.6; FXall Comment Letter at 6 n.18; CBOE Comment Letter at 3.

83
Vanguard Comment Letter at 5.

84
SIFMA AMG Comment Letter at 6.

85
FXall Comment Letter at 6 n.18.

Some commenters also stated that a SEF or DCM should be able to consider swaps executed on a bilateral basis.
86

CBOE stated that considering a swap's trading activity only on a SEF or DCM would otherwise incentivize market participants to minimize centralized trading in order to limit the number of swaps made available to trade.
87

SIFMA AMG stated that examining the bilateral market could reveal a liquid trading environment, but could then raise questions as to whether a swap should be made available to trade.
88

MFA and Vanguard recommended that the Commission utilize data for on- and off-

exchange trading to make the available-to-trade process more objective.
89

86
MFA Comment Letter at 3; SIFMA AMG Comment Letter at 6; Markit Comment Letter at 3; FXall Comment Letter at 6; Vanguard Comment Letter at 5; Spring Trading Comment Letter (Jan. 12, 2012) at 6; CBOE Comment Letter at 3; AIMA Comment Letter at 2; Morgan Stanley Comment Letter at 6; SDMA Comment Letter at 7.

87
CBOE Comment Letter at 3.

88
SIFMA AMG Comment Letter at 6.

89
MFA Comment Letter at 3; Vanguard Comment Letter at 5.

Commission Determination

The Commission will allow a SEF or DCM to consider activity in the same swap listed on another SEF or DCM and the amount of off-exchange activity in the same swap when determining whether a swap is available to trade. The Commission agrees with commenters that since the available-to-trade determination applies marketwide, a SEF or DCM should be able to consider activity on other SEFs and DCMs, as well as activity that takes place off-exchange, to the extent that such information becomes available. Information about trading activity in the entire swaps marketplace would better inform market participants about how the swap trades in the overall market and provide interested parties with additional information and analysis to comment upon. More comprehensive information would also better inform the Commission in its evaluation of the available-to-trade submission. The Commission also believes that consideration of off-exchange trading could provide additional data and insight about a swap's trading patterns,
e.g.,
trading volume or numbers and types of market participants, that would help a SEF or a DCM address one or more of the determination factors under §§ 37.10(b) and 38.12(b).

B. Sections 37.10(b) and 38.12(b)—Factors To Consider To Make a Swap Available To Trade

Proposed §§ 37.10(b) and 38.12(b) required a SEF or DCM to consider, as appropriate, the following factors with respect to a swap that it determines is available to trade: (1) Whether there are ready and willing buyers and sellers; (2) the frequency or size of transactions on SEFs, DCMs, or of bilateral transactions; (3) the trading volume on SEFs, DCMs, or of bilateral transactions; (4) the number and types of market participants; (5) the bid/ask spread; (6) the usual number of resting firm or indicative bids and offers; (7) whether a SEF's trading system or platform or a DCM's trading facility will support trading in the swap; or (8) any other factor that the SEF or DCM may consider relevant.
90

Under the proposed rule, no single factor would be dispositive, as the DCM or SEF could consider any one factor or any combination of factors in its determination that a swap is available to trade.

90
As noted above, the Commission believes that the mere listing or offering for trading of a swap on a DCM or SEF does not mean that the swap is available to trade.

Summary of Comments

Commenters expressed general support for the first seven proposed factors.
91

Some commenters stated, however, that SEFs and DCMs should be required to consider specific factors.
92

Some commenters also offered additional factors to consider, such as the ability to establish connectivity with new market participants without imposing undue burden;
93

the level of pre-trade transparency in the existing market;
94

and market depth and market breadth.
95

91
MFA Comment Letter at 2; Markit Comment Letter at 3; Tradeweb Comment Letter at 3 (proposing a pilot program based on the proposed factors); Bloomberg Comment Letter at 4; ICI Comment Letter at 4-5; Vanguard Comment Letter at 4; SIFMA AMG Comment Letter at 5; Geneva Energy Markets Comment Letter at 2; Spring Trading Comment Letter at 4 (Jan. 12, 2012); AIMA Comment Letter at 1; CME Comment Letter at 6; FHLB Comment Letter at 4.

92
For example, ISDA recommended that whether a SEF lists and supports trading in a swap should be a prerequisite. ISDA Comment Letter at 8. FSR emphasized that broad market participation must be shown. FSR Comment Letter at 7. Some commenters requested that SEFs and DCMs be required to consider both the size and frequency of swap transactions on SEFs, DCMs, and in bilateral transactions. AIMA Comment Letter at 2; ICI Comment Letter at 5 n.13; SIFMA AMG Comment Letter at 6.

93
FSR Comment Letter at 4.

94
Geneva Energy Markets Comment Letter at 2.

95
SDMA Comment Letter at 7. According to SDMA, a market depth test consists of calculating the sum of available bids and offers at or near the current price for a swap at a particular time, while a market breadth test consists of calculating the sum of market depth for a particular swap or class of swaps.

Other commenters opposed the proposed factors.
96

In particular, several commenters objected to the use of “any other factor” in a determination.
97

Eaton Vance Management and ISDA, for example, considered “any other factor” to be too broad and subjective and thought that it would incentivize SEFs and DCMs to make illiquid swaps available to trade.
98

ICI stated that the Commission would effectively delegate its authority to establish available-to-trade standards by allowing a SEF or DCM to use this factor alone.
99

CEWG similarly stated that use of non-enumerated factors by a SEF or DCM would create “uncertainty and variability” in the process.
100

96
For example, SDMA considered the factors to be duplicative of the mandatory clearing determination factors set forth in section 2(h)(2)(D) of the CEA, and therefore burdensome and costly. SDMA Comment Letter at 5.

97
Eaton Vance Management Comment Letter at 2; ISDA Comment Letter at 8; ICI Comment Letter at 5; CEWG Comment Letter at 3.

98
Eaton Vance Management Comment Letter at 2; ISDA Comment Letter at 8.

99
ICI Comment Letter at 5.

100
CEWG Comment Letter at 3.

Some commenters also objected to allowing a SEF or DCM to make an available-to-trade determination based on any one proposed factor and some recommended that SEFs and DCMs be required to consider all of the factors.
101

Vanguard and SIFMA AMG asserted that all of the factors are relevant
102

and that consideration of all factors would be consistent with the mandatory clearing determination process.
103

CBOE, however, contended that required consideration of all the factors would frustrate Congress's intent for greater transparency, competition, and oversight of the swaps market.
104

101
FHLB Comment Letter at 3; CEWG Comment Letter at 3; Eaton Vance Management Comment Letter at 3 (adopting ICI's recommendation); ICI Comment Letter at 2, 5; Vanguard Comment Letter at 4; Bloomberg Comment Letter at 4; SIFMA AMG Comment Letter at 5; Chatham Comment Letter at 3; AIMA Comment Letter at 2. Markit stated that this approach would grant “unfettered discretion” to SEFs and DCMs to disregard a swap's actual liquidity, Markit Comment Letter at 3. MarketAxess stated that the Commission would lack any basis to reject a determination. MarketAxess Comment Letter at 8.

102
Vanguard Comment Letter at 4; SIFMA AMG Comment Letter at 5.

103
SIFMA AMG Comment Letter at 5.

104
CBOE Comment Letter at 2.

Several commenters requested that the Commission set objective threshold criteria for the proposed factors.
105

Commenters stated that without objective criteria, a SEF or DCM would otherwise have unlimited discretion
106

to act in its financial self-interest
107

by determining that a swap is available to trade. Some commenters, however, acknowledged the difficulty of developing objective liquidity measurements.
108

105
Markit Comment Letter at 3; Spring Trading Comment Letter at 4; AIMA Comment Letter at 4; Bloomberg Comment Letter at 4; FXall Comment Letter at 6; Eaton Vance Management Comment Letter at 3; ICI Comment Letter at 5-6; FSR Comment Letter at 3, 6-7. Some commenters recommended that the swap must (1) trade a minimum number of times each day; (2) feature a minimum number of market participants trading it; and (3) meet an overall notional trading volume over a set period of time. Vanguard Comment Letter at 5; ISDA Comment Letter at 7; SIFMA AMG Comment Letter at 5, 7. Morgan Stanley recommended that the swap must (1) have resting bids and offers on the applicable SEF or DCM for at least half of the relevant trading hours for the 90-day period prior to a determination; and (2) have been traded an average of at least 5 times per day during the same period. Morgan Stanley Comment Letter at 4, 6. JPMorgan recommended that the swap must show an actual level of liquidity on the applicable DCM or SEF during a sample period of at least 180 days prior to the submission. JPMorgan Comment Letter at 1.

106
Morgan Stanley Comment Letter at 4.

107
FSR Comment Letter at 3; Morgan Stanley Comment Letter at 5; ICI Comment Letter at 6.

108
ICI Comment Letter at 6; Markit Comment Letter at 3; SIFMA AMG Comment Letter at 5-6.

Some commenters recommended imposing additional requirements on SEFs and DCMs with respect to considering the proposed factors. For example, SIFMA AMG recommended that a SEF or DCM must provide detailed reasoning and supporting evidence for the factors that it has considered.
109

CEWG recommended that a SEF or DCM should provide an explanation to the Commission, subject to public comment, when it believes that certain factors do not apply.
110

109
SIFMA AMG Comment Letter at 2.

110
CEWG Comment Letter at 3.

Commission Determination

The Commission is adopting the rule as proposed under final §§ 37.10(b) and 38.12(b), subject to two modifications and minor technical corrections. The Commission acknowledges commenters' concerns regarding the consideration of “any other factor” and thus is removing that factor from the final rule. The Commission believes that removing this factor will provide market participants with a more precise set of factors from which a swap may be made available to trade, thereby improving clarity, lessening uncertainty regarding how a determination may be made, and promoting a more consistent determination process. Further, given the adoption of a listing requirement, the Commission is removing an additional factor—whether a SEF's or DCM's trading facility or platform will support trading in the swap. This factor contemplated, among other things, whether the SEF or DCM lists the swap for trading on its trading facility or platform. Therefore, in light of the listing requirement, this factor is redundant.

As discussed above, the Commission has determined in this final rule that a SEF or DCM may consider activity in the same swap listed on another SEF or DCM and the amount of off-exchange activity in the same swap.
111

Therefore, the Commission is amending the second and third determination factors in proposed §§ 37.10(b)(2) and (3) and 38.12(b)(2) and (3) to remove duplicative language related to this matter.

111

See supra
Section II.A.4—Consideration of Swaps on Another SEF or DCM, or Bilateral Transactions for the Commission's discussion.

The Commission believes that the remaining enumerated factors provide a sufficient framework from which SEFs, DCMs, the Commission and market participants may evaluate whether a swap is subject to the trade execution requirement. While each of the enumerated factors is an indicator of trading activity and may be relevant in a determination, the Commission believes that no single factor must always be considered, nor must a SEF or DCM consider more than one factor in a determination. Therefore, the Commission believes that satisfying any one of the determination factors would sufficiently indicate that the contract is available to trade. By adopting a more flexible approach, SEFs and DCMs will be able to accommodate swaps with different trading characteristics that can be supported in a centralized trading environment. The Commission does not believe that it is necessary for a SEF or DCM to analyze and demonstrate compliance with every factor in a submission.

In response to SIFMA AMG's recommendation that a SEF or DCM should be required to provide detailed reasoning and supporting evidence for the factors considered, the Commission notes that §§ 40.5(a)(5) and 40.6(a)(7) each requires submissions to contain an explanation and analysis of the determination, including the factors considered and its compliance with the CEA and Commission regulations. The Commission expects such an explanation and analysis to be clear and informative as to how the factor or factors apply to the swap.

The Commission declines to adopt additional factors in the final rule as suggested by several commenters. The Commission believes that the enumerated factors provide a sufficient framework to allow: (1) A SEF or DCM to consider whether a swap should be subject to the trade execution requirement; (2) market participants to evaluate a determination and provide public comment; and (3) the Commission to evaluate a SEF's or DCM's determination that a swap is available to trade. Further, the Commission believes that the enumerated factors are broad in nature and incorporate many of the concepts recommended by commenters.

The Commission acknowledges commenters' request for establishing objective criteria associated with the factors and reiterates the view expressed in the FNPRM that as centralized trading develops and the Commission gains experience in oversight of swap markets, the Commission could then consider adopting objective criteria in a future rulemaking based upon an empirical analysis of swap trading data.

C. Sections 37.10(c) and 38.12(c)—Applicability

Proposed §§ 37.10(c)(1) and 38.12(c)(1) required that upon the Commission deeming that a swap is available to trade based on a SEF or DCM submission, all other SEFs and DCMs listing or offering for trading such swap and/or any economically equivalent swap must make those swaps available to trade for purposes of the trade execution requirement under section 2(h)(8) of the CEA. The Commission defined “economically equivalent swap” under proposed §§ 37.10(c)(2) and 38.12(c)(2) as a swap that the SEF or DCM determines to be economically equivalent with another swap after consideration of each swap's material pricing terms. The Commission also noted that if a DCM or SEF makes a swap available to trade, then the proposed rule would not require other DCMs and SEFs to list or offer that swap, or an economically equivalent swap, for trading.

Summary of Comments

Some commenters expressed general support for the economic equivalence requirement because it would enforce marketwide compliance with the trade execution requirement,
112

increase liquidity, and promote a more efficient available-to-trade process by allowing SEFs and DCMs to rely on existing determinations.
113

Many commenters, however, viewed the proposed definition of “economically equivalent swap” as excessively broad
114

and vague.
115

Some commenters stated that the proposed definition would create uncertainty about which swaps are available to trade.
116

Other commenters stated that the vagueness of the proposed definition would allow SEFs and DCMs to subject more swaps to mandatory trade execution,
117

thereby allowing illiquid swaps to be available to trade.
118

In addition, MarketAxess and CEWG commented that the proposed requirement is not prescribed

by statute.
119

Morgan Stanley and AIMA stated that the concept itself is inherently “elusive and subjective.”
120

Other commenters thought that the process would create uncertainty as to which swaps are subject to mandatory trade execution.
121

SIFMA AMG stated that swaps with slightly different characteristics,
e.g.,
time to maturity, could differ in the requisite liquidity, yet both be determined to be available to trade based on economic equivalence.
122

112
Tradeweb Comment Letter at 5.

113
SDMA Comment Letter at 7.

114
Eaton Vance Management Comment Letter at 3; CEWG Comment Letter at 5; Chatham Comment Letter at 4.

115
FXall Comment Letter at 7; ICI Comment Letter at 8; ISDA Comment Letter at 9; Morgan Stanley Comment Letter at 8-9; Spring Trading Comment Letter at 1 (Feb. 13, 2012); UBS Comment Letter at 2; Chatham Comment Letter at 4-5.

116
MFA Comment Letter at 5; ICI Comment Letter at 8; AIMA Comment Letter at 3.

117
MFA Comment Letter at 5; FXall Comment Letter at 7; ICI Comment Letter at 8; FHLB Comment Letter at 3; Morgan Stanley Comment Letter at 8; CEWG Comment Letter at 5-6; SIFMA AMG Comment Letter at 9; ISDA Comment Letter at 9; AIMA Comment Letter at 4; MarketAxess Comment Letter at 8-9.

118
CEWG Comment Letter at 5; FXall Comment Letter at 7; JPMorgan Comment Letter at 3; Chatham Comment Letter at 4.

119
MarketAxess Comment Letter at 9; CEWG Comment Letter at 5.

120
Morgan Stanley Comment Letter at 8; AIMA Comment Letter at 3 (based on the multitude of factors that affect the economic terms of a swap).

121
AIMA Comment Letter at 3; Morgan Stanley Comment Letter at 8; ICI Comment Letter at 8; MFA Comment Letter at 5; SIFMA AMG Comment Letter at 10; ISDA Comment Letter at 9; Sunguard Kiodex Comment Letter at 2; FXall Comment Letter at 7.

122
SIFMA AMG Comment Letter at 9. Several other commenters, though not all in support of eliminating the proposed requirement, also acknowledged that two otherwise identical swaps would also possess different liquidity characteristics if cleared at different clearinghouses. FSR Comment Letter at 3; Morgan Stanley Comment Letter at 9; Spring Trading Comment Letter at 2 (Feb. 13, 2012).

To prevent evasion of the trade execution requirement through slight modification of a swap's terms, some commenters recommended that the Commission should rely on its anti-evasion authority under section 6(e) of the CEA.
123

123
SIFMA AMG Comment Letter at 10; CEWG Comment Letter at 5; ISDA Comment Letter at 9; AIMA Comment Letter at 4; Morgan Stanley Comment Letter at 9.

Commission Determination

At this time, the Commission is adopting the rule as proposed with certain modifications under a new subsection titled, “Applicability,” for SEFs or DCMs that list or offer the same swap for trading. The Commission, however, is not adopting the proposed definition of economically equivalent swaps. The Commission intended the economic equivalence requirement as a means to avoid knowing or reckless evasion of the trade execution requirement, which could potentially occur if a SEF or DCM, acting in concert with a market participant, lists and allows trading of swaps with slightly amended terms to a swap previously determined to be available to trade. Given that the factors that could be considered may vary across different asset classes and products, the Commission recognizes the complexity of determining economic equivalence between swaps. Further, based on the comments received, the Commission has determined that it is not feasible, for purposes of determining which swaps are available to trade, to define “economic equivalent” with sufficient precision and clarity.

The Commission is also amending the rule text to clarify that once a swap is determined to be available to trade under part 40 of the Commission's regulations (
i.e.,
the Commission approves a SEF's or DCM's available-to-trade submission under § 40.5 or the submission is deemed as certified under § 40.6), then all other SEFs and DCMs that choose to list or offer the swap for trading must do so in accordance with the trade execution requirement.
124

Subsequent SEFs and DCMs will not be required to submit separate available-to-trade determinations to the Commission for a particular swap after it has been determined to be available to trade. Importantly, no SEF or DCM is required to list or offer a swap for trading even if another SEF or DCM has determined it is available to trade. Once a swap is available for trade for purposes of section 2(h)(8), however, that swap may only be executed on a SEF or DCM.

124

See supra
note 14 for a discussion of the methods by which swaps that are subject to the trade execution requirement must be executed on a SEF or DCM.

In response to commenters who recommended that the Commission rely on its existing anti-evasion authority, the Commission notes that its anti-evasion authority as constituted under section 6(e) of the CEA would not apply to SEFs and DCMs.
125

Section 6(e)(5), however, would apply to the actions of certain market participants—swap dealers and major swap participants in particular—that are carried out to evade the trade execution requirement.

125
Section 6(e)(5) of the CEA, as amended by section 741(b)(11) of the Dodd-Frank Act, prescribes that “[a]ny
swap dealer
or
major swap participant
that knowing or recklessly evades or participates in or facilitates evasion of the requirements of section 2(h) [of the CEA] shall be liable . . .” (emphasis added). 7 U.S.C. 9a.

D. Sections 37.10(d) and 38.12(d)—Removal

The proposed rule requested comment on (1) whether the Commission should specify a process where a swap may be determined to be no longer available to trade; and (2) if so, whether the part 40 processes should be used for this process. The proposed rule also requested comment on whether such a determination should apply only to the SEF or DCM that seeks to make the swap no longer available to trade.
126

126
76 FR 77734.

Summary of Comments

Several commenters responded to the Commission's request for comments related to whether the Commission should specify a process whereby a swap that has been determined to be available to trade may no longer be available to trade. Several commenters supported the development of a process under which a swap could be determined to be no longer available to trade for the purposes of the trade execution requirement. Commenters recommended that the Commission retain the authority to make such a determination
127

based on the Commission's access to data demonstrating a swap's overall liquidity
128

and the desire to prevent a SEF or DCM from making conflicting determinations with respect to the same swap.
129

ISDA, however, recommended that market participants should be able to submit to the Commission that a swap is no longer available to trade because they would have experience and relevant knowledge of market trends and changes.
130

127
MFA Comment Letter at 4; FXall Comment Letter at 7-8; ICI Comment Letter at 7; SIFMA AMG Comment Letter at 11-12; Spring Trading Comment Letter at 7 (Jan. 12, 2012); ISDA Comment Letter at 8-9; JPMorgan Comment Letter at 2.

128
ISDA Comment Letter at 8-9; MFA Comment Letter at 4.

129
FXall Comment Letter at 8; MFA Comment Letter at 4.

130
ISDA Comment Letter at 8-9.

Some commenters recommended use of the same factors as those used when making a determination that a swap is available to trade, albeit with objective thresholds.
131

FXall asserted that using objective criteria would render the removal process “transparent and impartial.”
132

131
MFA Comment Letter at 4; ICI Comment Letter at 7-8; FXall Comment Letter at 7-8.

132
FXall Comment Letter at 8.

Some commenters recommended that a determination that a swap is no longer available to trade should be subject to public notice and comment.
133

Accordingly, ICI recommended against using the procedures under §§ 40.5 and 40.6 because they lack adequate opportunity for public comment.
134

MFA also recommended that the Commission provide public notice after a swap is determined to be no longer available to trade.
135

133
FXall Comment Letter at 8; ICI Comment Letter at 7; Spring Trading Comment Letter at 7.

134
ICI Comment Letter at 7.

135
MFA Comment Letter at 5.

Some commenters stated that a determination that a swap is no longer available to trade should only apply to the petitioning SEF or DCM.
136

Spring Trading and SDMA stated that to apply the determination on a marketwide

basis would otherwise unfairly penalize other non-petitioning SEFs or DCMs.
137

ICI and MFA, however, stated that the determination should apply to all SEFs and DCMs that list or offer the swap for trading.
138

ICI stated that applying the determination to only one SEF or DCM would be inconsistent with the trade execution requirement.
139

136
Spring Trading Comment Letter at 7-8 (Jan. 12, 2012); SDMA Comment Letter at 10.

137

Id.

138
MFA Comment Letter at 4-5; ICI Comment Letter at 8.

139
ICI Comment Letter at 8.

Commission Determination

The Commission is not adopting a separate process for a SEF or DCM to submit a determination that a swap is no longer available to trade. Rather, the Commission believes that where all SEFs and DCMs that had listed a swap for trading, including the SEF or DCM that submitted the initial available-to-trade determination under part 40, no longer list that swap for trading on their respective facility or platform, (
i.e.,
all such SEFs and DCMs have “de-listed” the swap),
140

then the Commission would deem the swap to be no longer available to trade. In such a case, trading in the swap would no longer be subject to the trade execution requirement. The Commission believes that this approach is consistent with section 2(h)(8) of the CEA, which states a swap would otherwise not be subject to the trade execution requirement if, among other things, no SEF or DCM makes it available to trade.

140
In some instances, a swap that is available to trade potentially should no longer be subject to the trade execution requirement, but not all SEFs and DCMs have de-listed the swap. In such a case, the Commission may choose to review the available-to-trade status of such a swap, under § 40.2(b) or § 40.3(a)(10) of the Commission's regulations, which authorizes Commission staff to request, on an ongoing basis, additional information, evidence, or data that meets the requirements of the CEA or the Commission's regulations or policies thereunder. Further, market participants may request that the Commission, under section 8a(7) of the CEA, designate a swap to be no longer available to trade. Under section 8a(7), the Commission could initiate a proceeding to amend a SEF or DCM's available-to-trade designation of a swap if such a change is necessary for . . . the protection of traders” with respect to “other trading requirements.” First, however, the Commission must request in writing that the change be made and provide for appropriate notice and opportunity for hearing. The Commission, however, acknowledges that the section 8a(7) process is complex and emphasizes that the process should only be invoked where a swap clearly should not remain available to trade, but a SEF or DCM has declined a request to initiate a new assessment.

Where all SEFs and DCMs no longer list that swap for trading—denoting that open interest in that swap does not exist on any facility or platform
141

—the Commission would deem the swap as no longer available to trade because that swap would no longer meet any of the determination factors. The Commission, which will maintain and update a list of the SEFs and DCMs that list those available-to-trade swaps, will have access to the information and the ability to make the determination, without requiring a separate process. In response to FXall, the Commission believes that this approach would be transparent and impartial. In response to MFA's recommendation, the Commission will inform the public that a swap is no longer available to trade via notice pursuant to new §§ 37.10(d) and 38.12(d) (“Removal”). The Commission is also delegating authority to the Director of the Division of Market Oversight to issue notice in this instance.

141
Under § 40.6(a) of the Commission's regulations, the Commission would receive notice that a SEF or DCM has de-listed a swap through a submission, submitted in compliance with §§ 40.6(a)(1) and (2) and 40.6(a)(7).

E. Annual Review

Proposed §§ 37.10(d) and 38.12(d) required that a SEF or DCM perform an annual review and assessment of each swap that it has made available to trade. The proposed rule envisioned that an annual review would ensure that SEFs and DCMs evaluate on a regular basis whether swaps previously determined to be available to trade should continue to be “available to trade” for the purposes of the trade execution requirement. In the annual review and assessment, SEFs and DCMs would be required to consider the proposed factors in §§ 37.10(b) and 38.12(b), respectively. Upon completion of the annual review, a SEF or DCM would be required to provide the Commission with an electronic report of the review and assessment, including any supporting information or data, no later than 30 days after its fiscal year end. The proposed rule requested comment on whether SEFs and DCMs should conduct the review and assessment.

Summary of Comments

Several commenters supported the proposed annual review requirement.
142

Tradeweb, however, requested that the Commission clarify the effect of the proposed annual review process.
143

Some commenters stated that additional reviews were necessary because swaps could become illiquid between scheduled annual reviews, yet still be subject to the trade execution requirement. Thus, they recommended more frequent reviews, such as on a quarterly basis.
144

Several commenters, however, stated that the Commission, rather than SEFs, should conduct the review and assessment for similar reasons as those offered in support of allowing the Commission to exclusively determine whether a swap is available to trade.
145

CME, for example, recommended that the Commission conduct the review by obtaining data from SDRs in order to minimize overall costs.
146

142
Tradeweb Comment Letter at 5; CME Comment Letter at 7; Spring Trading Comment Letter at 7 (Jan. 12, 2012).

143
Tradeweb Comment Letter at 5.

144
Morgan Stanley Comment Letter at 8; MFA Comment Letter at 4-5; ISDA Comment Letter at 8; AIMA Comment Letter at 2-3; Eaton Vance Management Comment Letter at 4; ICI Comment Letter at 7; Markit Comment Letter at 4; Vanguard Comment Letter at 6; JPMorgan Comment Letter at 2; SIFMA AMG Comment Letter at 11; FSR Comment Letter at 3-4.

145
Markit Comment Letter at 4; MFA Comment Letter at 4; Vanguard Comment Letter at 6; SIFMA AMG Comment Letter at 11. CME recommended that the Commission conduct the review of all existing available-to-trade determinations within 30 days of December 31 of each year to minimize costs and administrative burdens. For determinations submitted after June 30 of a given year, the annual review would occur within 30 days of December 31 of the following year. CME Comment Letter at 7.

146
CME Comment Letter at 7.

Some commenters further recommended that market participants have the opportunity to participate in the process. Tradeweb recommended that reviews and assessments be subject to public comment because of their market impact.
147

147
Tradeweb Comment Letter at 5.

Other commenters opposed the proposed requirement. WMBAA stated that an annual review and assessment would be arbitrary, time-consuming, and offers insufficient regulatory value.
148

Sunguard Kiodex asserted that periodic reviews would cause swaps' available-to-trade status to fluctuate, therefore negating the benefit of an initial determination.
149

WMBAA and SDMA recommended that a SEF or DCM be able to rely solely on the clearing determination review instead and annually renew its self-certification without submitting a report.
150

148
WMBAA Comment Letter at 4.

149
Sunguard Kiodex Comment Letter at 2.

150
SDMA Comment Letter at 10; WMBAA Comment Letter at 4.

With respect to the factors to be considered in an annual review, some commenters supported use of the proposed determination factors in §§ 37.10(b) and 38.12(b).
151

Eaton Vance Management recommended that a SEF or DCM must affirmatively report each factor that a swap meets to continue to

be available to trade.
152

Other commenters stated that the Commission should establish objective review and assessment criteria.
153

151
Spring Trading Comment Letter at 7 (Jan. 12, 2012); Eaton Vance Management Comment Letter at 4; Tradeweb Comment Letter at 5; SIFMA AMG Comment Letter at 11; MFA Comment Letter at 4; Markit Comment Letter at 4.

152
Eaton Vance Management Comment Letter at 4.

153
SIFMA AMG Comment Letter at 11; MFA Comment Letter at 4; Markit Comment Letter at 4; AIMA Comment Letter at 3.

ICI and Eaton Vance Management requested that the electronic reports to be submitted to the Commission also be made available to the public.
154

154
ICI Comment Letter at 7; Eaton Vance Management Comment Letter at 2.

Commission Determination

The Commission is not adopting the proposed annual review requirement. The Commission intended the requirement to ensure that a SEF or DCM would regularly evaluate trading for the swaps that it has determined to be available to trade for purposes of the trade execution requirement. Based on the approach adopted for determining that a swap is no longer available to trade, however, the Commission believes that requiring SEFs and DCMs to submit a review or assessment is not necessary. A SEF or DCM will likely review, on an ongoing basis, whether swaps listed or offered for trading on its system or platform should continue to be listed or offered for trading. Such a review would likely consider one or more factors that are similar to those that can be used to determine if a swap is available to trade. Further, if the Commission believes that a review of a swap's available-to-trade status is warranted, then it may request that SEFs and DCMs submit relevant information to conduct that review under §§ 40.2(b) and 40.3(a)(10) of the Commission's regulations, respectively.
155

155

See supra
note 140. Under 17 CFR 40.2(b) and 40.3(a)(10), when requested by Commission staff, a SEF or DCM is required to submit additional evidence, information, or data that demonstrates that a swap listed for trading meets the CEA's requirements or the Commission's regulations. Under §§ 37.5 and 38.5 of the Commission's regulations, respectively, the Commission may also request a SEF or DCM to file information related to its business as a SEF or DCM, including trading information, in a particular form, manner, and time as specified.

F. Notice to the Public of Available To Trade Determinations

The Commission noted in the FNPRM that §§ 40.5 and 40.6 provide a process for notifying the public that a SEF or DCM has made an available-to-trade determination—SEFs and DCMs are required to post a notice and a copy of the rule submission on their respective Web sites concurrent with their filings at the Commission. The Commission stated that it would also post the filings on its Web site. The Commission also stated that it would assess the feasibility of posting notices of all swaps that are determined to be available to trade on an easily accessible page on its Web site. Commenters supported the proposal to provide notice to market participants through a central location on the Commission's Web site.
156

SIFMA AMG stated that a list would help market participants comply with the rules.
157

156
ICI Comment Letter at 10; Bloomberg Comment Letter at 3 n.9; SIFMA AMG Comment Letter at 12-13; AIMA Comment Letter at 4. SIFMA AMG and AIMA also recommended that such a centralized location could be operated by an independent third party.

157
SIFMA AMG Comment Letter at 13. SIFMA AMG requested that the Commission establish the Web site location prior to designating any swaps as available to trade.
Id.
In response to SIFMA AMG's comment, the Commission anticipates that this Web page will be established as soon as technologically feasible, and may or may not occur prior to the effective date of this rule. CME also requested that the Commission publish a list, on its Web site and in the
Federal Register
, of all swaps under current assessment. CME Comment Letter at 7. The Commission notes that §§ 40.5 and 40.6 filings will already be posted on its Web site.

The Commission agrees with commenters that a centralized list would help market participants, as well as SEFs and DCMs, comply with the Commission's rules and regulations related to the trade execution requirement. Therefore, the Commission will post such determinations on its Web site where market participants can readily ascertain which swaps have been determined to be available to trade, and therefore subject to the trade execution requirement, including the SEFs and DCMs that list or offer those swaps for trading.

III. Sections 37.12 and 38.11 of the Commission's Regulations—Trade Execution Compliance Schedule

Proposed §§ 37.12(a) and 38.11(a) required market participants to comply with the trade execution requirement under section 2(h)(8) of the CEA upon the later of (1) the applicable deadline established under the compliance schedule for the clearing requirement for a swap,
158

or (2) 30 days after the swap is first made available to trade on either a SEF or DCM.
159

In the proposed rule, the Commission noted that while the available-to-trade determination could precede the clearing requirement and vice versa, the trade execution requirement would not be in effect until the clearing requirement takes effect.
160

The Commission sought comment as to whether 30 days would be sufficient for necessary technological linkages to be established between (1) DCOs, DCMs, and SEFs; and (2) DCMs, SEFs, and market participants.
161

158
The Commission proposed to phase in compliance with the clearing requirement, and the trade execution requirement thereof, by category of market participant. As proposed, Category 1 entities, which included a swap dealer, a security-based swap dealer, a major swap participant, a major security-based swap participant, or an active fund, would have 90 days to comply with the clearing requirement. Category 2 entities, which include a commodity pool, private fund, employee benefit plan, or person predominantly engaged in activities that are in the business of banking or are financial in nature, would have 180 days to comply with the clearing requirement. Certain third-party subaccounts and all other swap transactions would receive 270 days to comply with the clearing requirement. With the exception of removing employee benefit plans from Category 2 and allowing such plans 270 days to comply with the clearing requirement, the Commission adopted this compliance schedule generally as proposed.
See
Swap Transaction Compliance and Implementation Schedule: Clearing Requirement under Section 2(h) of the CEA, 77 FR 44441 (July 20, 2012).

159

See
Swap Transaction Compliance and Implementation Schedule: Clearing and Trade Execution Requirements under Section 2(h) of the CEA, 76 FR 58186 (Sep. 20, 2011). In this final rule, the Commission is finalizing the compliance and implementation schedule for the trade execution requirement, and therefore, addresses the relevant comments submitted in response to this proposed rule.

160
76 FR 77731 n.38.

161
76 FR 58192.

Summary of Comments

Some commenters generally supported the proposed compliance schedule for the trade execution requirement,
162

but Tradeweb commented that a 30-day implementation period may not be sufficient for a class of swaps that is available to trade for the first time and recommended that the Commission maintain the authority to set an appropriate implementation period on a case-by-case basis for a class of swaps, with input from SEFs, DCMs, and market participants.
163

162
Chris Barnard Comment Letter at 2 (Sep. 23, 2011); Tradeweb Comment Letter at 2-4 (Nov. 4, 2011); Better Markets Comment Letter at 2 (Nov. 4, 2011).

163
Tradeweb Comment Letter at 4.

Several commenters recommended that the trade execution requirement should become effective only after the clearing requirement is fully implemented.
164

MFA commented that allowing mandatory trade execution to become effective simultaneously with mandatory clearing would potentially dilute market participants' resources to comply with both requirements.
165

MFA also recommended that all market participants be required to comply with

the trade execution requirement at the same time, rather than through a phased-in approach, to avoid fragmenting market liquidity.
166

164
AIMA Comment Letter at 3 (Nov. 3, 2011); MarkitSERV Comment Letter at 5 (Nov. 2011); Citadel Comment Letter at 5 (Nov. 4, 2011); MFA Comment Letter at 7 (Nov. 4, 2011); Vanguard Comment Letter at 5 (Nov. 4, 2011) (recommending 180-day compliance period between the effective date of the clearing requirement and the trade execution requirement).

165
MFA Comment Letter at 10-11.

166

Id.
at 12.

Other commenters stated that the proposed schedule does not afford adequate time for market participants to comply with the trade execution requirement, particularly with regards to the proposed 30-day post-determination implementation period.
167

JPMorgan and UBS stated that where a SEF or DCM submits a swap as available to trade using § 40.6, market participants could be required to transfer their existing trading in that swap onto a SEF or DCM within only 40 days of the submission.
168

167
JPMorgan Comment Letter at 3-4; UBS Comment Letter at 2; ICI Comment Letter at 5 (Nov. 4, 2011); CME Comment Letter at 2 (Nov. 4, 2011); Westpac Comment Letter at 3 (Nov. 4, 2011); Regional Banks Comment Letter at 7 (Nov. 4, 2011); FHLBanks Comment Letter at 5 (Nov. 4, 2011); ICI Comment Letter at 9; ISDA Comment Letter at 11; AIMA Comment Letter at 2-3; UBS Comment Letter at 2; ISDA Comment Letter at 11; ACLI Comment Letter at 2.

168
JPMorgan Comment Letter at 3; UBS Comment Letter at 2. Based on proposed §§ 37.12(a) and 38.11(a), commenters assumed that 30 days after the swap is made available to trade falls upon the later date than the applicable compliance date for the clearing requirement.

Some commenters noted that implementing new infrastructure, standards, and procedures necessary to comply with the trade execution requirement would require a longer post-determination period.
169

For example, FHLBanks commented that new infrastructure and procedures are necessary to ensure that swaps are properly submitted to a counterparty's FCM and to a DCO.
170

Some commenters also cited the need for market participants to develop adequate connectivity
171

and to obtain trading access
172

to a SEF or DCM. CME commented that DCOs, DCMs, and SEFs would not likely be able to establish the requisite technological linkages within the proposed 30-day implementation period,
173

while ICI commented that smaller market participants could need more than 30 days to connect to a SEF or DCM offering an actively traded swap.
174

Other commenters noted that market participants would also need time to complete applicable documentation and agreements.
175

Some commenters further stated that a longer implementation period would promote greater competition among trading venues and mitigate a SEF's or DCM's attempt to capture market share.
176

169
JPMorgan Comment Letter at 3-4; ISDA Comment Letter at 11; FHLBanks Comment Letter at 5 (Nov. 4, 2011); Westpac Comment Letter at 2-3 (Nov. 4, 2011).

170
FHLBanks Comment Letter at 5 (Nov. 4, 2011).

171
FSR Comment Letter at 4; Bloomberg Comment Letter at 5; ICI Comment Letter at 8; ISDA Comment Letter at 11; Eaton Vance Management Comment Letter at 3; Chatham Comment Letter at 4; SIFMA AMG Comment Letter at 9; CME Comment Letter at 6-7; Westpac Comment Letter at 3 (Nov. 21, 2011); ICI Comment Letter at 5 (Nov. 4, 2011).

172
MFA Comment Letter at 4; Vanguard Comment Letter at 6; SIFMA AMG Comment Letter at 9; AIMA Comment Letter at 3; CME Comment Letter at 6-7.

173
CME Comment Letter at 2 (Nov. 4, 2011).

174
ICI Comment Letter at 5 (Nov. 4, 2011).

175
SIFMA AMG Comment Letter at 9; ICI Comment Letter at 9; AIMA Comment Letter at 3; CME Comment Letter at 7; ISDA Comment Letter at 11; Westpac Comment Letter at 3; FIA/ISDA/SIFMA Comment Letter at 8 (Nov. 4, 2011).

176
Chatham Comment Letter at 4; FXall Comment Letter at 7; ICI Comment Letter at 8; SIFMA AMG Comment Letter at 9.

Commenters provided several suggestions for a longer post-determination period. Several commenters recommended a 90-day period after a swap is made available to trade,
177

while Chatham and FSR recommended at least a 6-month period.
178

SIFMA AMG recommended an implementation period of at least 90 days after the swap becomes subject to the trade execution requirement,
179

while some commenters recommended a similar period of at least 6 months,
180

particularly for market participants who are neither swap dealers or major swap participants.
181

SIFMA AMG and Vanguard stated that the period could be shortened over time as market participants become more experienced with centralized trading.
182

177
FXall Comment Letter at 7; ICI Comment Letter at 9; CME Comment Letter at 6-7; Vanguard Comment Letter at 6; Bloomberg Comment Letter at 5; Westpac Comment Letter at 3 (Nov. 4, 2011).

178
Chatham Comment Letter at 4; FSR Comment Letter at 4.

179
SIFMA AMG Comment Letter at 9.

180
Eaton Vance Management Comment Letter at 3; ISDA Comment Letter at 11.

181
Westpac Comment Letter at 3 (Nov. 4, 2011); FHLBanks Comment Letter at 5 (Nov. 4, 2011).

182
SIFMA AMG Comment Letter at 9; Vanguard Comment Letter at 6.

Commission Determination

The Commission is adopting §§ 37.12(a) and (b) and 38.11(a) and (b) as proposed with minor technical corrections, but is also amending the proposed rule text to clarify that market participants must comply with the trade execution requirement upon the later of (1) the applicable deadline established under the compliance schedule for the clearing requirement for a swap,
183

or (2) 30 days after the available-to-trade determination for that swap is deemed approved under § 40.5 or deemed certified under § 40.6 by the Commission as available to trade. As noted earlier, the Commission anticipates that because of the novel nature of the available-to-trade determinations, the initial determinations would likely be subject to a stay under § 40.6 for an additional 90-day review period or an extension of the 45-day review period under § 40.5 for an additional 45 days. Accordingly, the Commission's part 40 rule review procedures should provide market participants with adequate advance notice of the possible application of the trade execution requirement to a particular swap. The Commission believes that this period, along with the subsequent 30-day post-determination implementation period, is a sufficient amount of time for SEFs, DCMs, and market participants to become familiar and comply with the trade execution requirement. Taken in concert with the implementation schedule adopted for swaps subject to clearing requirement, the Commission also believes that this time is sufficient with respect to mandatory trade execution for an individual swap or a group, type, category, or class of swaps.
184

183

See supra
note 52.

184

See id.

To the extent that the phased-in compliance schedule for the clearing requirement previously adopted by the Commission may lead to phased-in compliance with the trade execution requirement, the Commission supports this approach. The Commission believes that the phased-in schedule for the former requirement—which accounts for a market participant's ability to comply based on risk profile, compliance burden, resources, and expertise—also applies with respect to compliance with the latter requirement. The Commission further notes that the concerns about fragmenting market liquidity caused by a phased-in approach are mitigated by (1) the phasing-in of similar entities, who transact similar volumes of swaps, under similar timelines and (2) the relatively compact timeframe in which market participants in all three clearing implementation and compliance categories must comply with the trade execution requirement.
185

185

See id.

Finally, the Commission notes that a trading facility could still clear and list a swap for trading after it is determined to be subject to the trade execution requirement, but prior to the effective date.

IV. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (“RFA”) requires federal agencies, in promulgating regulations, to consider the impact of those regulations on small entities.
186

The Commission has previously established certain definitions of “small entities” to be used by the Commission in evaluating the impact of its regulations on small entities in accordance with the RFA.
187

The Commission has previously determined that DCMs and SEFs are not “small entities” for purposes of the RFA.
188

The subject of this rulemaking also provides a compliance schedule for a new statutory requirement, section 2(h)(8) of the CEA, and does not itself impose significant new regulatory requirements.
189

Accordingly, the Commission received no comments on the Chairman's certification of the impact of the rules contained herein on small entities. Therefore, the Chairman, on behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the rule will not have a significant economic impact on a substantial number of small entities.

186
5 U.S.C. 601
et seq.

187
47 FR 18681-31 (Apr. 30, 1982).

188

See
47 FR 18618, 18619 (Apr. 30, 1982) discussing DCMs; 66 FR 45604, 45609 (Aug. 29, 2001) discussing DTEFs; 76 FR 1214, 1235 discussing SEFs.

189
76 FR 58193.

B. Paperwork Reduction Act

The Paperwork Reduction Act (“PRA”)
190

imposes certain requirements on federal agencies in connection with their conducting or sponsoring any collection of information as defined by the PRA. An agency may not conduct or sponsor, and a registered entity is not required to respond to, a collection of information unless it displays a currently valid control number by the Office of Management and Budget (“OMB”). This final rule contains new collection of information requirements within the meaning of the PRA. Accordingly, in connection with the FNPRM, the Commission submitted an information collection requested, titled “Parts 37 and 38—Process for a Swap Execution Facility or Designated Contract Market to Make a Swap Available to Trade” and supporting documentation to OMB for its review and approval in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11, and requested that OMB approve and assign a new control number for the collections of information covered by the FNPRM. Additionally, pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission, in the FNPRM, requested comments from the public on the proposed information collection requirements in order to, among other items, evaluate the necessity of the proposed collections of information and minimize the burden of the information collection requirements on respondents. On September 12, 2012, OMB assigned control number 3038-0099 to this collection of information, but withheld final approval pending the Commission's resubmission of the information collection, which includes a description of the comments received on the collection and the Commission's responses thereto.

190
44 U.S.C. 3501
et seq.

With respect to the adoption of §§ 37.12(a) and 38.11(a)—the trade execution compliance schedule—as stated in the prior proposed rule, this requirement will not require a new collection of information from any persons or entities.
191

191
76 FR 58193.

The Commission protects proprietary information according to the Freedom of Information Act and 17 CFR part 145, “Commission Records and Information.” In addition, section 8(a)(1) of the CEA strictly prohibits the Commission, unless specifically authorized by the CEA, from making public “data and information that would separately disclose the business transactions or market positions of any person and trade secrets or names of customers.”
192

The Commission is also required to protect certain information contained in a government system of records according to the Privacy Act of 1974.
193

192
7 U.S.C. 12(a)(1).

193
5 U.S.C. 552a.

1. Proposed Information Provided by Reporting Entities/Persons

In the FNPRM, the Commission estimated that 50 registered entities will be required to file part 40 rule submissions and annual reports.

Based on the previously estimated hours of burden under part 40 and the estimated additional time that a SEF or DCM would require to review applicable factors and data to make a determination, the Commission estimated that the hourly burden for a SEF or DCM under proposed §§ 37.10(a) and 38.12(a) to submit an available-to-trade determination would be 8 hours per submission. The Commission, however, did not provide an average annual hours of burden for each SEF or DCM to submit available-to-trade determinations under proposed §§ 37.10(a) and 38.12(a) because, as stated in the FNPRM, it is not feasible to determine the number of part 40 rule submission filings, on average, that each SEF or DCM would submit, as the number of swap contracts to be traded on a DCM or SEF and the number of those swaps that a SEF or DCM will eventually submit as available to trade is presently unknown.

2. Summary of Comments and Commission Response

Sections 37.10(a) and 38.12(a)—Process To Make a Swap Available To Trade

MarketAxess and SDMA characterized the proposed approach as burdensome and commented that it would require SEFs to expend a significant amount of time and resources.
194

MarketAxess recommended an alternative “recognition and notification” process in which a SEF or DCM provides notice to the Commission that a swap is available to trade when it becomes subject to the clearing requirement.
195

MarketAxess stated that this approach would allow SEFs to use their resources in a more efficient manner.
196

SDMA supported the part 40 approach, but stated that a SEF should determine if a swap is available to trade based on whether the swap is required to be cleared, not based on the enumerated factors.
197

Sunguard Kiodex also recommended an alternative approach—a real-time “illiquidity” test that would temporarily permit off-facility trading in a swap based on certain market observations—that would require less time and reduce costs.
198

WMBAA and Spring Trading commented that the Commission's estimate of the hours of burden for a SEF or DCM to make an available-to-trade determination are too low based on the different types of personnel that would be involved in a determination.
199

Spring Trading estimated that each rule filing would require at least 15-20 hours.
200

194
MarketAxess Comment Letter at 7-8; SDMA Comment Letter at 4-5.

195
MarketAxess Comment Letter at 6.

196

Id.
at 7.

197
SDMA Comment Letter at 6-7.

198
Sunguard Kiodex Comment Letter at 3.

199
WMBAA Comment Letter at 5; Spring Trading Comment Letter at 5 (Jan. 12, 2012).

200

Id.

The Commission notes that the alternative approaches proposed by commenters would eliminate a separate formal determination process. As stated in the preamble, however, the Commission believes that determining whether a swap is available to trade and whether a swap should be mandatorily cleared should remain separate

processes because each inquiry addresses different concerns. Further, adopting a real-time “illiquidity” test would require objective criteria, which the Commission has declined to adopt at this time.

The Commission acknowledges the comments from WMBAA and Spring Trading regarding the resources required to make a determination. Therefore, the Commission is revising its estimate of the hours of burden to reflect the addition of additional personnel that would process and analyze trading data, for which the Commission estimates this hourly burden to be 8 hours per submission. The Commission is also adopting a listing requirement in the final rule under new §§ 37.10(a)(2) and 38.12(a)(2), which requires a SEF or DCM to certify that it is listing the swap for which it submits an available-to-trade determination. The Commission notes that the listing process is governed by §§ 40.2 and 40.3 of the Commission's regulations, for which it has previously estimated the average hourly burden to be 2 hours per submission in a previous rulemaking.
201

201
76 FR 77734.

Accordingly, the Commission revises its estimate of the total hourly burden to be 16 hours per submission.

C. Cost-Benefit Considerations

Introduction

Title VII of the Dodd-Frank Act seeks to prevent a repeat of the harm caused by the 2008 financial crisis by establishing a comprehensive new regulatory framework for swaps and security-based swaps.
202

Among other things, the legislation seeks to promote market integrity, reduce risk, and increase transparency within the financial system and swaps markets. Consistent with the view that several weaknesses contributed to the crisis,
203

Title VII establishes a multidimensional regulatory approach designed to “mitigate costs and risks to taxpayers and the financial system.”
204

Provisions designed to move the transaction of swaps from primarily opaque, over-the-counter (“OTC”) markets—which traditionally feature bilateral negotiation and execution—to registered swap execution facilities (“SEFs”) and designated contract markets (“DCMs”)—which provide market participants and the public with improved swap market transparency—represent an important element of this approach.

202
Dodd-Frank Act section 701,
et seq.

203

See, e.g.,
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” at xxiv (Jan. 2011), available at
http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf.
(listing uncontrolled leverage; lack of transparency, capital and collateral requirements; speculation; interconnection among firms; and concentrations of risk in the market as contributing factors).

204
S. Rep. No. 111-176, at 92 (2010).

In particular, section 733 of the Dodd-Frank Act amended the CEA to, among other things, move swap trading and execution to SEFs and DCMs.
205

Section 723(a)(3) of the Dodd-Frank Act added a trade execution requirement,
206

which requires that swap transactions subject to the clearing requirement under section 2(h)(1) of the CEA be executed on a SEF or a DCM, unless no SEF or DCM “makes the swap available to trade” or the clearing exception under section 2(h)(7) of the CEA applies.
207

Taken together, these provisions are intended to transform the swaps market from one in which prices for bilaterally-negotiated contracts are privately quoted—typically by dealers who, unlike non-dealer market participants (typically the “buy-side”), enjoy asymmetric information advantages—to one in which bid/offer prices for swap contracts are accessible to multiple market participants to compare, assess, and accept or reject.
208

With this release, in conjunction with the Commission's final rulemaking establishing SEFs
209

and the final rulemaking defining appropriate minimum block sizes for swaps,
210

the Commission is implementing the trade execution requirement.

205
SEFs are a new type of regulated marketplace modeled largely on the existing Commission-regulated DCM structure. Section 1a(50) of the CEA, as enacted by section 721 of the Dodd-Frank 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.” 7 U.S.C. 1a(50). Section 5h(a)(1) of the CEA, as amended by the section 733 of the Dodd-Frank Act, prohibits any person from operating a facility for the trading and processing of swaps unless the facility is registered as a SEF or a DCM. 7 U.S.C. 7b-3(a)(1).

206
CEA section 2(h)(8), 7 U.S.C. 2(h)(8).

207
7 U.S.C. 2(h)(7).

208
Asymmetric information exists when one counterparty to a transaction has more or better information than the other counterparty. In some instances, a dealer could have an information advantage over a non-dealer, and vice versa. Abuse of this advantage is likely to contribute to market failure. By definition, bilateral negotiations imply lower levels of transparency of orders, quotes, trades and transaction prices. In the context of swap markets, as dealers are on one side of a large fraction of trades, they are privy to better information on prevailing market conditions and valuations relative to their non-dealer counterparties.
See
“An Analysis of OTC Interest Rate Derivatives Transactions: Implications for Public Reporting,” Michael Fleming, John Jackson, Ada Li, Asani Sarkar, and Patricia Zobel, Federal Reserve Bank of New York Staff Reports, no. 557, at 6 n.14 (Mar. 2012). Major derivatives dealer activity accounts for 89 percent of the total interest rate swap activity in notional terms.
Id.

209

See
Core Principles and Other Requirements for Swap Execution Facilities (May 16, 2013).

210

See
Procedures to Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades (May 16, 2013).

In this release, the Commission is adopting final rules (1) specifying the process by which a swap is made “available to trade,” thereby making it subject to the trade execution requirement under section 2(h)(8) of the CEA (“available-to-trade rule”); and (2) establishing the compliance schedule of the trade execution requirement, following a Commission determination that a swap is both required to be cleared and is available to trade (“trade execution compliance schedule”).
211

More specifically, these rules allow SEFs and DCMs to designate swaps that they list or offer for trading as “available to trade,”
212

thereby requiring market participants who transact such swaps (and who are subject to the clearing requirement under section 2(h)(1)(A) of the CEA) to comply with the trade execution requirement in carrying out these transactions. Swaps that are subject to the trade execution requirement (and are not block trades as defined under § 43.2 of the Commission's regulations) must be executed in accordance with other separately promulgated rules that implement the Dodd-Frank Act's swap exchange trading requirements and are intended to provide improved price transparency for swap transactions.
213

211
CEA section 2(h)(8), 7 U.S.C. 2(h)(8).

212

See supra
note 1.

213
The rules establishing SEFs focus on measures to promote pre-trade transparency and trade execution of swaps. To comply with the trade execution requirement, swaps that are traded on a SEF must be executed as Required Transactions. Under § 37.9(a)(2), Required Transactions must be executed by either (1) an Order Book, as defined in § 37.3(a)(3); or (2) a Request for Quote System, as defined in § 37.9(a)(3).
See
Core Principles and Other Requirements for Swap Execution Facilities (May 16, 2013). Swaps that are subject to the trade execution requirement, under section 2(h)(8) of the CEA, and traded on a DCM must be executed pursuant to subpart J of part 38 of the Commission's regulations, which implements revised DCM Core Principle 9 under section 5(d)(9) of the CEA, as amended by section 735(b) of the Dodd-Frank Act. 7 U.S.C. 7(d)(9).

Operating in concert with the statutory requirements and other rules,
214

the rules adopted in this rulemaking are designed to provide a process that fosters swaps becoming available to trade, and therefore subject to the trade execution requirement; this,

indirectly will counter information asymmetry and in turn, the informational advantage enjoyed by dealers to the potential detriment of other market participants. In this way, these rules will promote a competitive market environment with improved price discovery and characterized by narrower spreads and more reliable prices. Ultimately, these rules will benefit the financial system as a whole by creating a more efficient marketplace where market participants will be able to take into account the price at which recent transactions have occurred when determining at what price to quote or place orders.

214

See
part 37 and subpart J of part 38 of the Commission's regulations.

The Commission believes that some of the costs related to the application of these rules are a consequence of the Congressional trade execution requirement under section 2(h)(8) of the CEA. For example, those market participants who are not eligible for the end-user exception under section 2(h)(7) of the CEA
215

will not have the option to execute swaps made available to trade on a bilateral basis, even if they consider it more costly or less convenient to execute trades on a SEF or a DCM. As described further below, the Commission was cognizant of these costs in adopting these final rules, and has, where appropriate, attempted to mitigate the costs while observing CEA section 2(h)(8).

215
The Commission may determine that swap transactions exempted from the section 2(h)(1) clearing requirement pursuant to other statutory authority would also not be subject to the section 2(h)(8) trade execution requirement.
See supra
note 1.

The Statutory Mandate To Consider the Costs and Benefits of the Commission's Action: Section 15(a) of the CEA

Section 15(a)
216

of the CEA requires the Commission to consider the costs and benefits of its actions before promulgating a regulation under the CEA or issuing certain orders. Section 15(a) further specifies that the costs and benefits shall be evaluated in light of the following five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness, and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations. The Commission considers the costs and benefits resulting from its discretionary determinations with respect to the section 15(a) factors.

216
CEA section 15(a), 7 U.S.C. 19(a).

In this rulemaking to implement the trade execution requirement, the Commission is exercising its discretion to adopt the available-to-trade rule and the trade execution compliance schedule. The discussion that follows considers the section 15(a) factors for each set of rules separately. Prior to the section 15(a) consideration for each set of rules, the Commission discusses the costs, benefits, and alternatives to the approach adopted in these final rules as well as relevant comment letters.
217

With respect to the available-to-trade rule, costs, benefits, and alternatives are further broken out and discussed separately for various components of the process—Part 40 Process and Determination Factors, and Applicability.

217
The Commission solicited comments to aid its consideration of the costs and benefits resulting from (1) the proposed available-to-trade rule, 76 FR 77733, and (2) the proposed trade execution compliance schedule. 76 FR 58192.

Quantifying the costs and benefits to SEFs and DCMs is not reasonably feasible for many aspects of the available-to-trade rule because costs will depend, among other things, on the future business decisions of SEFs and DCMs. The Commission expects that the costs and benefits with respect to the available-to-trade rule will vary, based on the specific circumstances of the individual SEFs, DCMs, and market participants. Where the Commission is unable to quantify the costs and benefits, the Commission identifies and considers the costs and benefits of these rules in qualitative terms.

Given the novelty of the trade execution requirement—the mandatory trading of swaps on a new type of entity, SEFs, or on DCMs—the Commission is inherently limited by a lack of available data in attempting to quantify the costs and benefits of implementing the trade execution compliance schedule. As discussed further below, the Commission is not aware of any analog to another requirement that would provide information that is sufficient to ascertain such costs and benefits in quantitative terms. Accordingly, the Commission identifies and considers the costs and benefits of the compliance schedule in qualitative terms.

1. Available-to-Trade Rule

a. Part 40 Process and Determination Factors

Final §§ 37.10 and 38.12 govern the process that a SEF or DCM must use to determine whether a swap is available to trade for purposes of the trade execution requirement. For a swap to be subject to the trade execution requirement under section 2(h)(8) of the CEA, a SEF or DCM must have first determined that a swap is available to trade. The Commission views this determination as a trading protocol issued by the SEF or DCM (and therefore as a “rule,” as defined in § 40.1 of the Commission's regulations); as a rule, the SEF or DCM must submit the determination to the Commission in accordance with the procedures contained in part 40 of the Commission's regulations. Final §§ 37.10(a) and 38.12(a) set forth the procedure for a SEF or DCM to submit the determination under § 40.5 or § 40.6 of the Commission's regulations.

Final §§ 37.10(b) and 38.12(b) require a SEF or DCM to consider, as appropriate, six factors with respect to each swap when determining whether a swap is available to trade: (1) Whether there are ready and willing buyers and sellers; (2) the frequency or size of transactions; (3) the trading volume; (4) the number and types of market participants; (5) the bid/ask spread; or (6) the usual number of resting firm or indicative bids and offers. No single factor must always be considered as to whether a swap is available to trade; therefore, the SEF or DCM may consider any one or more of the factors in its initial determination. In its submission to the Commission under § 37.10(a) or § 38.12(a), a SEF or DCM must describe how it considered the factors that it deems appropriate.

Costs

Costs to SEFs and DCMs

In the proposed rule, the Commission estimated that conducting the assessment and submission process in §§ 37.10(a) and (b) and 38.12(a) and (b) could be performed internally by one compliance personnel of the SEF or DCM over approximatel

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2013-12250. Public record. Not legal advice.